Published on 29 Jan 2026
What records you need to keep when personal services income rules apply to your business will depend on how you earn PSI income and how your business structure is set up. When personal services income is mainly a reward for your personal efforts or skills, the Australian Taxation Office expects clear records that explain how you work out your position and how you claim deductions. Putting the right systems in place now makes your income tax return easier and reduces the stress of dealing with your tax obligations.
What is Personal Services Income in Practice
If you are a sole trader, an independent contractor or you work through a company or trust, you may earn PSI income if most of the income received is for your principal work, not for income producing assets or other people’s efforts. The PSI rules apply when personal services are the main driver of the income, regardless of whether you operate in almost any industry such as IT, trades, consulting or creative services. Understanding what PSI income is, how the PSI tests work and what records to keep helps you pay tax correctly and avoid missing out on legitimate tax deductions.
The good news is that once you know what the Australian Taxation Office looks for, you can set up practical record keeping that fits the way you provide services. Clear records help you work out if you are a Personal Services Business (PSB), how the rules apply in each income year and what you can safely claim as deductions. This article walks through the core records you need when personal services income rules apply to your business, and how to stay on top of your tax without drowning in paperwork.
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When Do the Personal Services Income Rules Apply?
Personal services income is income where more than half of the amount you earn is a direct result of your personal efforts and skills. It often arises when you provide services as an independent contractor, consultant, freelancer or specialist, and clients are really paying for you rather than for income producing assets, other staff or large amounts of equipment required. In simple terms, if you stopped working, the income would likely stop as well.
The PSI rules apply when you earn PSI through a personal services entity such as a company, trust or partnership, or in some cases as a sole trader. Under these rules, only individuals can be taxed on PSI received, and the law limits certain tax benefits such as income splitting and some types of deductions. You still have to report PSI on your income tax return even if you pass the PSB tests, so your records should always show how you worked out your position.
How Do You Work Out If You are a Personal Services Business?
A personal services business is a business that passes at least one of the PSB tests, so the more restrictive PSI rules do not apply to that PSI income. The results test is the main test and looks at whether you are paid to produce a specific result, you provide your own equipment required to do the work, and you are responsible for fixing mistakes at your own cost. If you pass the results test, your PSI is treated more like normal business income.
If you do not pass the results test, the remaining tests are based on the pattern of your business and are sometimes called the business premises test, the employment test and the unrelated clients test. These PSB tests look at things such as whether you have separate business premises, more than one client, or one or more apprentices or other workers helping you with principal work. In some cases, you may also apply for a personal services business determination if your situation is more complex.
What PSI Records Must Show When Rules Apply?
When PSI rules apply, your records must show how you worked out that you receive PSI and how the rules apply in that income year. At a minimum, you need to show whether the income is PSI income, which PSI tests you considered, and whether you are treated as a personal services business PSB or not. You also need to clearly link the PSI received to the individual’s personal efforts that generated the income.
Your records should make it easy to see which work performed is principal work and which is non principal work, and how any wages or other costs relate to that PSI. If you operate through a company or trust, you need to show which PSI belongs to which individual and how the PSI is reported in the income tax return.
What Types of Income Records Should You Keep for PSI?
First, you need records that show the income you receive for personal services. This includes invoices issued to each client, details of amounts paid and dates, and the nature of the services you provide. These records should also show whether the income is at market value and whether you were engaged more like a contractor than an employee.
It is also important to keep copies of each contract or agreement with your clients because these documents help show whether the results test or other PSB tests are met. Contracts usually explain if you are paid for a result, if you provide your own public liability insurance and equipment required, and how you fix errors. Together with your invoices and bank statements, this builds a clear picture of the PSI income your business earns.
How Should You Record Work Performed and Time Spent?
Your records should show the work performed that led to the income received, and that it was your personal efforts or skills that created that income. Timesheets, job registers, project logs or diary entries are all useful ways to record hours worked, tasks completed and which client or job those hours relate to. This helps show that you provide services directly and are not just managing income producing assets.
If you are the only employee or main worker in your business, detailed work records become even more important because the rules often focus on whether only individuals perform the services. Recording non principal work separately, such as simple admin support, can help you explain your situation if asked. Many small business owners find that digital time tracking tools make this much easier.
What Expense and Deduction Records Matter for PSI?
To claim deductions against PSI, you must keep records that show each expense was incurred to earn PSI income and is not private in nature. This includes receipts, invoices and other evidence for items such as tools, software, protective clothing, training and some types of insurance like public liability. Where your business uses vehicles, a logbook and mileage records are important to support claims.
You also need to track expenses that may be partly private, such as home office running costs, phone, internet and some bank fees or account keeping fees. For these, your records should explain the business use percentage, so you only claim the tax deductions you are entitled to. If PSI rules apply, some types of deductions such as mortgage interest on your home or payments to associates for non-principal work may be limited or disallowed.
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How Do PSI Rules Affect Deductions for Business Premises and Assets?
When PSI rules apply, the law focuses on whether your income is mainly from your personal skills or from other factors such as business premises or income producing assets. If you genuinely operate from separate business premises that are used only for your business and are physically separate from your home, this may help you satisfy the business premises test. Your records should include leases, utility bills and photos or floor plans that support this.
In many PSI situations, the business does not rely heavily on large income producing assets, but you may still have equipment required such as laptops, tools, or specialised instruments. Keep invoices and asset registers that show the cost and use of this equipment. These records help you calculate depreciation and other deductions correctly in your tax return and show that any claimed equipment is reasonable for the services you provide.
How Do PSI Records Differ for Sole Traders and Companies?
If you are a sole trader, the PSI rules still matter but the income tax is assessed to you directly, not to a separate personal services entity. You must keep records that show how much PSI income you earned, which PSI tests you considered, and how you worked out what to claim. As a sole trader you still need to report PSI on your income tax return and keep enough detail to support the figures.
When you operate through a company or other entity, records must also show how much PSI is attributed back to each individual who does the personal services. This is important because the rules say only individuals can pay tax on PSI income, even if the company receives the money. Detailed records of wages, director fees and other payments to each individual help you show that no inappropriate income splitting has taken place.
What Common PSI Record Keeping Mistakes Should You Avoid?
One common mistake is relying on memory rather than keeping simple notes on how you decided the PSI rules apply or do not apply. For example, you might remember that you passed the unrelated clients test or that you had more than one client, but without records it is harder to prove later. A short written summary kept with your contracts is often enough to avoid this problem.
Another frequent issue is not keeping copies of contracts or emails that show how the client relationship was structured. This can make it difficult to show you worked on an arm’s length basis, and that you were paid at market value for the services you provide. Businesses also sometimes mix private and business expenses so that mortgage interest, private travel or family wages are not clearly separated from genuine business costs.
How Can Good Systems Help You Earn PSI and Stay Compliant?
Simple, consistent systems make it much easier to earn PSI and stay on top of record keeping at the same time. Cloud bookkeeping software puts your income, expenses and bank feeds in one place, which makes it easier to match invoices to payments and track your PSI received. Storing contracts, work logs and PSI test notes alongside your accounting records means everything is ready when you or your accountant need it.
You can also set up digital folders by client, by income year and by individual, so it is clear which records support each PSI earner. When your records are organised, it is much simpler to complete your income tax return, answer questions from the Australian Taxation Office and check that you only pay tax on the correct amounts. This kind of structure also supports your broader business, not just your PSI obligations.
When Should You Seek Professional Advice about PSI?
Because the PSI rules can be complex and the PSB tests have several conditions, it is wise to seek professional advice if you are unsure. An experienced accountant or bookkeeper can walk you through what is PSI income, which PSI tests apply to your situation and how to structure your records. They can also explain how PSI affects your tax obligations and what you can safely claim.
Professional advice is especially important if you work through a personal services entity, have one client that provides most of your income, or employ family members. In these cases, there can be a greater risk of unintentional income splitting or claiming deductions that the rules do not allow. Getting guidance early helps you avoid problems and gives you confidence that your records and tax return are on the right track.
It is also important to note that in November 2025, the Australian Taxation Office released new guidance (PCG 2025/5) that increases focus on how personal services businesses structure their affairs. Even if you pass the PSB tests, the ATO may still review arrangements involving income retention or payments to associates. Businesses have until 30 June 2027 to review and adjust their structures if needed, so getting professional advice now helps you stay ahead of these requirements.
What are the Next Steps if Personal Services Income Rules Apply to Your Business?
If you know that personal services income rules apply to your business, start by reviewing your current records for income, work performed, expenses and PSI tests. Check that you have clear contracts, time records and evidence for all major deductions, and that you can show how you worked out whether you are a personal services business or not. Where you spot gaps, put simple processes in place to fix them for the next income year.
From there, focus on building habits that keep your records up to date, such as saving contracts as soon as they are signed, recording time as you work and filing receipts as you go. Finally, consider working with a professional who understands PSI so you can manage your tax obligations with clarity and confidence. That way, you can focus your personal efforts and skills on growing your business while knowing that your PSI records and tax position are in good order.
