PSI 80% Rule Explained: Can You Still Pass the Results Test?

General information only. This is not tax or financial advice. Consult a registered tax agent for advice specific to your situation.

Personal services income (PSI) rules can re-characterise income that mainly rewards your personal effort or skills. The 80% rule is the first filter — and if you trigger it, your options narrow fast.

What is PSI?

PSI is income that is mainly a reward for your personal efforts or skills, rather than income generated by a business structure, the use of assets, or the sale of goods.

Common examples: an IT contractor who does project work for clients, a freelance designer, a consultant billed through their own company.

The PSI rules exist to prevent individuals from routing what is effectively salary or wages through a company or trust to reduce their tax rate, split income to lower-taxed family members, or claim deductions that wouldn’t be available to an employee.

Why it matters: what happens if PSI rules apply

If your income is PSI and you don’t qualify as a Personal Services Business (PSB), the rules attribute that income directly to you as an individual, regardless of what entity invoiced the client. That means:

• You can’t split the income to a spouse or lower-taxed beneficiary
• The company or trust cannot deduct expenses like admin salaries, rent, or associate payments
• You pay tax as if you earned the income personally

The key question is: do you qualify as a PSB? To find out, you first need to check the 80% rule.

Step 1: The 80% rule — does it apply to you?

Add up all your PSI for the income year. If 80% or more comes from a single client (or their associates), the 80% rule is triggered.

This doesn’t automatically mean you’re stuck — but it does limit which PSB tests you can self-assess against.

• 80% or more from one client: you can only self-assess using the results test. The other three tests are off the table unless you get an ATO PSB determination.
• Less than 80% from one client: you can self-assess against any of the four PSB tests.

Step 2: The four PSB tests

You only need to pass one test to qualify as a PSB.

1. Results test

You pass if all three of the following apply to at least 75% of your PSI:

1. You are paid to produce a result — not just to show up and work hours. The contract specifies an outcome or deliverable.
2. You provide your own tools and equipment — not relying on the client’s hardware, software licences, or facilities.
3. You are liable for rectifying defects — if the work is wrong, you fix it at your own cost.

All three criteria must be met together. Meeting two out of three is not enough.

2. Unrelated clients test

You get PSI from two or more unrelated clients, and you made offers to the public (advertising, website, word-of-mouth referrals from different sources). This test is not available if the 80% rule is triggered.

3. Employment test

You employ at least one other person (not an associate) who performs at least 20% of the principal work. This test is not available if the 80% rule is triggered.

4. Business premises test

You use business premises that you own or lease, that are separate from both your home and any client’s premises, and that you use exclusively for your work. This test is not available if the 80% rule is triggered.

Decision flowchart

Step 1: Is 80% or more of your PSI from one client?

• No → You can self-assess against any of the four PSB tests. Pass any one and PSI rules don’t apply.
• Yes → Go to Step 2.

Step 2: Do you pass the results test (paid for a result, own tools, liable for defects)?

• Yes → You are a PSB. PSI rules don’t apply. You can operate through your company or trust.
• No → PSI rules apply unless you obtain an ATO PSB determination. Income is attributed to you personally.

Worked example: IT contractor passes the results test

Alex is a software developer contracting through his own company. In the 2025-26 income year, 90% of his company’s income comes from a single engagement with a bank.

The 80% rule is triggered — Alex can only use the results test.

Alex reviews his contract:

• The contract specifies deliverables (a working software module) — result test: pass
• Alex uses his own laptop and software licences — tools test: pass
• The contract includes a warranty clause requiring Alex to fix defects at no extra charge — defect liability: pass

All three criteria are met. Alex passes the results test for more than 75% of his PSI. His company qualifies as a PSB, and the PSI rules don’t apply.

What happens if you fail all available tests

If the 80% rule is triggered and you don’t pass the results test, the PSI rules apply. Specifically:

• The income is attributed to you personally in the income year it’s earned
• The entity (company or trust) that received the income cannot claim deductions for payments to you or your associates, or for non-arm’s length expenses like associate salaries
• Your super guarantee obligations are calculated on your attributed income
• You may need to lodge an amended return if this wasn’t handled correctly

You can apply for a PSB determination from the ATO. If granted, you can operate as a PSB despite not passing the self-assessment tests. Determinations are not automatic — you must demonstrate that your circumstances warrant it.

Key takeaways

• PSI is income that rewards your personal effort or skills, not a business structure
• If 80%+ of your PSI comes from one client, the results test is your only self-assessment option
• The results test requires all three: paid for a result, own tools, liable for defects
• Failing all available tests means income is attributed to you personally — no income splitting, no entity-level deductions
• An ATO PSB determination is available but not guaranteed

Sources

• ATO: Personal services income
• ATO: Self-assessing as a PSB
• Tax Ruling TR 2022/3 — Income tax: personal services income and personal services businesses
• ITAA 1997, Divisions 84–87 (Personal services income and PSB tests)