PSI, PSB & Part IVA: What Every Founder, Contractor and Advisor Needs to Know

If you earn income from your own skills, experience, expertise or you run a business built around people delivering services, there are three areas of Australian tax law you must understand:

Personal Services Income (PSI)
Personal Services Business (PSB) tests
Part IVA (the general anti-avoidance rule)

These rules were designed to stop individuals from using companies or trusts to artificially reduce tax by “diverting” what is essentially their own personal income.

Right now, these topics are major ATO compliance focus areas, especially as more consultants, contractors and knowledge workers operate through entities.

This article breaks down each area clearly and accurately so you can understand how the rules apply and what the ATO expects..

1. What Is Personal Services Income (PSI)?

The ATO defines Personal Services Income (PSI) as income that is mainly a reward for an individual’s personal effort, skills or expertise.

Put simply, If clients pay you because of the work you personally do, the income is likely PSI.

PSI can be earned directly or through:

• a company

• a trust

• a partnership

• an ABN sole trader structure

Income is PSI when it comes from:

• your professional skills

• your labour or personal services

• your specialised knowledge

• work only you can perform

Income is not PSI when it comes from:

• a business with employees doing the core work

• substantial assets or intellectual property

• systems or processes that operate without you

• a business where outcomes are not dependent on you personally

The ATO looks at what is actually happening — not what the structure appears to be.

2. Why PSI Matters?

If your income is PSI and your entity is not considered a Personal Services Business (PSB), then the income must be attributed back to the individual

The company or trust cannot retain the profit to access lower tax rates, and the deductions are limited

Certain deductions are not allowed, including:

• rent or mortgage interest

• payments to associates

• most super contributions

• income-splitting payments

You cannot split PSI with family and distributions and trust income cannot be used to lower tax when the income is PSI.

Artificial arrangements are at risk under Part IVA, even if PSI rules don’t technically apply, the ATO can still use anti-avoidance laws.

3. When Is a Business a Personal Services Business (PSB)?

Div 87 of the ITAA 1997 provides four tests.
If you pass any of these, you are a PSB and PSI rules no longer apply.

(1) The Results Test

You must satisfy all three conditions:

• You’re paid to achieve a result

• You provide your own tools/equipment

• You’re liable to fix any mistakes

This is the hardest test to pass but the most powerful.

(2) The 80% Rule

If 80% or more of your PSI comes from one client, you can’t self-assess the other tests — you must apply to the ATO for a PSB determination.

If less than 80% comes from one source, you may self-assess the remaining three tests.

(3) Unrelated Clients Test

You must have two or more unrelated clients AND obtain those clients through public offers, marketing or competitive processes, not simply via labour hire or referrals.

(4) Employment Test

You must have:

• Employees or contractors performing at least 20% of the principal work, or

• An apprentice for at least half the income year.

"Principal work" must be the core income-producing work — not admin or support roles.

(5) Business Premises Test

Premises must be:

• Used exclusively for business

• Physically separate from private premises

• Available for at least 50% of the year

• Satisfy all separation and exclusivity requirements

Very few small service providers meet this test.

4. Part IVA: The Anti-Avoidance Rule That Overrides Everything

Even if PSI rules don’t apply, the ATO can still invoke Part IVA of the ITAA 1936 if they believe the dominant purpose of your structure is to obtain a tax benefit.

Part IVA looks at:

• how the arrangement was set up

• the substance versus the form

• whether the income would normally be yours

• whether the structure creates a lower tax outcome

If the ATO decides the dominant purpose is tax reduction, they can:

• cancel the tax benefit

• reconstruct the arrangement

• tax the income to the individual

• impose penalties and interest

5. Why the ATO Is Focused on PSI, PSB and Part IVA in 2025

Several trends are driving heightened scrutiny:

• More individuals using companies and trusts for income splitting

• Rapid rise in self-employed consultants, coaches, freelancers, and contractors

• Labour-hire and subcontractor mismatches

• Incorrect PSB self-assessment

• Increased use of entities to access lower tax rates

The ATO is using the below to identify inconsistencies, incorrect PSI treatment, and potential avoidance schemes.

• TPAR reporting

• Single Touch Payroll (STP)

• ABN cancellations

• Data matching

• Bank transaction analysis

6. Who Is Most at Risk?

Industries commonly reviewed include:

• IT contractors

• Consultants & advisors

• Engineers

• Health professionals

• Construction contractors

• Creative freelancers

• Financial services professionals

7. How to Protect Yourself and Stay Compliant

• A robust tax position requires:

• Correct PSI assessment

• Accurate PSB test application

• Clean, commercially grounded structuring

• Avoiding income splitting where PSI applies

• Proper documentation and contracts

• Seeking professional advice early