Personal services income rules can feel like a maze for Queensland contractors. The good news is that you can often steer clear of the toughest parts of that maze if you understand one key concept called the results test. This article explains the federal PSI regime in plain English, shows why the results test usually matters more than anything else, and walks through practical ways to pass that test so you can keep the deductions and flexibility that genuine businesses enjoy.
What is personal services income (PSI) and why Queensland contractors should care
Personal services income is money that is mainly a reward for your own effort or skill rather than the profit from assets, employees, or large scale business systems. If more than half of the amount on a single invoice or contract is tied to you turning up and doing the work yourself, the Australian Taxation Office treats that amount as PSI.
Queensland has one of the largest contractor workforces in the country, spread across construction, mining services, information technology, engineering, health, and professional consulting. Many of those workers trade through companies or trusts because a principal insists on an ABN or because the structure provides commercial protection. The PSI rules operate nationally, which means a carpenter on the Gold Coast, an IT developer in Brisbane, and a locum doctor in Bundaberg all face the same tests.
When the PSI rules apply, extra tax can follow. The ATO may force income earned in the company or trust back onto the individual, then restrict deductions to those that employees normally claim. Fringe benefits and income splitting with family can also be unwound. In short, the wrong result can strip away the advantages that contractors expect when they spend money on a business structure.
Personal services business status and the four tests in plain English
The law offers a safety valve. If you can show that you operate a personal services business, the PSI rules switch off. There are four ways to prove that status and you only need to succeed with one of them in any income year.
| Test | What it really measures | Key hurdles |
|---|---|---|
| Results test | Are you paid for delivering a defined outcome and do you carry commercial risk for tools and defects | Must satisfy all three conditions for at least seventy five percent of PSI |
| Unrelated clients test | Do you work for multiple unrelated clients during the year after making public offers of your services | Fails automatically if a single client provides eighty percent or more of PSI |
| Employment test | Do you employ or subcontract others who perform at least twenty percent of the principal work or engage an apprentice for half the year | Requires genuine delegation not mere admin help |
| Business premises test | Do you maintain separate business premises that are used mainly for producing PSI and are physically separate from private property | Premises must be in place all year not just as needed |
Contractors often talk about having four doors out of the PSI rules. The results test is usually the easiest door to open and, crucially, it is the only door that stays unlocked even when one client accounts for more than eighty percent of your revenue.
The results test and why it carries the most weight
Industry bodies and accounting commentators call the results test the strongest of the four. That description holds because it focuses on the substance of your contract and the commercial risk you carry rather than the size of your client list or whether you lease an office.
The three conditions you must satisfy
First, payment must be tied to a specific result. A fixed price for completing a bathroom renovation or a milestone payment for delivering a software module points to a result. An hourly or daily rate that simply rewards time does not.
Second, you must provide the equipment, tools, or plant needed to do the work. For a carpenter, that means personal nail guns, saws, or scaffolding. For a civil engineer, it could be specialised survey equipment and design software licences. Minor consumables supplied by the client rarely harm this factor, but relying entirely on the client’s plant usually fails it.
Third, you must be liable for rectifying defects at your own cost. The contract or common law must make you responsible for fixing your mistakes without additional payment. A warranty clause in a domestic building contract or an obligation in a consulting agreement to remedy faulty deliverables achieves this. If the client bears the cost or if you can bill extra for the rework, the condition fails.
Understanding the seventy five percent rule
All three conditions need to apply to at least seventy five percent of the personal services income you earn in the year. You cannot cherry pick a single project that meets the conditions and ignore the rest. Most contractors revisit their job files at year end, allocate revenue between projects, and check that the bulk meets the trio of result, tools, and defect responsibility. If it does, the PSI rules step back.
The eighty percent rule and single client reality in Queensland
Queensland mining, construction, and health sectors often lock contractors into long runs with one principal. The unrelated clients, employment, and business premises tests are unavailable when a single client provides eighty percent or more of your PSI. The results test is not tied to that eighty percent cap. That makes it vital for a heavy equipment fitter working almost full time for one mine operator in Moranbah or a project manager who spends most weeks onsite for a single property developer in Brisbane.
How the other three tests work and when they help
The results test does not always fit. When it fails, a contractor can look at the other doors provided the eighty percent rule allows it.
Unrelated clients test
To pass, you must earn PSI from at least two unrelated clients in the year and the work must arise as a direct result of making a public offer of your services. Cold calls, advertising on a trade platform, or a website that leads to the engagement help tick this box. Referrals from existing clients or agencies do not count. Queensland trades who win jobs through online tender sites often rely on this test when they spread labour across many homeowners.
Employment test
You pass if employees or subcontractors perform at least twenty percent of the actual contract work by market value or you employ an apprentice for at least half the income year. Using admin staff adds no weight. A Sunshine Coast electrician who sends a team of apprentices to rough in wiring while supervising completes real principal work through others and may pass this test.
Business premises test
You need exclusive premises used mainly for delivering your service and separate from your home and from your client’s premises. A Townsville cabinet-maker who owns a factory unit where most cutting and finishing occurs may rely on this test. A home office in the spare bedroom does not satisfy the separation requirement.
Real world examples of Queensland contractors applying the results test
Fixed price renovation carpenter Maria runs a small company that renovates Queenslander houses in Ipswich. She quotes a lump sum on each project, brings her own tools and machinery, and provides a six month workmanship warranty. Ninety percent of her income meets all three conditions. Maria passes the results test and the PSI rules do not apply.
Labour hire electrician on an hourly rate Shane is an electrician supplied through an agency to multiple construction sites around Brisbane. The host supplies most tools and the agency contract pays by the hour. The host is responsible for any rework. Shane fails each condition and does not meet the seventy five percent threshold.
IT developer with mixed terms Rohan delivers software to a Gold Coast fintech. His day rate contract specifies staged deliverables and holds him liable to fix bugs for ninety days. Rohan supplies high end testing equipment. Although paid partly on days, the contract ties milestones to payments and the client withholds ten percent until final acceptance. Rohan analyses revenue and finds eighty percent of his fees fall under the milestone structure with tool supply and defect liability. He passes the results test.
Locum doctor through a service company Dr Lee provides medical services at a regional hospital under a roster that pays by the hour. The hospital supplies all equipment and carries malpractice risk. Dr Lee cannot charge for a failed procedure and does not warranty outcomes. She fails the test.
These scenarios show that result orientation, tool supply, and defect responsibility combine to turn the key.
How PSI appears in your tax return
The online return asks whether personal services income was received, whether you satisfied the results test, and which deductions apply. If you lodge through a company or trust, you complete the Business and Professional Items schedule and answer similar prompts. The ATO cross-checks answers with reported income, industry codes, and third party data. Contractors who tick the results test box must hold evidence such as contracts, invoices, insurance policies, and written warranties.
Contract and business tips to help you meet the results test
Draft contracts that define deliverables instead of hours. Use language like completion, milestone, acceptance, and fixed fee.
Make sure the agreement states that you supply the necessary plant and that you remain responsible for it. If a client insists on using their equipment, consider hiring comparable equipment yourself so the contract reflects that arrangement.
Insert a clear obligation to remedy defects at your own cost within a stated period. Pair that with appropriate public liability or professional indemnity insurance so the financial risk is real.
Operate like a business. Quote projects, hold tools, maintain bank accounts, and keep job folders showing quotations and warranties. Evidence of an independent commercial posture supports the results test during an ATO review.
What happens when you fail the tests and next steps
Failure to qualify as a personal services business triggers attribution. The company or trust must attribute the PSI back to the individual and deny deductions that an employee could not normally claim. Travel for family, super contributions for spouses, and profit distributions to relatives are common adjustments.
Contractors facing that outcome have options. They can seek a personal services business determination from the ATO if unique circumstances still show a genuine business. Alternatively, they can restructure contracts to introduce result based terms, supply their own tools, and accept warranty clauses in future engagements. Some expand client lists or hire staff to open other tests. A proactive review before year end often avoids costly amendments later.
Frequently asked questions
What is personal services income
Personal services income is income mainly earned from an individual’s own labour or skill rather than from assets or employees.
What are the four personal services business tests
The four tests are the results test, the unrelated clients test, the employment test, and the business premises test. Passing any one test means the PSI rules generally do not apply.
What are the three conditions within the results test
Payment must relate to a specific result, the contractor must supply the necessary tools or plant, and the contractor must bear the cost of fixing any defects.
How does the seventy five percent requirement operate
All three results test conditions must be satisfied for at least seventy five percent of the personal services income earned in the year.
What is the eighty percent rule
If a single client and its associates provide eighty percent or more of your personal services income in the year, the unrelated clients, employment, and business premises tests are not available. The results test or a formal determination becomes essential.
Does having an ABN automatically pass the results test
Holding an ABN or sending invoices proves little on its own. The ATO looks at contract terms and real behaviour, not registration status.
What deductions are at risk if the PSI rules apply
Deductions not ordinarily available to employees such as private motor vehicle costs, family super contributions, and income splitting distributions can be denied when income is attributed.
Can I still be an independent contractor for Fair Work purposes if the PSI rules apply
Yes. The PSI rules are tax integrity rules. They do not decide employment status for workplace law, payroll tax, or workers compensation.
How often should I review my position
Each income year. The mix of contracts, clients, and work practices can change and you self assess annually.
Where can I get help
The ATO provides an online PSI decision tool. A registered tax agent with experience in contractor matters can review contracts and calculate whether the tests are satisfied.
The bottom line for Queensland contractors
Queensland contractors thrive when they balance flexibility with compliance. Understanding the PSI rules, then shaping engagements so that at least three quarters of personal services income meets the results test, keeps you on the right side of the ATO and preserves the tax advantages of trading through a business structure. Review contracts, keep clear records, and seek professional guidance early. When the results test is built into your day-to-day dealings, you gain certainty and can focus on the work that matters.
