# PSI Rules ATO (2026–27): Personal Services Income & Results Test Guide for Sole Traders

- **Canonical URL:** https://iluratechnology.com/keel/australia-ato-personal-services-income-psi-sole-trader-guide/
- **Jurisdiction / Region:** AU
- **Last Verified:** Mon Nov 02
- **Keel Official Pricing (v5.3.2):** Free to download on the App Store (daily tracking included; optional 5-Folder Pack $49.99 per period, or Keel Lifetime $299.99 paid once — no monthly subscription)
- **Summary:** Complete guide to PSI rules ATO (2026–27) for Australian sole traders: 50% labour test, 75% Results Test, 80% rule, Item P1 tax return & invoice structure.

---
# PSI Rules ATO (2026–27): Personal Services Income & Results Test Guide for Sole Traders

**Short answer: Under PSI rules ATO (Division 84–87 of the *Income Tax Assessment Act 1997* and TR 2022/3), income is Personal Services Income (PSI) when more than 50% of an invoice is a reward for your personal skills, labour, or expertise rather than supplying materials or plant. However, sole traders who pass the Results Test — being paid to produce a specific result, supplying their own tools, and bearing liability to fix defects — qualify as a Personal Services Business (PSB) and stay exempt from PSI deduction restrictions at Item P1.**

> **⚡ Instant Australian Sole Trader PSI Results-Test Invoice & Tax Toolkit (`$AUD` + `🔗 Embed / CSV Template`):** Structure fixed-scope, results-based ABN tax invoices in the **[Australian GST & ABN Calculator](/keel/australia-gst-calculator/)** or **[Free ABN Invoice Generator](/keel/invoice-generator/)**, export via **`🔗 Embed / CSV Template`** or save up to **5 Free Saves in your [iCloud Web Workspace](/keel/workspace/)**, explore the **[AU & NZ Tradies App Store Edition](/keel/cpp/australia-nz-sole-traders/)**, or **[Download Keel on the App Store (`$0/mo` AU Sole Trader Edition)](https://apps.apple.com/app/apple-store/id6786659713?pt=127772795&ct=blog_vergi_australia-ato-psi-guide&mt=8&ppid=8470921a-830e-47a3-abf5-bf0b1cce24ac)** to separate labour, materials, and defect-warranty scope on every quote and invoice.

Every Australian sole trader who bills predominantly for their own labour — whether an electrician, carpenter, IT consultant, civil engineer, drafter, or subcontracting tradie — faces the **Personal Services Income (PSI)** question at **Item P1 (*Personal services income*)** of the **Business and professional items schedule** on their annual tax return. Guided by the [Australian Taxation Office (ATO) Personal Services Income guidance](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/personal-services-income) and **Taxation Ruling TR 2022/3**, the PSI regime prevents individuals from disguising employment-like arrangements or claiming quasi-domestic deductions when they work like an employee.

Yet thousands of genuine independent tradies and solo contractors panic unnecessarily at tax time because they confuse *earning PSI* with *being caught by the PSI rules*. Earning PSI is only step one; if your contracting arrangement passes one of the four **Personal Services Business (PSB)** tests — most commonly the **Results Test** — the PSI deduction restrictions do **not** apply to you at all.

For related Australian tax compliance guides, see [Australian Sole Trader Tax Return Guide](/keel/australia-sole-trader-tax-return/), [Contractor vs Employee in Australia](/keel/australia-contractor-vs-employee/), [How to Invoice as a Sole Trader in Australia](/keel/australia-how-to-invoice-sole-trader/), [TPAR Taxable Payments Annual Report Guide](/keel/australia-tpar-taxable-payments-annual-report-guide/), and [Australian Sole Trader Expenses & Receipts](/keel/australia-sole-trader-expenses-receipts/).

---

## What is Personal Services Income (PSI) under the ATO 50% rule?

You assess **Personal Services Income (PSI)** contract by contract (or invoice by invoice). Under [ATO Division 84 rules](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/personal-services-income/work-out-if-the-psi-rules-apply-to-you), you look at the market value of each component of the contract:

- **More than 50% for your personal effort or skill = PSI:** If more than 50% of the amount you charged on the invoice is for your personal labour, skill, or expertise, then **100% of that contract's income is classified as PSI**.
- **50% or less for your personal effort or skill = Not PSI:** If 50% or more of the invoice value comes from supplying materials, selling goods, or providing heavy income-producing plant and machinery (such as an excavator, bobcat, crane, or commercial prime mover), **none of that contract is PSI**, and you report it under normal business income at **Item P8** instead of **Item P1**.

| Invoice / Contract Scenario (AUD, Ex-GST) | Labour & Skill Component | Materials / Plant Component | Labour % of Total | Is It PSI Under the ATO 50% Test? |
|---|---:|---:|---:|---|
| **Subbie chippy billing 40 hours @ $85/hr (labour only)** | $3,400 | $0 | **100.0%** | **Yes — 100% PSI** (proceed to the Results Test) |
| **Plumber supplying & installing hot water unit** | $900 | $1,500 (tank, valves, copper) | **37.5%** | **No — Not PSI** (materials are 62.5% of invoice) |
| **Sparky rough-in (labour + $800 cable/breakers)** | $2,400 | $800 | **75.0%** | **Yes — 100% PSI** (proceed to the Results Test) |
| **Earthmoving operator supplying 14t excavator + operator** | $1,200 | $2,800 (commercial plant hire value) | **30.0%** | **No — Not PSI** (heavy plant exceeds 50%) |
| **Structural engineer / IT consultant fixed-fee audit** | $4,500 | $0 | **100.0%** | **Yes — 100% PSI** (proceed to the Results Test) |

> **Why itemised invoices matter:** If you bundle $1,500 of materials and $900 of labour into a single vague line item ("Bathroom plumbing works — $2,400"), an auditor cannot immediately see that 62.5% of the supply was materials. Splitting materials and labour on your invoice proves whether a contract falls outside PSI from day one.

---

## How do you pass the ATO Results Test (the #1 PSB test for tradies and contractors)?

If your income is PSI, the next step on the ATO decision tree is whether you self-assess as a **Personal Services Business (PSB)** for the 2026–27 income year. **Regardless of whether 80% or more of your income comes from one client**, you automatically qualify as a PSB if you meet the **Results Test** for at least **75% of the PSI** you earned during the income year.

To pass the **Results Test** under **section 87-18 of the ITAA 1997** and **TR 2022/3**, **all three** of the following conditions must be satisfied for at least 75% of your PSI:

1. **Condition 1 — You are paid to produce a specific result (`Paid for a Result`):**
   - Payment is conditional on achieving a contractually specified outcome or deliverable (for example, roughing-in and testing 18 power points to AS/NZS 3000, framing a roof to plan, or delivering a completed engineering report), rather than merely turning up and being paid an hourly or daily attendance rate regardless of completion.
   - *ATO nuance:* Quoting using an internal hourly estimate or a schedule of rates per square metre / per fixture still satisfies Condition 1 **provided the client only owes payment once the specified stage or result is completed**.
2. **Condition 2 — You provide the equipment and tools of trade (`Tools & Plant`):**
   - You supply the hand tools, power tools, testing meters, ladders, software licences, or commercial vehicle needed to perform the work (where the trade requires tools).
3. **Condition 3 — You are liable for the cost of rectifying defects (`Defect Liability`):**
   - If the work is defective, you must fix it at your own expense (or pay for someone else to fix it) in your own unpaid time, rather than being paid extra hours by the principal contractor to redo faulty work.

| Contract Feature | Passes Results Test (PSB — Exempt from PSI Rules) | Fails Results Test (Caught by PSI Rules Unless Another Test Applies) |
|---|---|---|
| **How the quote & invoice are phrased** | Fixed price, progress stage, or piece-rate per completed deliverable ("Supply & install switchboard upgrade — $2,200") | Pure time-attendance billing ("38 hrs labour Week Ending 14 Nov @ $75/hr — $2,850") with no deliverable tied to payment |
| **Who supplies tools & equipment** | Sole trader brings own ute, laser levels, saws, testers, and consumables | Principal contractor supplies all tools and plant on site |
| **Who pays to fix a defect** | Sole trader returns and rectifies defects at own cost / unpaid time | Principal pays the worker their hourly rate while they fix the mistake |

---

## What is the ATO 80% rule and what are the other three PSB tests?

If you do **not** pass the Results Test for at least 75% of your PSI (for example, because you bill purely by the hour as a labour-only subcontractor), the ATO looks at the **80% Rule**:

- **Does 80% or more of your PSI come from one client (and their associates) in the income year?**
  - **If YES (80% or more from a single client):** You **cannot** self-assess under the remaining three PSB tests. Unless you obtain a formal **PSB Determination** from the Commissioner of Taxation due to unusual circumstances, **the PSI rules apply to you**.
  - **If NO (less than 80% of your PSI comes from any single client):** You can self-assess as a PSB if you pass **at least one** of the other three PSB tests:
    1. **Unrelated Clients Test:** You earn PSI from two or more unrelated clients, **and** you obtain work by making offers or invitations to the public at large or a section of the public (such as maintaining a public website, Google Business Profile, trade directory listing, or signage on your ute — not solely through one labour-hire agency).
    2. **Employment Test:** You engage employees, apprentices, or other subcontractors who perform at least **20% (by market value) of the principal work** that generates your PSI (clerical/bookkeeping work by a family member does not count as principal work).
    3. **Business Premises Test:** At all times in the income year, you maintain business premises used mainly for PSI work, exclusively by you, physically separate from your private home and separate from your client's premises.

---

## Which deductions are blocked if the PSI rules apply to a sole trader?

When you fail the Results Test and the other PSB tests so that the **PSI rules apply**, your PSI is still taxed at your individual marginal tax rates — **but your tax deductions are restricted to roughly what an employee could claim** under section 85-10 of the ITAA 1997:

| Expense Category | Allowed if You Pass PSB / Results Test? | Allowed if PSI Rules Apply (Non-PSB)? |
|---|---|---|
| **Cost of gaining work (advertising, quoting software, tender fees)** | ✅ Yes (100% deductible) | ✅ Yes (deductible) |
| **Public liability & professional indemnity insurance** | ✅ Yes | ✅ Yes |
| **Tools of trade, protective clothing & trade depreciation ([Instant Asset Write-Off](/keel/australia-instant-asset-write-off-sole-trader/))** | ✅ Yes | ✅ Yes (business portion) |
| **One work vehicle / commercial ute ([ATO logbook or cents per km](/keel/australia-car-expenses-cents-per-km/))** | ✅ Yes | ✅ Yes (up to one vehicle with private use) |
| **Home office running expenses (electricity, internet, phone business %)** | ✅ Yes ([67c/hr or actual](/keel/australia-work-from-home-deductions/)) | ✅ Yes |
| **Home office occupancy expenses (share of rent, mortgage interest, council rates, house insurance)** | ✅ Yes (if a dedicated place of business) | ❌ **Blocked** under section 85-15 |
| **Wages or super paid to a spouse/associate for admin, bookkeeping, or secretarial work** | ✅ Yes (at commercial rates) | ❌ **Blocked** under section 85-20 (unless they perform principal trade work) |

---

## How do you report PSI vs PSB at Item P1 and P8 on the Sole Trader Tax Return?

When completing the **Business and professional items schedule** in myTax (or through your registered tax agent):

1. **If you earned NO PSI (or passed the Results Test / PSB tests):**
   - At **Item P1**, if you received PSI but passed the **Results Test** (or another PSB test), you answer **Yes** to the PSB test question and then report your income and full business deductions in the main **Item P8 (*Business income and expenses*)** section.
2. **If the PSI rules DO apply to you:**
   - You complete **Item P1 (*Personal services income*)** in full, entering your gross PSI, any tax withheld under voluntary agreements or labour-hire arrangements, and only your allowable PSI deductions to arrive at **Net PSI**, which transfers into your taxable income.

---

## How should Australian sole traders structure quotes and invoices to document the Results Test?

Because the ATO looks at both your written contract/invoice and your day-to-day working reality under **TR 2022/3**, your paperwork should clearly reflect a results-based contracting relationship whenever you are hired to deliver a defined scope:

1. **State the deliverable and milestone on the quote and tax invoice:** Instead of writing *"40 hours carpentry @ $80/hr"*, write *"Supply and install timber decking frame and merbau boards (24m² as per site plan) — $3,200.00 + $320.00 GST"*.
2. **Separate materials from labour:** Always itemise materials and hardware on separate lines so any contract with $\ge 50\%$ materials is immediately identifiable as non-PSI.
3. **Include your tools & defect-rectification terms:** In the notes or terms block of your quote and invoice, state: *"Contractor supplies all trade tools and equipment and warrants workmanship against defects in accordance with Australian statutory warranties."*

---

## Frequently asked questions

**What are the PSI rules ATO for sole traders in 2026–27?**

Under the ATO Personal Services Income (PSI) rules in Division 84–87 of the *Income Tax Assessment Act 1997*, if more than 50% of the amount you charge on a contract is a reward for your personal labour, skills, or expertise, 100% of that contract's income is classified as PSI. If you do not pass the Results Test or one of the other Personal Services Business (PSB) tests, you cannot deduct home occupancy costs (rent or mortgage interest) or payments to a spouse/associate for non-principal administrative work.

**Can I still pass the Results Test if I get 100% of my income from one builder or client?**

Yes. The **Results Test overrides the 80% rule** under Australian tax law. Even if 90% or 100% of your income comes from a single builder or principal contractor during the financial year, you qualify as a Personal Services Business (PSB) if at least 75% of your PSI meets all three Results Test conditions: you are paid to produce a specific result, you provide your own tools of trade, and you are liable to rectify defects at your own cost.

**Does quoting with an hourly rate automatically fail the ATO Results Test?**

Not necessarily. Under **Taxation Ruling TR 2022/3**, using an internal hourly rate to calculate your quote — or billing against a schedule of unit rates per fixture or square metre — still passes the Results Test if your legal entitlement to be paid depends on completing a specified result or stage of work rather than simply being paid for hours attended.

**How does TPAR interact with Personal Services Income (PSI)?**

When a builder or commercial contractor pays your ABN invoice, they report the total gross amount (including GST) to the ATO on their annual [Taxable Payments Annual Report (TPAR)](/keel/australia-tpar-taxable-payments-annual-report-guide/). The ATO matches those TPAR totals against your tax return at **Item P1** and **Item P8**, which is why keeping clean, itemised ABN invoices that distinguish materials from labour is essential.

**Can I claim my work ute, tools, and public liability insurance if the PSI rules apply to me?**

Yes. Even when the PSI rules apply because you did not qualify as a Personal Services Business (PSB), you can still deduct trade tools, protective clothing, public liability insurance, quoting and invoicing software, and up to one work vehicle or commercial ute (adjusted for private use) using the [ATO cents-per-kilometre or 12-week logbook method](/keel/australia-car-expenses-cents-per-km/).

---