If you provide your skills or labour through a company, trust, or partnership (as a consultant, contractor, IT professional, medical or allied health practitioner, engineer, or tradesperson), the personal services income (PSI) rules are likely to affect how your income is taxed.
Key takeaways
- PSI is income earned mainly from your personal skill or effort, rather than from selling goods, using significant assets, or running a business with staff.
- PSI attribution rules tax that income in the hands of the individual who earned it, even if it’s received through another structure such as a company, trust, or partnership.
- Qualifying as a personal services business (PSB) switches off the PSI attribution rules.
- Satisfying the results test alone is enough to qualify as a PSB. It’s the only test that works even when 80% or more of income comes from one client, so if it’s met, none of the other three tests need to be considered.
- If the results test isn’t satisfied, you can still self-assess as a PSB where less than 80% of your PSI comes from one client and you satisfy one of the three other tests (unrelated clients, employment, or business premises).
- PCG 2025/5 shifts the endpoint of the analysis: qualifying as a PSB no longer settles the question, as Part IVA (the general anti-avoidance provision) can still apply to how the resulting profits are split or retained.
- There’s a transition window to 30 June 2027 for taxpayers making a genuine attempt to move a higher-risk arrangement into a low-risk position.
In late 2025, the ATO sharpened its focus on this area with Practical Compliance Guideline PCG 2025/5, and it’s now actively reviewing arrangements that fall outside its comfort zone.
This article explains what PSI is, what it means to run a personal services business (PSB), how the PSB tests actually work, and what PCG 2025/5 changes for business owners operating through an entity.
What is personal services income?
PSI is income received by an individual or an entity that is produced mainly from an individual’s personal skill, effort, or expertise, rather than from the sale of goods, use of substantial income-producing assets, or a large workforce delivering the work.
“Mainly” means more than half. The test is applied contract by contract, not across your business as a whole: if more than 50% of the amount you receive under a particular contract or invoice is a reward for your personal efforts and skills, that income is PSI.
Income that is generally not PSI
- Income from selling or supplying goods, where the goods are the substance of what the client is paying for.
- Income produced by a substantial income-producing asset (for example, an excavator, a truck, or specialised plant) rather than by the operator’s labour.
- Income from licensing intellectual property, or royalties.
- Income generated by a business structure: a practice with several fee-earners, substantial assets and goodwill, where no single individual’s effort produces the income.
The rules exist to stop what the ATO calls “alienation” of income, where an individual’s personal efforts generate income, but that income is directed through a company or trust so it can be split with family members or taxed at a lower rate than the individual’s own marginal rate.
If the PSI rules apply and your entity doesn’t qualify as a personal services business, the income is generally attributed back to the individual who performed the work, and deductions available to the entity are also restricted, regardless of how the income was legally structured or paid out.
What is a personal services entity?
A personal services entity (PSE) is a company, partnership or trust whose income includes the PSI of one or more individuals. If you invoice clients through a company you own, and the invoices are mainly for your own work, that company is a PSE.
The label matters because the PSI rules operate differently depending on whether the income lands in your own name or in an entity. A sole trader earning PSI faces deduction restrictions, but nothing needs to be attributed because the income is already theirs. A PSE that fails the PSB tests must attribute the net PSI back to the individual who earned it.
What is a personal services business (PSB)?
A PSB is an entity (a company, trust, or partnership) that is genuinely running a business, rather than simply channelling an individual’s personal earnings through a structure.
If an entity qualifies as a PSB, the PSI attribution rules don’t apply to it, and it can generally claim the full range of business deductions.
An entity qualifies as a PSB by self-assessing against the following tests, or by applying to the ATO for a formal Personal Services Business Determination if none of the self-assessment tests are met.
The following flow chart summarises the PSB tests:
-
Is it personal services income?
Income earned mainly from an individual’s personal skill or effort
If no Not personal services income Ordinary business rules apply -
Does it pass the results test?
All three, for at least 75% of the PSI
- Paid to produce a result
- andSupplies its own tools and equipment
- andLiable to rectify defects
If yes Personal services business Passes the results test, so no other test is needed -
Is 80% or more of the PSI from one client?
Including that client’s associates
If yes ATO determination needed The entity can’t self-assess -
Does it pass any of these tests?
Only one needs to be met
- Unrelated clients test
- orEmployment test
- orBusiness premises test
If no Not a personal services business The PSI is attributed to the individual
A simplified guide to self-assessment. An entity that doesn’t meet any of the tests can still apply to the ATO for a personal services business determination.
The four PSB tests explained
Test 1: The results test
This is the most powerful test. If it is passed, the entity is a PSB and the other tests do not need to be considered.
The results test most closely reflects genuine independent contracting. For at least 75% of the entity’s PSI in the income year, all three of the following must be true:
- the entity is paid to produce a specific result, rather than for time worked;
- the entity supplies the plant, equipment or tools of trade needed to do the work, where such items are required; and
- the entity is liable to rectify defects at its own cost.
Hourly-rate engagements with no fixed deliverable, where the client supplies the equipment and carries the risk of rework, will generally fail this test.
The 80% rule
If the results test is not satisfied, the entity will need to consider the 80% rule. This is not a test in itself, but a threshold which needs to be passed before the remaining tests can be considered.
If less than 80% of the PSI comes from any single client, the entity may self-assess against any of the three remaining tests.
If 80% or more of the PSI comes from one client and that client’s associates, the remaining tests are not available. The entity must apply to the ATO for a personal services business determination, or accept that the PSI rules apply.
Why this catches people out
A contractor on a long engagement with one principal client frequently assumes the unrelated clients test is available because they had two or three clients earlier in the year. The 80% threshold is measured on income for the income year, not on the number of clients, so a second client contributing 5% of revenue doesn’t open up the other tests.
Test 2: The unrelated clients test
Two conditions must both be met:
- the entity provides services to two or more clients who are not associated with each other, or with the individual or the entity; and
- the services are provided as a direct result of offers or invitations made to the public, or to a section of the public, for example through advertising, a website, tendering, or a public profile in the market.
The second limb is the one that fails most often. Work obtained through a labour hire firm, recruitment agency or placement service is specifically excluded from counting as an offer to the public. Simply having several clients is not enough if the work arrives through an intermediary rather than through your own approach to the market.
Test 3: The employment test
The entity engages others to perform at least 20% of the principal work, measured by market value. Associates performing non-principal work (a spouse doing the bookkeeping, for instance) do not count towards the 20%. Alternatively, the test is met if the entity has one or more apprentices for at least half the income year.
“Principal work” means the core services the client is paying for, not administration, invoicing or business development.
Test 4: The business premises test
The entity maintains and uses business premises that, at all times in the income year, are:
- used mainly (more than 50%) for the personal services work;
- used exclusively by the entity;
- physically separate from the private residence of the individual or their associates; and
- physically separate from the premises of the entity’s clients or their associates.
A home office will not satisfy this test, and neither will a desk at the client’s site.
What happens if the PSI rules apply?
Two sets of consequences follow.
Attribution. The entity’s net PSI is attributed to the individual who performed the work and taxed at their marginal rate, whether or not the cash was actually paid to them. The entity has PAYG withholding and reporting obligations on the attributed amount.
Restricted deductions. The entity cannot claim deductions that the individual could not have claimed as an employee. In practice, the significant exclusions are:
- payments to associates for work that is not principal work, and superannuation contributions on those payments; and
- rent, mortgage interest, rates and land tax for the individual’s residence (or an associate’s residence).
One common misunderstanding is worth correcting: the PSI rules deal only with how income is taxed. They do not determine whether you are an employee or a contractor for superannuation guarantee, workers’ compensation or payroll tax purposes. Those are separate tests, and an arrangement can land differently under each.
What is PCG 2025/5?
On 28 November 2025, the ATO finalised PCG 2025/5, which sets out its compliance approach to personal services businesses and Part IVA of the Income Tax Assessment Act 1936, the general anti-avoidance provision.
The guideline doesn’t change the law. What it does is confirm something many advisers had suspected but the ATO had never spelled out so directly: qualifying as a PSB protects you from the PSI attribution rules in Division 86, but it does not protect you from Part IVA.
Even where an entity legitimately passes a PSB test, the ATO can still look at how the profits are actually used, and if the arrangement’s dominant purpose looks like tax reduction rather than genuine commercial activity, Part IVA can apply to unwind the tax benefit and attribute the income back to the individual.
PCG 2025/5 applies broadly, extending beyond the professional services and medical sectors it’s most associated with to trades such as plumbing and electrical work, and to any structure used to allocate income earned from personal effort.
PCG 2025/5 sits alongside the ATO’s earlier PCG 2021/4, which deals specifically with how professional firms allocate profits among partners and practitioners; PCG 2025/5 is broader, covering any personal services entity’s profit retention or distribution, regardless of industry.
Which arrangements does the ATO consider higher risk?
The guideline sets out a risk-based framework, sorting arrangements into low-risk and higher-risk zones based on how PSI is retained or distributed once it reaches the PSB. Common higher-risk indicators include:
- Profit retention without commercial purpose: leaving significant profits sitting in a company indefinitely, with no plan for reinvestment or business growth.
- Income splitting: distributing income to a spouse, family member, or other associate taxed at a lower marginal rate, where that person contributes little or no actual work.
- Uncommercial remuneration: paying the key service provider (the individual actually doing the work) well below market value, so a larger share of profit is taxed at the lower corporate rate instead.
- Diversion to loss entities: channelling PSI into related entities carrying forward tax losses, purely to shelter the income.
By contrast, low-risk arrangements are generally those where the individual who performs the services is paid at or near market value and taxed at their own marginal rate, and any retained profits or payments to associates have a clear, documented commercial rationale, for example, funding genuine business expenses or reflecting real value contributed by others.
A worked example
Consider an IT consultant operating through her own company. She works for four unrelated clients won through her own website and referrals, so the company comfortably passes the unrelated clients test and is a PSB. Division 86 does not attribute her income.
The company bills $400,000 for the year. She draws a salary of $90,000. Her spouse, who spends about two hours a week on invoicing, is paid $85,000. The remaining profit is retained in the company and taxed at the corporate rate.
Under the old analysis, the PSB status ended the conversation. Under PCG 2025/5, two features stand out: a market salary for a consultant billing $400,000 is plainly higher than $90,000, and $85,000 for a few hours of administration a week is not commercially explicable. Both are the kind of features the ATO says it will examine under Part IVA.
The same business, with the consultant paid a defensible market salary and the spouse paid a market rate for the administrative work actually performed, sits in a very different position, with no change to the structure itself.
This example is illustrative only. The figures are not benchmarks, and market value depends on the role, sector and location.
Four common misconceptions
- “I have an ABN and a company, so the PSI rules don’t apply.” Structure alone is irrelevant. The rules look at what produces the income, not the vehicle it flows through.
- “I have more than one client, so I pass the unrelated clients test.” Only if the work came from offers made to the public, and only if no single client provides 80% or more of your PSI.
- “I passed a PSB test, so I can split the profits however I like.” This is exactly the assumption PCG 2025/5 was written to correct.
- “If the PSI rules apply, I’m really an employee.” No. PSI is a tax-attribution concept. Employment status for superannuation and workers’ compensation is decided separately.
What this means for business owners
The practical impact of PCG 2025/5 is that satisfying a PSB test is no longer the end of the analysis. It’s the start of a second question: can the way profits are used or split be commercially justified?
To manage this risk, business owners operating through a personal services entity should:
- Revisit which PSB test applies and confirm the self-assessment still holds for the current income year, including the 80% threshold.
- Benchmark remuneration paid to the key service provider and to any associates against the market value of the work actually performed.
- Document the commercial rationale for retaining profits in the entity. Business plans, reinvestment strategies, and board or trustee minutes all help demonstrate genuine purpose rather than tax deferral.
- Review structures involving family members, particularly where a spouse or adult child receives income disproportionate to the work they perform.
- Keep contemporaneous records. A rationale documented at the time carries far more weight than one reconstructed during a review.
Transition window
The ATO has indicated that where a taxpayer makes a genuine attempt to move a higher-risk arrangement to a low-risk position by 30 June 2027, it won’t seek to apply Part IVA to that arrangement if selected for review. That makes now the right time to review existing structures, rather than waiting for an ATO risk review to prompt the conversation.
Getting your structure right
The interaction between the PSI rules, the PSB tests, and Part IVA is nuanced, and the right answer depends heavily on the specifics of how income is earned, retained, and distributed in your structure. If you operate through a company, trust, or partnership and haven’t reviewed your position against PCG 2025/5, we’d recommend doing so before the ATO does it for you.
Our tax strategy and business advisory services cover exactly this kind of review, and our fixed-fee approach means you’ll know the cost before any work begins.
This article provides general information only, is current as at the date of publication, and does not constitute tax advice. Tax outcomes depend on your individual circumstances. Please contact us if you would like us to review your current structure and assess it against the ATO’s risk-based framework.
Frequently asked questions
Do the PSI rules apply if I have an ABN and work through my own company?
Yes, they can. Having an ABN, a registered company or a service trust makes no difference on its own. The PSI rules look at what actually produces the income. If more than half of what a client pays is a reward for one individual’s personal skill or effort, that income is personal services income regardless of the structure it flows through.
What is the 80% rule for personal services income?
If 80% or more of an individual’s PSI in an income year comes from one client and that client’s associates, the entity can only self-assess against the results test. The unrelated clients, employment and business premises tests are unavailable. If the results test isn’t met, the entity must apply to the ATO for a personal services business determination, or accept that the PSI rules apply.
If less than 80% comes from any single client, all four tests are available.
What is the difference between PSI and a personal services business?
PSI describes the income: earnings produced mainly by an individual’s personal skill or effort. A personal services business (PSB) describes the entity: one that satisfies at least one of the four PSB tests, or holds an ATO determination.
You can earn PSI and still be a PSB. If you are, the attribution rules in Division 86 don’t apply and the entity can claim its ordinary business deductions.
Does passing a PSB test protect me from Part IVA?
No. This is the central message of PCG 2025/5. Qualifying as a personal services business switches off the PSI attribution rules in Division 86, but it does not displace Part IVA, the general anti-avoidance provision. The ATO can still examine how profits are retained or distributed, and apply Part IVA where the dominant purpose of the arrangement appears to be obtaining a tax benefit rather than genuine commercial activity.
Can I still split income with my spouse if my company is a PSB?
Only where the payment reflects the market value of work that person genuinely performs. Paying a spouse or adult child an amount disproportionate to their actual contribution is specifically identified as a higher-risk feature under PCG 2025/5, even where the entity passes a PSB test. Keep a contemporaneous record of the role, the hours and the basis for the rate.
What happens if the PSI rules apply to my income?
Two things. First, the entity’s net PSI is attributed to the individual who performed the work and taxed at their marginal rate, whether or not the cash was paid out, with PAYG withholding obligations attaching. Second, deductions are restricted: the entity generally cannot claim rent, mortgage interest, rates or land tax on a residence, or payments to associates for non-principal work.
Do the PSI rules mean I am an employee?
No. The PSI rules only determine how income is taxed. Whether you are an employee or a contractor for superannuation guarantee, workers’ compensation and payroll tax purposes is decided under separate tests, and an arrangement can be treated differently under each.
