What is the difference between a profit and loss business and personal services income in Australia?

If you are working under an ABN in Australia, the ATO makes a distinction between two types of business income that can affect how your tax is calculated. Understanding whether your income is personal services income or genuine business profit and loss income matters when you lodge your tax return.

What is personal services income?

Personal services income (PSI) is income you earn mainly from your own personal skills, effort, or expertise rather than from the sale of goods or the use of business assets. If you are a tradesperson, freelancer, cleaner, fruit picker, or anyone else who is paid for work they personally perform, your income is likely PSI.

For example, if you work as a carpenter under an ABN and a construction company pays you for your hours on site, that payment is personal services income. The money comes from your skills, not from a product you made or sold.

What is a profit and loss business?

A genuine profit and loss business earns income through the production of goods, the use of assets, or by employing other people to do the work. The business itself generates income independently of the owner's personal involvement.

A bakery selling bread, a company manufacturing products, or a labour hire business — these earn income that is not primarily tied to the owner's personal effort.

Why does the distinction matter?

The PSI rules affect which deductions you can claim. Under PSI rules, some deductions that would otherwise be available to a business — such as certain rent and salary deductions — may not be claimable. The rules exist to prevent individuals from reducing their tax by structuring personal employment-like arrangements as businesses.

If more than 50% of your income comes from your personal efforts and skills, your income is likely PSI and the PSI rules will apply.

How does this apply to working holiday makers?

Most working holiday makers earning income under an ABN are earning PSI. Farm work, hospitality, trade work, cleaning, and most freelance services are all PSI. This is not a problem — it simply means certain business deductions are not available, while the standard deductions for tools, equipment, and work-related expenses still are.

What to do with this information

When you lodge your tax return with a tax agent, they will assess whether your ABN income is PSI or profit and loss and apply the correct rules. What is helpful is knowing this distinction exists and describing your business activities accurately when discussing your return with your agent.

Need help?

Working under an ABN and unsure how your income is classified?

Our team helps ABN holders understand their tax obligations and lodge accurate returns. Talk to us on WhatsApp.