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Are you an IT professional thinking of changing your work arrangement?

If you are an IT or other professional who is considering registering a company to do IT contracting jobs for one employer, it is essential to understand the concept of PSI and the tax implications that come with it.


What is Personal Services Income (PSI)?


Income is classified as PSI when more than 50% of the income you’ve received from a contract is a reward for your personal efforts or skills, rather than being generated by the use of assets, the sale of goods, or from a business structure. In other words, PSI is income that is earned mainly from an individual’s personal skills, efforts, or expertise. This type of income can come from activities such as consulting, contracting, or freelancing. If you are an IT professional who earns income through these activities, your earnings may be considered PSI.
The ATO provides guidelines for determining whether your income is PSI or not. Some of the factors that may indicate that your income is PSI include:

  • You are required to perform the work personally, and you are paid for the hours you worked.
  • You are provided with the necessary tools and equipment to complete the work.

If your income is considered PSI, special taxation rules apply.
Taxation of Personal Services Income (PSI)
If your income is considered PSI, you are subject to the Personal Services Income rules. These rules are designed to prevent individuals from using a company structure to reduce their tax liability on PSI. The rules apply if you earn PSI through a company, partnership, or trust structure.
If you receive personal service income, you need to check whether you meet one of the following tests in order to get an exemption from PSI rules:

  • The results test: You must demonstrate that you are paid to achieve a result, rather than for the hours worked. This test is met if at least 75% of your income for the year is from producing a result.
  • The unrelated clients test: To pass the unrelated clients test in an income year, you must meet both of the following conditions:
    • You must have received PSI from 2 or more unrelated clients.
    • There must be a direct connection between the offer to the public and you being engaged to perform the work.
    • less than 80% of your PSI is from the same entity and its associates.

If you operate through a company, partnership, or trust and you have more than one individual generating PSI, you’ll need to work out whether you pass the unrelated clients test for each individual separately. It is possible to have different outcomes for different individuals.

  • The employment test: To pass the employment test, your business must employ or contract others to help perform work that generates your PSI, and you must meet one of the following conditions:
    • at least 20% of the principal work is performed by others
    • one or more apprentices are employed for at least 6 months of the income year.
    • less than 80% of your PSI is from the same entity and its associates.

If you do not meet any of the tests, your income is considered PSI and is subject to special taxation rules. Under these rules, your income is attributed to you personally and is taxed at your marginal tax rate. You are not entitled to any deductions that are not directly related to earning your PSI income.

Registering a Company for IT Contracting Jobs

If you are an IT professional who is thinking of registering a company to do IT contracting jobs for one employer, you should be aware of the PSI rules and how they apply to your situation. If your income is considered PSI, you may be subject to additional taxation and reporting requirements.

Before registering a company, it is recommended that you seek advice from a qualified accountant or tax professional. They can help you understand the implications of the PSI rules and assist you in structuring your business in a tax-efficient manner.

For more information on PSI you can refer to below ATO link:

https://www.ato.gov.au/Business/Personal-services-income/Income-that-is-PSI/