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The ATO distinguishes between two types of business income earned under an ABN: Personal Services Income (PSI) and genuine business profit-and-loss income. The difference matters because PSI rules restrict certain deductions that are otherwise available to businesses.
What is Personal Services Income (PSI)?
PSI is income mainly from your own personal skills, effort, or expertise:
- Tradespeople paid for their labour
- Freelancers paid for their work
- Cleaners paid for their cleaning service
- Fruit pickers paid for their picking
- Consultants paid for their advice
- Anyone where the income comes from "you" personally rather than from goods or assets
For a carpenter working under an ABN for a construction company: the payment is for the carpenter's hours and skills. That is PSI.
What is a profit-and-loss business?
A profit-and-loss business generates income through:
- Production of goods (manufacturing, baking, crafting)
- Use of business assets (rental income, leasing equipment)
- Employing others to do the work
- Selling products sourced from suppliers
The income is not primarily tied to the owner's personal effort. A bakery selling bread, a labour hire company employing pickers, or a rental property business all fall into this category.
Why does the PSI distinction matter?
The PSI rules restrict certain deductions:
Available with PSI:
- Tools and equipment you personally use
- Work-related clothing and uniforms
- Travel between work sites
- Vehicle expenses for genuine business travel
- Self-education directly related to your work
- Phone and internet (work portion)
NOT available with PSI (or restricted):
- Salaries paid to associates (e.g., a partner or family member)
- Rent for premises if not strictly required for the work
- Some superannuation contributions for associates
- Certain home office expenses
The rules exist to prevent individuals from reducing tax by structuring personal employment as a "business" with elaborate deductions.
How is PSI identified?
The ATO uses the 80% rule: if more than 80% of your income comes from one client, your income is likely PSI. Other tests also apply:
- Results test: are you paid for a specific outcome rather than hours worked?
- Unrelated clients test: do you have multiple unrelated clients?
- Employment test: do you employ others to help with the work?
- Business premises test: do you operate from dedicated business premises?
Most working holiday makers fail all of these tests because the work is straightforward labour for one or few clients.
How does PSI apply to working holiday makers?
For most working holiday makers under an ABN, the income is PSI:
- Farm work paid by piece rate: PSI
- Hospitality contracting: PSI
- Trade work for one main client: PSI
- Cleaning subcontracts: PSI
- Freelance services for occasional clients: PSI
This is normal and not a problem. The standard work-related deductions (tools, uniforms, vehicle use, training) still apply. Just some of the more elaborate business deductions are not available, which is fine because working holiday makers rarely have those types of expenses anyway.
How does our team handle PSI?
When we prepare your tax return:
- We assess whether your ABN income is PSI based on the ATO tests
- We apply the correct rules to your deductions
- We maximise all eligible work-related deductions
- We ensure compliance with PSI requirements
What is helpful is describing your work accurately:
- Who your main clients were
- How you were paid (hourly, piece rate, project)
- What equipment you provided
- Whether you employed anyone
Send us these details when we start your return and we will work out the correct treatment.