Australia Personal Services Income (PSI) — Divisions 84-87

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Law-change context. Two 2025-26 developments reshape PSI work. (1) The ATO finalised draft PCG 2024/D2 as PCG 2025/5 (issued 28 November 2025): qualifying as a personal services business does NOT immunise income splitting or profit retention from Part IVA -- Rule 11 carries the low-risk / higher-risk framework, including the ATO's statement that it will not pursue Part IVA compliance where a taxpayer makes a genuine attempt to move to a low-risk arrangement by 30 June 2027. (2) The $1,000 standard deduction for work-related expenses (Treasury Laws Amendment (Tax Reform No. 1) Act 2026, from 1 July 2026) does NOT extend to PSI earners -- Rule 12.

Section 1 -- Quick reference

Read this whole section before classifying any income or computing anything.

Field	Value
Country	Australia
Primary Legislation	ITAA 1997 Part 2-42: Div 84 (definition), Div 85 (individuals' deduction limits), Div 86 (attribution + entity deduction limits), Div 87 (PSB tests)
Tax Authority	Australian Taxation Office (ATO)
Income Year	2026-27 (1 July 2026 -- 30 June 2027); lodgment season under way for 2025-26
PSI definition	Income mainly (more than 50%) a reward for an individual's personal efforts or skills (s 84-5)
Results test	All 3 conditions met for at least 75% of the individual's PSI (s 87-18)
80% rule	80% or more of PSI from one client + its associates blocks self-assessment on the other three tests (s 87-15(3)) -- results test or PSBD only
Other PSB tests	Unrelated clients (s 87-20), employment (s 87-25), business premises (s 87-30) -- each needs the 80% rule met
PSB determination	ss 87-60 (individuals) / 87-65 (entities); unusual-circumstances gateway
Attribution	Net PSI included in the individual's assessable income (s 86-15); NANE to the entity (s 86-30)
PAYG on attributed PSI	TAA 1953 Sch 1 Div 13 (attributed amounts) and Div 12 (salary actually paid)
Core ATO ruling	TR 2022/3 (replaced TR 2001/7 and TR 2001/8)
Part IVA guideline	PCG 2025/5 (issued 28 Nov 2025; applies before and after issue)
Contributor	Open Accountants
Validated by	Pending

Conservative defaults:

Ambiguity	Default
Entity's fee income traced to one individual's work	Treat as PSI of that individual until the >50% "mainly" analysis says otherwise
Hourly or daily-rate contract	Assume the results test FAILS (not paid for a result) until the contract shows otherwise
Client concentration unknown	Assume the 80% rule FAILS; only the results test or a PSBD can then save PSB status
"We advertise" claimed for unrelated clients test	Assume NOT satisfied until offers/invitations to the public are evidenced (website, tenders, ads -- not a labour-hire panel)
Home office claimed as business premises	Assume the business premises test FAILS (not physically separate, rarely exclusive)
PSB status asserted, low salary + retained profits visible	Treat as PCG 2025/5 HIGHER RISK; run the Rule 11 screen and escalate
Employee-like engagement (one payer, their tools, their control)	Flag employee/contractor characterisation and sham-contracting risk before any PSI analysis (Rule 12, R-AU-PSI-5)

Section 2 -- The five-step decision flow

Work every engagement, per individual, per income year, in this order. Never skip a step.

1. Is any income PSI? More than 50% of the reward under each contract/invoice for an individual's personal efforts or skills -> PSI (Rule 1). Test each contract separately.
2. Is the individual/entity a PSB under the results test? (Rule 4). If yes for >= 75% of PSI -> PSI rules do not apply (go to step 5 anyway).
3. Is less than 80% of the PSI from one client and its associates? If no -> PSI rules apply unless a PSBD is obtained (Rule 8). If yes -> test unrelated clients, employment, business premises (Rules 5-7).
4. No test met, no PSBD? PSI rules apply: deduction limits (Rule 10), attribution (Rule 9), PAYG (Rule 9).
5. PSB after all? The income keeps its PSI character; ordinary rules plus Part IVA apply -- run the PCG 2025/5 risk screen (Rule 11).

Section 3 -- GL sweep library

PSI work starts with the ledger and the debtor list, not the client's self-assessment.

GL pattern	Likely issue	Action
Company/trust service fees generated by ONE individual's skills	PSE candidate	Run the Section 2 flow per individual; check invoices for goods/asset components
One debtor >= 80% of fee income	80% rule fails	Results test or PSBD are the only PSB routes; else attribution
Low director salary + material retained profits	PCG 2025/5 higher-risk retention	Verify PSB status first, then Rule 11 screen; escalate structuring (R-AU-PSI-6)
Dividends/distributions to non-working spouse or family members	Higher-risk income splitting	Rule 11; document services actually provided; escalate (R-AU-PSI-6)
Rent, mortgage interest, rates paid to the individual/associate for their residence	Denied: s 85-15 / s 86-60	Add back in the attribution computation
Salary or "admin fee" to an associate	Deductible only for principal work (s 85-20); admin support denied	Add back non-principal amounts; test reasonableness
Two or more cars with private use by the individual	One-car limit (s 85-25 / s 86-70)	Add back the excess
Nil PAYG remitted but attribution applies	TAA Sch 1 Div 13 breach	Quantify; flag urgently
Contract income billed hourly with timesheets	Results test likely failing	Evidence check before any PSB claim

Section 5 -- Tier 1 rules

Rule 1 -- What PSI is (s 84-5)

Ordinary or statutory income that is mainly -- more than 50% -- a reward for an individual's personal efforts or skills. Assess contract by contract on the substance of what the payment rewards, not the invoice label. Only individuals have PSI, but a company, partnership or trust (a personal services entity, PSE) can receive it; the rules then operate per test individual. Almost any profession can earn PSI: IT contractors, engineers, medical practitioners, consultants, construction professionals.

Rule 2 -- What PSI is not

Income mainly from: supplying or selling goods; granting the use of income-producing assets (e.g. plant hire, a truck where the payment mainly rewards the vehicle); or a business structure (substantial employees/practice assets generating the income rather than one person's exertion). A structure is not "business structure income" merely because a company exists, carries on a business, or qualifies as a PSB (PCG 2025/5 paras 18-20). Salary of a genuine employee is outside the PSI regime entirely (s 84-10 works the other way too -- see Rule 12). Professional firms with genuine structure income are PCG 2021/4 territory, not this file.

Rule 3 -- The gateway and the 80% rule (s 87-15)

A PSE/individual conducts a PSB in an income year only if: the results test is met; or less than 80% of the individual's PSI comes from one client and its associates AND at least one of the other three tests is met; or a PSB determination is in force. At 80%-or-more concentration the unrelated clients, employment and business premises tests are unavailable to self-assessment no matter how clearly they would be satisfied -- only the results test or a PSBD helps. Apply the 80% rule per individual, aggregating each client with its associates.

Rule 4 -- Results test (s 87-18)

Met if at least 75% of the individual's PSI for the year satisfies ALL three conditions, judged against custom or practice for independent contractors (s 87-18(4)):

1. the income is for producing a result (payment contingent on outcome -- hourly/daily rates generally fail);
2. the individual/entity is required to supply the plant, equipment or tools of trade needed to do the work (where the work genuinely needs none, the condition can still be satisfied -- TR 2022/3); and
3. the individual/entity is or would be liable for the cost of rectifying defective work (a real exposure to rectify at own cost, not a right of the client to terminate).

The results test is the only test available regardless of client concentration. Mixed contract books are common: measure the percentage of PSI dollars meeting all three limbs, not the number of contracts.

Rule 5 -- Unrelated clients test (s 87-20)

Both limbs, in the income year: (a) PSI from 2 or more clients who are not associates of each other or of the individual/PSE; and (b) the services are provided as a direct result of making offers or invitations to the public or a section of the public -- advertising, a public website, competitive tenders; word-of-mouth referrals can qualify in narrow, specialised markets (TR 2022/3). Statutory carve-out: merely being available through an entity whose business is arranging for persons to provide services to its clients (labour-hire firms, some agencies/platforms) is NOT making offers to the public (s 87-20(2)). Failing limb (b) with otherwise-plentiful clients is the most common practitioner error.

Rule 6 -- Employment test (s 87-25)

Met if the entity/individual engages one or more others who perform at least 20% (by market value) of the principal work for the year, or has one or more apprentices for at least half the year. The test individual never counts toward it; for individuals, non-individual associates count only where the work is performed by others. "Principal work" is the work generating the PSI, not administration or bookkeeping.

Rule 7 -- Business premises test (s 87-30)

At all times during the income year, the individual/PSE maintains AND uses business premises: (a) at which the PSI-producing activities are mainly conducted; (b) of which they have exclusive use; (c) physically separate from private premises of the individual/associates; and (d) physically separate from the premises of the client (and client's associates). The premises need not be the same all year, but there must be qualifying premises for every day. Home offices fail (c); a rented room without exclusive use fails (b); shared reception areas do not count.

Rule 8 -- PSB determinations (ss 87-60, 87-65)

When self-assessment is unavailable -- typically 80%+ concentration, or a test narrowly missed -- the PSE/individual can apply for a PSBD. The Commissioner may make one where satisfied a test was met or could reasonably be expected to be met but for unusual circumstances (e.g. starting out while genuinely advertising to the public with a reasonable expectation of unrelated clients; temporary loss of a client; natural disasters interrupting premises -- TR 2022/3 example of flood-delayed premises). For the results/unrelated-clients routes at 80%+ concentration the ATO also looks to whether the income could have come from unrelated clients. Determinations operate for specified years and can be revoked on changed facts. Preparing or lodging an actual PSBD application escalates -- R-AU-PSI-4. This file only identifies candidacy.

Rule 9 -- Consequences: attribution and PAYG (Div 86; TAA 1953 Sch 1 Divs 12-13)

Where the PSI rules apply to PSI received by a PSE:

• Attribution (s 86-15): the individual's assessable income includes the entity's income that is that individual's PSI, EXCEPT amounts promptly paid to the individual as salary (within 14 days after the end of the relevant PAYG payment period) -- those are salary in the ordinary way.
• Net amount (s 86-20): the attributed amount is reduced by the entity's deductions relating to that PSI (after the Rule 10 limits). If deductions exceed the PSI, the excess flows to the individual (s 86-27).
• No double tax (s 86-30): attributed income is neither assessable nor exempt income of the entity.
• PAYG: the entity withholds under Div 12 on salary actually paid AND must pay amounts to the Commissioner under Div 13 in respect of attributed (alienated) PSI quarterly, reporting the attributed income to the individual annually. Missed Div 13 obligations are a standing audit flag.
• Sole traders whose PSI is caught face the Rule 10 deduction limits directly (no attribution needed) and report at the PSI labels.

Rule 10 -- Consequences: deduction limits (Div 85; Subdiv 86-B)

The organising principle: no better than an employee. Against PSI, the individual (s 85-10) -- and derivatively the PSE (s 86-60) -- can deduct only what an employee earning that income could deduct, plus a short statutory list. Specifically DENIED:

• rent, mortgage interest, rates, land tax for the residence of the individual or an associate used for PSI work (s 85-15) -- the classic home-office occupancy claim;
• payments to associates (salary, super) for non-principal work -- admin, bookkeeping, secretarial support (s 85-20); payments to associates for principal work remain deductible;
• car expenses beyond one car used partly privately at a time (s 85-25; s 86-70);
• general entity running costs beyond entity maintenance deductions -- the allowed list is narrow: financial-institution account fees, s 25-5 tax-related expenses, Corporations Act document/lodgment costs, statutory fees (s 86-65, applied first against the entity's other income).

Still DEDUCTIBLE (s 85-10(2) and TR 2022/3): costs of gaining work (advertising, tendering, quoting), insuring against income loss, public liability and professional indemnity premiums, GST-related amounts, engaging others (non-associates, or associates for principal work), super for those workers, and the employee-style claims themselves (running expenses for a home work area, tools, self-education with nexus). s 85-30 switches Div 85 off where the individual is conducting a PSB; s 85-35 keeps employees and office-holders out of Div 85 entirely.

Rule 11 -- PSB does not mean safe: Part IVA and PCG 2025/5

Passing a PSB test switches off Divs 85-86 only. The note to s 86-10, TR 2022/3 (para 161's income-splitting considerations) and PCG 2025/5 (issued 28 November 2025, finalising PCG 2024/D2; applies before and after issue) all confirm Part IVA of the ITAA 1936 can still cancel the tax benefit from alienation arrangements -- income splitting or retention of profits -- where the dominant purpose is a tax benefit (s 177D eight-factor test; Tupicoff, Gulland, Mochkin, Hart).

PCG 2025/5 zone	Markers	ATO posture
Low risk (Examples 1-9)	Entire net PSI assessed to the doing individual in the year earned, at marginal rates; remuneration commensurate with services; associate wages reasonable for bona fide work; superannuation for the individual; temporary retention with a genuine commercial purpose carried out; deferrals explained by events outside control (illness)	Compliance resources will not be applied
Higher risk (Examples 10-17)	Net PSI diverted so it is taxed at an overall lower rate; individual's remuneration below the value of their services; nil distribution to the doer; splitting to lower-taxed associates; associate pay not commensurate with their actual services; retention beyond commercial needs -- retention of PSI is of itself a higher-risk indicator, including where retained funds return via complying Div 7A loans	Increased likelihood of review and Part IVA consideration; materiality of the diverted amount drives prioritisation

There is no safe percentage of diversion (para 41). Record-keeping expectations are extensive (contracts, timesheets, minutes, resolutions, contemporaneous purpose notes -- paras 43-47). Transitional: no Part IVA compliance pursuit for genuine moves to low-risk arrangements by 30 June 2027 (para 11). Spousal partnerships sit outside the Guideline's focus but artificial no-contribution partnerships still raise Part IVA (paras 16-17). Screening against the table is in scope; any Part IVA position or restructure design escalates (R-AU-PSI-6).

Rule 12 -- Boundaries: employees, sham contracting, and the $1,000 standard deduction

• PSI rules do not make anyone an employee (s 84-10): super guarantee, payroll tax, workers comp and Fair Work status are decided under their own laws.
• Employee in substance? If the "contractor" is actually an employee (contract-rights analysis per Personnel Contracting [2022] HCA 1; TR 2023/4), the payer has PAYG/SG obligations and the PSI analysis is moot. Representing an employment relationship as independent contracting risks sham contracting penalties (Fair Work Act ss 357-359). Reclassification questions escalate (R-AU-PSI-5).
• Standard deduction excluded: the up-to-$1,000 standard deduction for work-related expenses (Treasury Laws Amendment (Tax Reform No. 1) Act 2026 Sch 4; from 1 July 2026, first applying to 2026-27 returns) is for employment-style work income and does not apply to taxpayers whose relevant income is PSI or business income -- substantiated actual claims continue for them. Never net it against PSI or attributed amounts.

Section 7 -- Excel working paper template

AUSTRALIA PSI -- DECISION AND ATTRIBUTION REGISTER
Entity/individual: [name]   Test individual(s): [names]   Income year: 2026-27
Prepared: [date]

STEP 1 -- PSI IDENTIFICATION (per contract)
  Contract / client:                [____]
  Amount:                           AUD [____]
  Mainly (>50%) reward for personal efforts/skills? [Y/N -- basis]
  Goods / asset-use / business-structure component: AUD [____]

STEP 2 -- PSB TESTS (per test individual)
  Results test: % of PSI meeting result + tools + defect liability: [__%]  (need >= 75%)
  Client concentration: largest client + associates share: [__%]  (>= 80% blocks other tests)
  Unrelated clients: 2+ non-associated clients? [Y/N]  Offers to public evidenced? [Y/N]
  Employment: others perform >= 20% of principal work by market value? [Y/N]
  Business premises: mainly-PSI / exclusive / separate from home / separate from client,
    at ALL times? [Y/N x 4]
  PSBD in force? [Y/N -- years covered]
  CONCLUSION: PSB? [Y/N -- which test]

STEP 3 -- IF PSI RULES APPLY
  PSI received by entity:            AUD [____]
  less salary promptly paid (14-day rule): AUD [____]
  less deductible outgoings (employee-style + s 86-65 list): AUD [____]
  add back DENIED items:
    rent/mortgage/rates to associate residence: AUD [____]
    associate non-principal work payments:      AUD [____]
    second-car expenses:                        AUD [____]
  = NET PSI ATTRIBUTED (s 86-15/86-20): AUD [____]
  Div 13 PAYG remitted on attributed amounts? [Y/N -- amounts]

STEP 4 -- IF PSB: PCG 2025/5 SCREEN
  Net PSI assessed to the doing individual this year? [Y/N]
  Remuneration commensurate with services? [Y/N]
  Retention -- amount, stated commercial purpose, carried out? [____]
  Distributions to associates -- recipient, services provided, amount: [____]
  Zone assessment: [LOW / HIGHER -- indicators]

REVIEWER FLAGS
  [R-AU-PSI codes triggered; unresolved facts]

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Section 8 -- Reading guide

1. Identify PSI contract-by-contract before any test: the >50% "mainly" question comes first, and goods/asset components can split a single invoice.
2. The 80% rule is a gate on self-assessment, not a definition of PSI -- clients conflate them constantly.
3. Hourly rates are the tell: they usually sink the results test's first limb regardless of how skilled the work is.
4. For the unrelated clients test, count only clients won by offers to the public -- the labour-hire carve-out (s 87-20(2)) is the most-missed subsection in the Division.
5. PSB status ends the Div 85/86 analysis and starts the Part IVA one. Never write "PSI rules don't apply" without the PCG 2025/5 screen attached.

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Section 9 -- Reference material

Key figures

Item	Value
"Mainly" threshold (PSI definition)	More than 50% of the reward (s 84-5)
Results test coverage	>= 75% of the individual's PSI, all 3 conditions (s 87-18)
80% rule	< 80% from one client + associates to self-assess the other tests (s 87-15(3))
Employment test	>= 20% of principal work by market value, or apprentice(s) >= half the year (s 87-25)
Business premises test	All 4 conditions at all times in the year (s 87-30)
Salary carve-out from attribution	Paid as salary within 14 days after the PAYG payment period (s 86-15(4))
Agents regime commission floor	>= 75% commission/results-based (s 87-40)
Standard deduction (2026-27)	Up to $1,000; work expenses; EXCLUDES PSI/business-only earners
PCG 2025/5 transition	Genuine move to low-risk arrangement by 30 June 2027

Primary sources (verified 20 August 2026)

Topic	Source
Statute	ITAA 1997 Part 2-42: Divs 84, 85, 86, 87 (ss 84-5, 85-10 to 85-35, 86-15, 86-20, 86-30, 86-60 to 86-70, 87-15, 87-18, 87-20, 87-25, 87-30, 87-40, 87-60, 87-65); ITAA 1936 Part IVA
Core ruling	TR 2022/3 Income tax: personal services income and personal services businesses
Part IVA guideline	PCG 2025/5 Personal services businesses and Part IVA (issued 28 Nov 2025; finalised PCG 2024/D2); PS LA 2005/24; IT 2121, IT 2330, IT 2503, IT 2639; TR 2003/6
PAYG on attributed PSI	TAA 1953 Sch 1 Divs 12 and 13
ATO guidance pages	PSI hub QC 16906; results test QC 46006; self-assessing/80% rule QC 46014; PSI-rules flow QC 70976; PSI decision tool QC 47696
Standard deduction	Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Sch 4); ATO new-legislation page QC 107405 (updated 26 June 2026)
Employee/contractor	CFMMEU v Personnel Contracting [2022] HCA 1; ZG Operations v Jamsek [2022] HCA 2; TR 2023/4; Fair Work Act 2009 ss 357-359

Test suite

Test 1: Company invoices $150,000 for its director's consulting, hourly rate, client's tools, no defect liability. -> PSI; results test fails; check 80% rule next.

Test 2: 75% of PSI dollars meet all three s 87-18 limbs, one client pays 95% of income. -> Results test met at exactly 75%; PSB despite concentration.

Test 3: Four unrelated clients (largest 40%) all sourced from a recruiter's panel. -> 80% rule met but s 87-20(2) defeats the offers-to-public limb; unrelated clients test fails.

Test 4: Contractor's spouse does 25% (market value) of the principal design work as an employee. -> Employment test met; PSB if <80% concentration.

Test 5: "Business premises" is a dedicated home-office wing. -> Fails s 87-30(c) physical separation; test not met.

Test 6: PSE with $200,000 PSI, $120,000 prompt salary, $10,000 deductible costs, $15,000 rent paid to the individual for his house. -> Attribution = 200,000 - 120,000 - 10,000 = $70,000; the $15,000 is denied and ignored.

Test 7: Deductions relating to PSI exceed the PSI by $5,000. -> Excess flows to the individual (s 86-27).

Test 8: PSB company pays the doer 100% of net PSI as salary + super at the cap. -> PCG 2025/5 low risk (superannuation for the individual is a low-risk indicator).

Test 9: PSB trust distributes 60% of net PSI to a non-working beneficiary. -> Higher risk (splitting, remuneration not commensurate); escalate R-AU-PSI-6.

Test 10: Employee asks to claim the $1,000 standard deduction; sole trader with only PSI asks the same. -> Employee yes (2026-27 onward); PSI earner no.

Prohibitions

• NEVER treat an ABN, company or trust as taking income outside PSI -- structure is irrelevant to the s 84-5 definition
• NEVER use the 80% rule as the PSI definition -- "mainly" (>50%) defines PSI; 80% only gates self-assessment
• NEVER self-assess the unrelated clients, employment or business premises tests at >= 80% single-client concentration
• NEVER pass the results test on an hourly-rate contract without documented result-basis, tools and defect liability
• NEVER count labour-hire or agency panel availability as offers to the public
• NEVER deduct rent/mortgage interest to the individual or an associate, associate non-principal wages, or a second private-use car against PSI
• NEVER claim the $1,000 standard deduction against PSI
• NEVER treat PSB status as Part IVA protection -- run the PCG 2025/5 screen every time
• NEVER design salary/distribution/retention levels, prepare PSBD applications, or opine on dominant purpose -- compute, flag, escalate
• NEVER present figures as definitive

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Contributed by Ryan Duguid.