Key takeaways
- Personal services income (PSI) is income mainly earned for your personal skills and effort, which is common for IT contractors.
- If the PSI rules apply and you are not running a personal services business, income is generally attributed to you personally, and deductions are limited.
- The results test is the most common way to qualify. It looks at whether you are paid to produce a result, supply your own tools and are liable to fix defects.
- The 80 per cent rule applies if 80 per cent or more of your PSI comes from one client. In that case, you generally need to pass the results test.
- Contractor or employee status depends on the real substance of the working relationship, not just the label in the contract.
- Employee share scheme (ESOP) rules are separate and have their own tax timing. Confirm the details on ato.gov.au.
What is personal services income?
Personal services income, or PSI, is income that is mainly a reward for your personal skills, knowledge or effort. For many IT contractors, such as developers, consultants, analysts and project managers, most of the income earned will be PSI, even when it is paid to a company or trust.
The PSI rules are designed to stop individuals from reducing their tax by diverting what is effectively employment income through a company, partnership or trust. Whether they apply to you is a question of fact, and it is worth working through before you set up or restructure.
Am I running a personal services business?
If you earn PSI, you are in one of two positions. Either you are a personal services business (PSB), in which case the PSI rules do not restrict your deductions, or you are not, and the PSI rules apply. There are two ways to be a PSB: pass the results test, or pass the 80 per cent rule and then meet certain other tests.
The ATO can also issue a personal services business determination, which gives certainty for a set period. Applying for one can be worth it if your situation is borderline, but the application needs to be supported with evidence.
How does the results test work?
The results test asks whether you are paid to produce a result, rather than for your time. In general, you need to meet three conditions in at least 75 per cent of your PSI from a contract or arrangement. You are paid for a result, such as a completed deliverable. You supply the tools and equipment needed to do the work. You are legally responsible for rectifying defects at your own cost.
For IT contractors, hourly or daily rates are usually a warning sign. Fixed-price deliverables with a clear specification, your own equipment, and a real obligation to fix errors at your cost, are closer to what the test is looking for. These points need to be reflected in the contract and in how the work actually operates.
What is the 80 per cent rule?
If 80 per cent or more of your PSI in an income year comes from one client, or one client and its associates, you cannot rely on the other three business tests alone. You will generally need to pass the results test, or hold a PSB determination, to be treated as running a PSB.
This catches many IT contractors who work for a single large client or through a single labour hire arrangement. It is one reason that a contract with one agency can carry more risk than a mix of clients.
What are the other business tests?
If the 80 per cent rule does not apply to you, you can also qualify by passing any one of three other tests. These are the unrelated clients test, the employment test and the business premises test.
The unrelated clients test looks at whether you earn PSI from two or more unrelated clients that you obtained through offers to the public. The employment test looks at whether at least 20 per cent of the work is done by others. The business premises test looks at whether you maintain separate business premises used mainly for the business. Each has detailed conditions, so please check them on ato.gov.au.
What changes if the PSI rules apply to me?
If you are not a PSB, the PSI that your company or trust earns is generally attributed to you personally and taxed in your hands. The entity's deductions are also restricted. For example, certain costs such as rent, mortgage interest and rates for your home, and payments to associates for non-work reasons, may not be deductible.
This does not make a company or trust structure wrong. It means that the structure may not deliver the benefit you expected, and you should know this before you set it up.
Contractor vs employee in Australia: how is it decided?
Contractor vs employee Australia is a separate question from PSI, although the two are linked. The test looks at the real relationship: who controls how the work is done, whether you can delegate, whether you work for others, who provides the tools, and whether you carry commercial risk.
Recent High Court decisions have placed greater weight on the written contract terms where the contract is a complete record of the relationship. Separate changes to the Fair Work legislation have also affected how the test is applied in workplace law. The tax, superannuation and workplace tests can produce different answers, so check each one. Please seek advice if your arrangement is unclear.
How do employee share schemes (ESOP) fit in for tech workers?
Many technology workers are offered equity through an employee share scheme, often called an ESOP in Australia. The tax treatment depends on whether the scheme is taxed upfront or deferred, whether concessions apply, and whether the company is eligible as a start-up. Contractors are not always eligible in the same way as employees.
The tax point can arise years after the grant, sometimes before there is a way to sell the shares. For that reason, it is important to review your offer documents early. Please check the current rules and thresholds on ato.gov.au.
Speak with a registered tax agent about your contracting set-up
ANH Accounting is a Sydney advisory firm established in 2018, a Xero partner, and a Registered Tax Agent (RN 26258346). If you contract in the technology sector and want to understand how the PSI rules apply to you, we offer a free 30-minute session. There is no obligation, and it is best done before you sign your next contract.
Frequently asked questions
What is personal services income?
It is income that is mainly a reward for your personal skills, knowledge or effort, rather than from assets or the work of others.
Do the PSI rules apply if I operate through a company?
Yes, they can apply to income earned by a company, partnership or trust if that income is mainly for your personal efforts.
What is the 80 per cent rule?
If 80 per cent or more of your PSI comes from one client or its associates, you generally need to pass the results test to be a personal services business.
Am I a contractor or an employee?
It depends on the real substance of the working relationship and the contract terms, so each case needs to be assessed individually.
Are shares from an ESOP taxed when I receive them?
Not always, as the timing depends on the scheme type and concessions, so review your offer documents and the ATO guidance before the tax point arises.
General information only, last reviewed October 2026. It is not personal advice. Tax law changes, so confirm your circumstances with a registered tax agent or on ato.gov.au.