Personal Services Income (Australia)

Sometimes startup founders want to pay themselves as contractors to their business.

Or you might be paying others in this way (or thinking of it).

Either way, you need to be aware of the ATO's personal services income (PSI) rules because they can mean your startup needs to pay superannuation and workcover, just as if the contractor was an employee.

What are the PSI rules?
Essentially, they're rules designed to stop people minimising their tax situation by acting as a contractor to a business that they are earning most or all of their income from (note that they don't apply to employees who are receiving income from salaries and wages only).

And they’re designed to stop businesses avoiding obligations to contractors who are effectively their employees.

Here's how to figure out if the PSI rules will apply when paying a contractor (including yourself):

  1. Determine if the income is classified as PSI. The ATO says it is: Income produced from your personal skills or effort as an individual, regardless of your business structure.

    Note that if more than 50% of the income received for a contract was for your (or the other contractor in question) labour, skills or expertise, then ALL the income from that contract is classified as PSI.
  2. Establish whether the income can be deemed to come from a Personal Services Business (PSB). If it does, you won't need to worry about PSI because it will be exempt from the rules.

    How do you establish this? There are a few ways to do it and the ATO has a pretty simple (we think!) chart to step you through it here.

If you need help understanding how to pay yourself from your startup, try our article on this here.

ATO resources