PSI vs PSB: a simple guide to the business tests (and how not to get tripped up)

12 Aug

If you earn a living by selling your skills and effort, think doctors, IT contractors, engineers, designers, consultants, tradies, the Personal Services Income (PSI) rules are squarely in your world. They’re designed to stop people from funnelling what is essentially their personal labour income through a company or trust to split income or access business-only deductions.

But there’s a crucial flip side: if you’re genuinely running a business, you can often step outside the PSI net by being a Personal Services Business (PSB). That’s where the PSB tests come in.

This guide demystifies PSI and PSB in straight talk—what they are, why they matter, how the tests work, what the key cases say, and how to set yourself up properly.

What is PSI (and what isn’t)?

PSI is income that’s mainly (more than 50%) a reward for your personal skills, knowledge, or efforts. Classic examples:

A GP billing for consultations
An IT business analyst charging for their own time
A civil engineer selling their expertise by the hour or on a deliverables contract where the value is still mostly their personal effort

Not PSI: income that mainly comes from things other than you, for example, selling goods, hiring out substantial equipment, or leveraging a team/bigger business system where your personal effort isn’t the main driver.

Why it matters: If the PSI rules apply, you can’t split that income to family or a bucket company; some deductions are restricted; and in a company/trust the income can be attributed back to the individual who performed the work. If you’re a PSB, those PSI rules don’t apply to that income.

The four PSB tests (and the 80% rule gate)

There are four tests. Pass any one and you’re a PSB for that income for that year. One of them, the results test stands on its own. The other three need you to also pass the 80% rule (i.e., less than 80% of your PSI is from one client and their associates).

1) The results test (the “gold” test)

You need all three of the following:

Paid to produce a result (not just hours).
Provide your own equipment/tools (where relevant).
Fix defects at your own cost.

If your contracts say “we’ll deliver X for $Y”, you carry commercial risk for defects, and you bring your own kit, you’re on the right track. Many tradies pass this comfortably. Many professionals can’t, because the service is still you by the hour, at the client’s site, under their systems, with little risk of rework at your cost.

Example: An electrician quotes to install a switchboard for a fixed price, uses their own gear, and must come back to fix faults without extra pay. That smells like a result. A business analyst on a day rate using the client’s laptop and systems, with no rework obligation? That’s usually not a result.

2) The unrelated clients test (needs the 80% rule)

You must earn PSI from two or more unrelated clients, as a direct result of making offers to the public (for example, real advertising, a website that actually brings in jobs, tenders you win). What doesn’t cut it is being fed to work through intermediaries (e.g., recruiter or labour-hire) unless you can show the client engagement happened because of your public offer.

This “direct result” bit is where plenty come unstuck. Having a LinkedIn profile or a website is rarely enough if the work arrives via an agency or because of pre-existing relationships. You need a clear causal link: the client found you from your ad/website/tender and engaged you because of it.

3) The employment test (needs the 80% rule)

You pass if, for the year, you:

Have one or more others performing at least 20% of the principal work (by market value), or
Have an apprentice for at least half the income year.

“Principal work” means the core service your clients pay for, not admin. Hiring a bookkeeper does not help. Engaging another doctor to see patients, another engineer to design, or a second videographer to shoot, those are principal work. Make sure you can show the percentage or apprentice period across the year.

4) The business premises test (needs the 80% rule)

You need to maintain and use business premises for the whole income year that are:

Used mainly for activities that produce your PSI,
Exclusively used by you (or your entity), not shared with your private use, and
Physically separate from your home and from clients’ premises.

A rented commercial suite you control exclusively usually works. A spare bedroom, garage, or a hot-desk at the client’s office generally won’t. The law is strict here, “near enough” isn’t good enough.

The 80% rule

If 80% or more of your PSI comes from a single client (including their associates) in the year, you can’t rely on the unrelated clients, employment, or business premises tests. You’d need to pass the results test, or seek a PSB determination in special cases. If you’re under 80%, you may self-assess against those three tests.

What the courts have said

You don’t need to be a lawyer, but a couple of cases matter for everyday judgement calls:

LinkedIn and the “direct result” rule: A major case involving a consultant found that simply having a LinkedIn profile wasn’t enough to pass the unrelated clients test when the actual engagements came through recruiters. The court looked for a direct link between public advertising and the client choosing you. If the agency is the real cause of work landing, you’ll likely fail this test.
Home garage ≠ business premises: In a case about the business premises test, a taxpayer tried to rely on a garage at home. It failed. The courts have taken a narrow view: premises must be exclusive, commercial-like, and physically separate from private residence. A home space, even if nicely fitted out, usually won’t pass.

Those two points alone explain why many professionals can’t self-assess as a PSB unless their facts are carefully structured.

Practical scenarios

1) GP in a clinic paying a service fee

Results test: Rarely satisfied, consults are billed by time/attendance, and the GP typically uses the clinic’s rooms/equipment with little true defect risk.
Unrelated clients test: Patients arrive because of the clinic’s brand/booking channels, not a direct result of the GP’s own advertising. Usually fail.
Employment test: Could pass if the GP employs another GP or a registrar who performs 20%+ of principal work across the year, or has an understudy or intern equivalent (uncommon). Admin nurses/reception won’t count.
Business premises test: Would need exclusive, separately leased rooms used mainly by the GP’s practice, not shared privately and not part of the clinic’s premises. That’s difficult unless the GP controls and maintains their own rooms.

2) IT contractor via recruiters

Working via agencies is a classic unrelated clients test trap. Even with multiple end-clients, if the engagements came through recruiters and not as a direct result of your own advertising/tenders, you likely fail the test.
Results test will turn on contract wording and commercial risk, most day-rate roles won’t make it.
Employment/premises tests seldom fit typical IT contracting unless you run a genuine multi-person consultancy with your own office.

3) Electrical contractor quoting fixed prices

Often passes the results test: fixed-price deliverables, own tools/gear, obligation to fix defects. If you pass this, you don’t need the 80% rule or other tests.
Subbies could also support the employment test if they do 20%+ of principal work across the year.

Common myths

“I’ve got a company/trust, so I’m a business.” Not necessarily. PSI looks at the substance: who’s doing the valuable work, how the money is made, and where risk sits.
“I have a website and LinkedIn, so I pass unrelated clients.” Not unless you can show clients engaged you because of those offers. If work comes via agencies or word-of-mouth with no causal link to your public offer, that test fails.
“My home office is my business premises.” Almost always no for the business premises test. It must be exclusive and physically separate from private areas.
“Admin staff helps me pass the employment test.” Only principal work counts. Admin won’t help.

Quick self-check

Do I take on fixed-price jobs, bring my own kit, and fix defects at my cost?
If yes (consistently and on paper), you might pass the results test.
Is less than 80% of my PSI from one client?
If yes, I can also look at unrelated clients, employment, or business premises tests.
Can I show a direct trail from my public advertising/tenders to actual client engagements?
If yes, the unrelated clients test might be within reach.
Across the whole year, did others perform 20%+ of the core billable work (or did I have an apprentice for half the year)?
If yes, the employment test might be satisfied.
Do I maintain exclusive, separate, commercial-style premises used mainly for my PSI work for the entire year?
If yes, the business premises test may be ticked.

How to set yourself up (without gaming it)

If your facts legitimately point to a real business, paper it properly:

Contracts that speak “results”: fixed-price or milestone-based where sensible; include defect rectification at your cost; make sure risk really sits with you.
Tools and equipment: own and use your own where relevant; avoid relying wholly on the client’s set-up.
Proving “public offers”: keep dated copies of ads, website analytics, tender submissions, enquiry logs, and evidence that specific clients engaged you because of them.
Using others for principal work: scope sub-contracts to include core deliverables, track the market value across the whole year, and keep proper invoices and timesheets.
Premises: if you’re relying on this test, secure a clearly separate commercial lease, document the exclusivity, keep photos/floor plans, utility bills, and show the space is used mainly for producing your PSI.
Mind the 80% rule: monitor concentrations and plan capacity so you aren’t locked out of three tests by one big client.

And remember: you can be a PSB for some income and not for others. Apply the tests at the individual level and by income stream if your setup is more complex (e.g., company with multiple fee earners).

A note for medical and allied health professionals

Clinics and service-fee models often look and feel like a business, but the PSB tests are strict:

Patients usually come via the clinic’s channels (not your public offer).
Rooms and systems belong to the clinic.
You’re paid per consult/session (not for a defined “result”).
Admin/nurses are support staff (not principal work).

It’s not impossible to pass a test, but it requires deliberate structuring, think your own rooms (separate lease), your own public offers that actually drive patient bookings, and engaging other practitioners to perform principal work. Get specific advice before making changes.

Bottom line

PSI vs PSB isn’t about clever labels, it’s about how you actually operate. If your income is really just you for hire, expect the PSI rules to apply. If you’ve built something more business-like, taking commercial risk for results, bringing your own infrastructure, winning work through your own marketing, employing others to do the core work, or operating from proper business premises, then the PSB tests may recognise that.

Treat the tests like guardrails, not loopholes. Set up genuinely, document carefully, and keep evidence that tells a consistent story. Do that, and you’ll sleep better at night, and spend less time arguing definitions when review time rolls around.

Dario Della Vecchia