PSI (personal services income) rules — contractor with 3 clients, passes results test?
IT contractor client. sole trader, ABN. 2024-25 income 100% from his consulting activity.
client mix:
- client A: 70% of income, long-running engagement via recruiter
- client B: 20%
- client C: 10%
PSI applies to his income by default. to escape PSI (become a PSB — personal services business), he needs to pass ONE of:
- results test (paid for a specific result, supplies tools/equipment, liable for rectifying defects)
- 80% test (no one client > 80% of income + pass unrelated clients OR employment OR business premises test)
- unrelated clients test (income from 2+ unrelated clients)
- employment test
- business premises test
his 70/20/10 mix passes the 80% test AS LONG AS he also passes the unrelated clients test (clients A, B, C are unrelated businesses). results test might also work but his recruiter-sourced A income looks more like employment than "paid for specific result".
my read: he's a PSB via 80% + unrelated clients. treats income as business income, can claim expenses, retirement contributions etc.
is that right? the ATO has been aggressive lately with recruiter-sourced contractors.
3 replies
self-answering — reviewed the 2024 ATO rulings (TR 2022/3) and the 80% test + unrelated clients test path is solid for his facts.
the ATO aggression is mostly on SINGLE-client contractors claiming PSB status — your client's 70/20/10 mix is safer. the unrelated clients test requires the clients not be connected (same corporate group, same controlling individual etc.) which seems fine here.
ONE watch-out: if the 70% client A is sourced via a recruiter, make sure the contract is between contractor and end client (or recruiter + end client clearly identified as separate), not just "recruiter is the client". ATO will sometimes treat recruiter as the only client if documentation is sloppy, which would fail unrelated clients test.
totally different mechanism but the same problem shows up in the US — IRS looking at 1099 contractors who really should be W-2 employees. the UK has IR35 doing similar work. every jurisdiction has some version of "is this actually independent contracting?"
IR35 is the UK flavour as Sarah said — and the "outside IR35" vs "inside IR35" determination has become a minefield since the 2021 off-payroll rule extension. your PSI framework sounds more prescriptive than IR35's "status" tests.
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