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When an individual receives income that is mainly a reward for his/her personal efforts or skills, they may fall within the Personal Service Income (PSI) rules. To be excused from the rules, the business needs to be a Personal Services Business (PSB). 
Individuals can receive PSI in almost any industry, trade or profession, which include financial professionals, information technology consultants, engineers, construction workers and medical practitioners. PSI does not affect an individual if he/she is only receiving salary and wages.

As an individual, he/she needs to identify whether the work they do falls under the category of PSI.  Thus, if income is more than 50% of the amount an individual receives for his/her labour, skills or expertise, only then it will be PSI. For example, ABC company provides computer programming services but Mr. X does all the work involved in providing those services as he is the only employee. Mr. X uses the client's equipment and software to do the work. ABC’s income from providing the services is Mr. X's personal services income because it is a reward for his personal efforts and skills.
When an individual receives PSI, they need to work out if the PSI rules apply to that income. To do this, individual needs to work through a series of steps provided by the Australian Tax Office in the correct order. These are:

  • Step 1 is to work out if individual has received PSI; and
  • Steps 2 to 4 are known as the PSB tests. This will help individual to identify whether the contract or job is a PSB.

PSI rules are not applicable to incomes which are mainly:

  • For supplying and selling goods;
  • Generated by an income-producing asset; 
  • For granting a right to use property; or 
  • Generated by a business Structure.

For an instance, Mr. Y owns and drives a bulldozer that he uses on construction sites. The income is not his PSI because it is derived mainly by the use of the bulldozer and not by his personal efforts or skills.

To receive PSI, individual does not need to be a sole trader. If he/she is producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

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