Personal services income: the four tests, and why a PSB is not a Part IVA shield

Personal services income is income that is mainly a reward for an individual's personal efforts or skills — more than half the contract income is for their labour, skills or expertise. It can be earned by a sole trader or through a personal services entity: a company, trust or partnership.

The rules sit in Part 2-42 of the ITAA 1997. Division 84 defines PSI, Division 85 limits deductions, Division 86 attributes income, and Division 87 sets out what a personal services business is.

The current ruling is TR 2022/3, issued 23 November 2022, which combined and replaced TR 2001/7 and TR 2001/8. Content still citing the 2001 rulings is out of date; the principles are largely unchanged, but TR 2022/3 incorporates two decades of case law.

The results test requires all three of the following, for at least 75% of the PSI in the income year:

If 80% or more of the PSI comes from one client and its associates, the 80% rule is failed. The consequence is that the unrelated clients, employment and business premises tests are no longer available for self-assessment. The only remaining options are to satisfy the results test, or to apply to the Commissioner for a personal services business determination.

This is why the results test matters disproportionately: it is not subject to the 80% rule. An entity that meets it is a PSB even if 100% of its income comes from a single client. In practice the results test rarely suits professionals billing hourly, and commonly suits trades and fixed-price project work.

Where PSI from any one client is under 80%, all four tests are available. Each has a specific trap:

This is the test that generates the most disputes, and the authority is worth stating carefully because it is often misattributed.

In Commissioner of Taxation v Fortunatow [2020] FCAFC 139, decided 17 August 2020, the Full Federal Court allowed the Commissioner's appeal and held that section 87-20(1)(b) requires a direct causal connection: the adjective 'direct' limits the field of relevant causal relationships, and if an offer only indirectly resulted in the provision of services, the required connection is absent.

The Court's central point concerned intermediaries. An offer or invitation made only to an intermediary, which is not passed on to the client and plays no part in the client's decision, cannot have directly resulted in the services being provided — the offer loses its causal effect at the level of the intermediary. On the facts, the evidence did not establish that clients relied on the taxpayer's advertising, and there was no direct link between the advertising and the client.

Section 87-20(2) supports that reading. It provides that merely being available to provide services through an entity that conducts a business of arranging for persons to provide services to its clients is not the making of offers or invitations. That is a labour-hire carve-out — which is why work obtained through labour-hire firms and recruiters generally fails the test, and why the agency is also treated as the source of the income for the 80% rule.

The proposition that word-of-mouth referrals do not satisfy the unrelated clients test is the ATO's administrative view in TR 2022/3 at paragraph 104. It is an extrapolation from the reasoning in Fortunatow — the Full Court itself did not use the phrase — and it is worth attributing accurately.

It also carries an exception that is easy to overlook and valuable for specialist clients. The ATO accepts that offers made by word of mouth in a very specialised or niche industry, where there are only a very small number of potential service acquirers, may in limited circumstances meet the condition.

The ruling illustrates both sides. A graphic artist who advertises but also picks up work by referral does not operate in a niche industry, so the referral work is not counted. An undersea diver working on offshore oil rigs does — the work is highly specialised with very few potential clients — and there the test can be met through word-of-mouth referrals. The idea that a niche market can constitute a section of the public traces to Yalos Engineering, where the Federal Court accepted that the phrase can refer to the limited number of players operating in a narrow field.

Where a personal services entity earns PSI and is not conducting a PSB, the net PSI is attributed to the individual who performed the services and included in their assessable income — whether or not it was actually paid out.

The exception is prompt payment: attribution does not apply to the extent the entity pays the income to the individual as salary or wages within 14 days after the end of the PAYG payment period in which the entity derived it. The entity has additional PAYG withholding obligations on the attributed amount, and the individual receives a corresponding credit. Attributed PSI is reported at item 9 of the individual return.

A common client misconception is that PSI means no deductions. It does not. Division 85 denies a specific list:

Many secondary sources list the car restriction among the Division 85 denials. It is not there. The rule is in section 86-70, within Subdivision 86-B, and it applies to personal services entities rather than to individuals generally.

What it says is that there cannot be, at the same time, more than one car for which deductions arise in relation to gaining or producing the same individual's personal services income. The entity must nominate the car, and the choice persists while that car is held. Because the restriction operates per test individual, an entity with two test individuals may claim one car each.

Section 85-10(2) also preserves a substantial list of ordinary deductions: costs of gaining work such as advertising and tendering, income protection insurance, professional indemnity and public liability insurance, engaging non-associates, engaging associates for principal work, the individual's own superannuation, workers compensation, and meeting GST obligations.

This is the most significant recent development in the area. PCG 2025/5, released on 28 November 2025 and replacing draft PCG 2024/D2, states the ATO's position directly: Part IVA can apply even where the PSI rules do not — that is, even where a personal services entity qualifies as a personal services business. Passing the PSB tests exempts you from Division 86 attribution only. It confers no immunity from the general anti-avoidance provisions. The guideline applies to arrangements entered into both before and after 28 November 2025.

Lower-risk indicators include net PSI being distributed to the individual who performed the services and taxed at their marginal rate; remuneration substantially commensurate with the value of those personal services; payments to associates commensurate with services actually provided; any deferral being temporary and having a non-tax justification; retained income serving a clear commercial purpose that is actually followed through; and superannuation contributions being made for the individual.

Higher-risk indicators include net PSI being directed to another entity or individual producing a lower overall tax outcome; the individual receiving below-market remuneration; income splitting with associates who contribute little or nothing; income diverted to entities with tax losses; and profit retention without commercial justification, or retained amounts remaining accessible for personal use.

The guideline provides that where a taxpayer makes a genuine attempt to move a higher-risk arrangement to low risk by 30 June 2027, the ATO will not seek to apply Part IVA if the taxpayer is selected for review. In its 4 May 2026 article on the compliance focus, the ATO put the question and answer directly: is this approach an amnesty or safe harbour? No — it is a targeted call to action. It should not be described as an amnesty.

Two practical points from that article. The window runs from 28 November 2025 to 30 June 2027, and a genuine attempt means timely, meaningful steps — self-assessing whether PSI has been inappropriately diverted, addressing higher-risk behaviours, and ensuring the current year return is compliant. For arrangements involving significant diversion, previous years' returns may also need correcting. And where the ATO has already completed a review or audit and issued a decision, that decision stands, though objection rights remain.

One boundary worth knowing: PCG 2025/5 applies where a personal services business is being conducted. Where income is generated by a broader professional practice rather than mainly by an individual's personal services, it is not PSI, and the ATO instead applies the professional firm profit allocation approach in PCG 2021/4. The two are complementary and mutually exclusive — moving along the business continuum does not eliminate alienation risk, it changes how it is assessed.

The recurring ones, in the order they tend to come up: