Many doctors only hear the phrase personal services income when an accountant mentions it halfway through a tax meeting, usually with a slightly worried tone. It sounds technical, and the rules do take some care. But the core idea is easy to grasp, and understanding it early can save you from nasty surprises with the ATO.
Personal services income, usually shortened to PSI, is income that’s mainly a reward for your own personal effort or skill. For a doctor, that describes most clinical work almost perfectly. The rules exist to stop people using a company or trust to split or reduce tax on what is really personal labour.
How Does the ATO Define Personal Services Income?
The ATO treats income as PSI when it’s mainly a reward for an individual’s personal efforts or skills. A common way to think about it is that more than half of the income comes from your own work, rather than from assets or staff you employ. It doesn’t matter whether the money is paid to you, a company, a partnership or a trust.
Say a GP sees patients under a service agreement and the fees flow into her family trust. Because the income comes from her own consultations, it’s very likely PSI. The same goes for a specialist who bills through a company, since the structure doesn’t change where the income comes from.
Why Do the PSI Rules Matter for Doctors?
If your PSI doesn’t pass certain tests, the income is attributed back to you personally, even though it was paid to an entity. That means you can’t spread it across family members or leave it in a company at a lower tax rate. Some deductions are also restricted or denied.
These are the main things that can be affected when the PSI rules apply:
- Splitting income with a spouse or other family members
- Retaining profit in a company taxed at the company rate
- Claiming rent, mortgage interest or rates on a home used for work
- Deducting payments to associates for work they didn’t genuinely do
- Claiming certain costs that would normally be deductible to an entity
Because these rules touch both your structure and your tax return, it pays to have someone who understands medical practice arrangements look at them. The overview of tax and accounting services for medical professionals shows the kind of compliance and planning support that can cover PSI questions. Raising the topic early usually costs far less than fixing a problem later.
What Is a Personal Services Business?
You can escape the PSI rules if you’re conducting a personal services business, known as a PSB. There are a few ways to qualify, and the first is the results test. You pass if, for at least 75 percent of your PSI, you are paid to produce a result, you supply the tools or equipment needed, and you’re liable to fix any defects at your own cost.
If you don’t pass the results test, the next hurdle is the 80 percent rule. When 80 percent or more of your PSI comes from one client and its associates, you generally can’t rely on the other tests. Below that level, you may self assess against the unrelated clients test, the employment test or the business premises test. Clinical work is usually paid by the hour or by the patient rather than for a defined result, so many doctors struggle with the results test and end up leaning on these alternatives.
Does the 80 Percent Rule Hurt Medical Professionals?
Sometimes, yes, and it surprises people. A doctor who works almost entirely at one practice, or through one agency, can trip the rule easily. Work arranged through a single agency often counts as one source, even if you see many different patients.
Picture a locum who takes all of their shifts through one staffing company. Even though the work spans several hospitals, the income may be treated as coming from one source. In that case, self assessment against the other tests isn’t available, and the only route to PSB status may be a personal services business determination from the ATO.
What Is a PSB Determination?
A determination is a ruling from the ATO confirming that your income is earned through a personal services business. You can apply for one whether you earn more or less than 80 percent from a single source, and for people who exceed 80 percent it’s often the only option. The ATO looks at whether your circumstances meet the relevant tests or whether unusual circumstances prevented you from meeting them.
It’s a formal process, so you’ll want evidence in order before you apply. That includes contracts, invoices, records showing who you work for and how you’re paid, and details about your business premises and other clients. Good records make the process far smoother.
Many doctors also find that a determination request is easier when the wider business picture is already organised. Support such as business advisory for medical professionals can help you document how your work is structured, who your clients are and how your practice operates. A clear paper trail turns a stressful application into a manageable one.
How Should You Prepare?
Start by listing every source of clinical income and what share each one represents. Then read your contracts to see whether you’re paid for results or for time. Finally, check how your entity is set up and whether it matches what your accountant has documented.
If you like learning through conversation, the podcast for medical professionals is a relaxed way to hear money topics explained in plain language. Listening on the commute can make tax concepts feel far less intimidating. It’s a good way to arrive at your next accountant meeting with sharper questions.
Wrapping Up the PSI Guide
Personal services income is income mainly earned through your own skill and effort, which describes most medical work. The rules decide whether you can use a company or trust to share or retain that income, or whether it’s taxed in your hands. Passing the results test, or meeting the 80 percent rule plus another test, can protect your structure.
For ongoing reading on tax, structure and wealth topics, the resources section is a handy place to keep exploring. A little background knowledge goes a long way when you’re making decisions about how your income is structured. It also helps you spot when something in your own arrangements deserves a second look.
My recommendation is to review your income sources and structure before the end of the financial year, not after the ATO asks questions. A short conversation with a medical accountant can clarify where you stand. If your income were reviewed tomorrow, could you show exactly why your structure works?
Frequently Asked Questions
PSI is income mainly rewarding your own personal effort or skill, rather than assets or employed staff. For doctors, almost all clinical work qualifies. It doesn’t matter whether payment goes to you, a company, a partnership or even a trust.
If PSI fails the required tests, the income is attributed back to you personally. You cannot split it with family or retain it in a company at lower rates, and some deductions become restricted or denied entirely under the rules.
A PSB lets you escape the PSI rules. You can qualify through the results test or, if less than 80 percent of income comes from one client, the unrelated clients, employment or business premises tests, which you can self assess.
You pass if at least 75 percent of your PSI is paid to produce a result, you supply the tools or equipment needed, and you are liable to fix defects at your own cost. Doctors often struggle; pay is hourly.
If 80 percent or more of your PSI comes from one client and its associates, you generally cannot rely on the other tests. Work arranged through a single agency often counts as one source, even if you see many patients.
Yes. A locum taking all shifts through one staffing company may have income treated as one source, even across several hospitals. Self assessment against the other tests isn’t available to you, so the only route may be an ATO determination.
A determination is an ATO ruling confirming your income is earned through a personal services business. You can apply whether you earn more or less than 80 percent from one source, and it is often the only option above that.
List every source of clinical income and its share, read your contracts to see whether you’re paid for results or time, and check your entity matches your accountant’s documents. Keep all contracts, invoices and records of your other clients ready.
