The hidden tax trap: understanding personal services income

Kate Beresford • October 3, 2025

With more Australians choosing self-employment and small business ownership, many turn to company structures for tax efficiency and flexibility.

The appeal is clear: companies with a turnover under $25 million benefit from a flat 25% tax rate, compared to the top personal marginal rate of 45% (plus the Medicare levy). That’s a significant difference and one that can make incorporation seem like a smart move.


A company structure also offers other advantages, such as the ability to claim tax deductions, retain profits within the business and distribute franked dividends to shareholders.


But, while the benefits are appealing, the ATO’s Personal Services Income (PSI) rules can quickly change the game. If the ATO determines that your income falls under PSI, it can override the positives of operating through a company and result in higher personal tax obligations.i


What is PSI?

PSI is income that is mainly a reward for your personal effort, skill or expertise. It’s assessed on a contract-by-contract basis and applies whether you operate as a sole trader or through a company, trust, or partnership.


Taxpayers in almost any industry, trade or profession can earn PSI, including financial professionals, engineers and medical practitioners.


Income is not normally deemed to be PSI if it is mainly derived from supplying or selling goods, generated by an income-producing asset, or produced from granting a right to use property (such as intellectual property).ii


One example of PSI is the income earned by an IT consultant employed by their own company using a client’s equipment to complete their work, because this mainly involves their personal effort and skills. Another example may be a freelance engineer, hired to provide design expertise on a project.


On the other hand, the ATO is less likely to consider as PSI a truckdriver who drives their own truck because the income is mainly derived by the use of the truck, not the truck driver’s personal effort. Similarly, the income a photographer earns from selling prints or licensing images is not likely to be deemed PSI.


Only individuals can earn PSI, but it can be received directly (as a sole trader) or indirectly through a company, trust, or partnership. If you earn PSI through another entity, that entity is referred to as a personal services entity (PSE).


How do you know if the PSI rules apply?

Taxpayers who receive PSI must self-assess each year to determine whether the PSI rules apply. You can avoid the PSI rules for one year if you qualify as a Personal Services Business (PSB) by passing one of the following tests:


  1. The results test At least 75% of your income must meet all three of these conditions: you’re paid to produce a specific result; you provide your own equipment or tools; and you’re required to fix mistakes at your own cost.
  2. The 80% rule Less than 80% of your income comes from one client and you meet at least one of three tests: unrelated clients test, employment test, and business premises test.


What’s the impact of the PSI rules?

If you don’t qualify as a PSB, the PSI rules kick in and they can significantly affect your tax position.


Here’s what changes:

  • Your income is taxed at your personal marginal rate, even if it’s earned through a company, partnership, or trust
  • Your business can only claim deductions that an individual would be entitled to (such as work-related travel or equipment)
  • You cannot claim deductions for rent, mortgage interest, payments to associates, or other business-like expenses unless they directly relate to earning PSI


Does PSI affect your business relationships?


Importantly, the PSI rules do not change your legal or contractual status.


You can still operate under an Australian Business Number (ABN), register for goods and services tax (GST) and maintain a contractor relationship with clients.

However, PSI does affect how your income is taxed and what deductions you can claim.


If PSI is generated by a number of people within your business, deductions must be allocated proportionally to each person’s income.iii


The PSI rules can be complex, so if you would like more information on how they affect your tax obligations, call our office today.


i Personal services income | Australian Taxation Office

ii Income that is PSI | Australian Taxation Office

iii Claiming deductions when receiving PSI | Australian Taxation Office

Do you know how your super is performing?

By Nikki Ashurst • November 2, 2026
Many Australians don't know how their super fund has performed or what it invests in. Are you one of them? Here's what to check and why it matters. Do you know how your super fund performed over the last two years? Many Australians don’t and are working towards their financial future without fully understanding one of their most important assets and without a clear plan for how their super may support them in retirement. That's not surprising, as many people view super as something that should run quietly in the background while they're busy with careers, families and everything else that life throws at them. But when you’re not sure what’s happening behind your balance, it’s harder to know whether you’re on track, whether your current approach reflects your goals or what opportunities might be available to help you make the most of what you’ve built so far. Your super isn't sitting in an account, it's invested Super is invested by a fund on your behalf across a mix of assets, with those investments working to grow your balance over time. Those include: Shares Ownership in Australian and international publicly listed companies. Their value can rise and fall, sometimes substantially over short periods but shares can provide capital growth over the long term. Property and infrastructure Real assets like office buildings, shopping centres, airports and energy networks. They can produce income and don't always behave in the same way as share markets, helping diversify investment holdings. Fixed interest and bonds Lending to governments and companies in return for interest. They can provide regular income and be steadier than shares, although returns and risk vary depending on the investment. Cash Generally, the most stable and lowest risk investment type. It can provide stability and faster access to money but typically offers lower longer term return potential. The investment option you choose determines the mix of assets held in your super based on your risk appetite. Most super funds offer options from conservative to high growth. If you’re young, a growth option with a higher exposure to growth assets like shares could offer higher returns over time – but it also comes with higher risk. As retirement nears, you might want to consider a more conservative approach with more defensive assets, like bonds for example to protect your savings. If you've never made a choice, you're probably in your fund's default option, which is designed to suit a broad membership. It’s worth knowing whether the mix you're in matches your circumstances and goals, including how far you are from retirement. Why performance alone is not a true comparison If you're thinking about how your super compares, returns are often where people start. The trouble is that a return figure means nothing without context: What it's being compared to Growth and conservative options invest differently and with different levels of risk. Compare like with like or the comparison may not be genuine. The comparison period A single year can be heavily influenced by short term market conditions. Super is measured in decades, so five, seven and ten year returns tell you far more about whether a fund is consistently doing its job, albeit not a predictor of future performance. Fees and tax Published returns should reflect investment fees, costs and tax but administration fees may be charged separately from your balance. Two funds quoting the same return can leave you in meaningfully different places once all fees are accounted for. Then there are the things that returns can't show you at all. For example, what insurance is attached to your account and what it's costing you, whether the fund offers guidance, tools and advice or simply sends a statement once a year. Another consideration maybe the level of support available when you need it. When comparing funds, it's worth looking at the full picture, including performance, fees, investment options, retirement support and member benefits. What today’s decisions mean tomorrow To understand how your super stacks up, start here: Find your investment option It's on your annual statement and in your online account. Look at what's in it Your fund publishes the asset allocation (shares, cash etc.) for each investment option. Check the long-term return for that option Focus on five and ten year returns, not just last year and compare them with equivalent options. Understand the total cost Add together administration fees, investment fees and insurance premiums as an annual dollar figure. Comparing super is about working out which option will perform best for you. Before you jump in, it’s worth understanding what's behind the numbers so you can make decisions based on more than a headline return. Knowing where you stand is the first step A super balance tells you where you are today. Understanding how your super is invested, how it compares and whether it's aligned with your goals helps show whether you're heading in the right direction. Source: MLC The information in this article does not take into account your objectives, needs and circumstances. We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this document. Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives gives any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of the information contained in this document. Principal Wealth Management Pty Ltd trading as BMO Financial Solutions ABN 53 109 336 601 is a Corporate Authorised Representative (CAR 277821) of Capstone Financial Planning Pty Ltd ABN 24 093 733 969 Australian Financial Services Licence (AFSL) No. 223135.

The SMSF landscape is changing

By Jude Schofield • October 7, 2026
More Australians are choosing to take direct control of their retirement savings by establishing a self-managed super fund (SMSF) and according to the SMSF Association, Aussies now see their super as an important part of building and managing their overall wealth.