Understanding Personal Services Income (PSI) and Exemptions

Personal Services Income (PSI) is income primarily derived from an individual’s skills or efforts, whether earned directly or through a business structure. The PSI rules, however, do not apply to income earned as an employee.

Business Structure and PSI
A “business structure” refers to a business large enough to generate income from its operations rather than from the individuals involved. This term doesn’t imply the business is a company or a trust; rather, it includes businesses of various sizes where income is seen as coming from the business entity rather than directly from individuals.

Tests to Determine if PSI Rules Apply

1. Results Test: The PSI rules do not apply if 75% or more of income is earned from producing a specified outcome, where the individual provides their own tools or equipment and is responsible for correcting any defects. This test demonstrates that income is based on results rather than simply personal effort.
2. Unrelated Clients Test: This test is met if services generate income from at least two clients who are not connected, and these clients were acquired through public advertising or offers. Passing this test suggests income is derived from a broader market, not a single source.
3. Employment Test: PSI rules do not apply if other unrelated businesses are contracted to complete at least 20% of core work by market value, or if an apprentice is employed for at least half of the income year. This test indicates that the income is linked to a broader team effort rather than individual performance.
4. Business Premises Test: The PSI rules do not apply if the business premises are the primary location for generating income, are exclusively used for business purposes, and are physically separate from any personal or client premises. This test ensures that income is derived from a dedicated business setting rather than personal spaces.

Personal Services Determination
In some cases, the ATO may rule that PSI rules do not apply if there are temporary changes in circumstances that lead to failing the PSI tests. This ruling, known as a “personal services determination,” can be requested from the ATO if you believe the PSI rules shouldn’t apply to you due to unique circumstances.