The short answer: an independent consultant's bookkeeping and structuring decisions are shaped heavily by the personal services income (PSI) rules, which determine whether income earned mainly from personal effort or skill can be split, distributed through a company or trust, or has to be attributed back to the individual regardless of the structure used. Add GST registration (compulsory above the turnover threshold, often sensible earlier), and the right business structure choice, and consultant bookkeeping becomes a genuinely different exercise from bookkeeping for a business selling products or a team's collective labour.
Key takeaways
- Personal services income (PSI) rules can stop a one-person consultancy from simply running income through a company to reduce tax, and the rules apply based on the actual nature of the work, not the structure chosen.
- Passing the results test, or one of the other PSI tests, changes what deductions and structuring options are actually available to an independent consultant.
- GST registration is compulsory once turnover crosses the threshold, and many consultants register voluntarily earlier than that for credibility and input tax credit reasons.
- The right structure (sole trader, company, trust) depends on income level, asset protection needs and whether PSI rules apply, not a one-size-fits-all default.
What Personal Services Income Actually Means
PSI is income that is mainly a reward for an individual's personal effort or skill, rather than being generated by a business structure, employees, or significant business assets. A solo IT consultant billing for their own time is a textbook PSI example. A consultancy with several employees delivering the work, or one that owns significant income-producing assets, is generally not caught by the PSI rules in the same way, because the income is no longer mainly attributable to one person's effort.
| Business situation | Likely PSI treatment | What it means practically |
|---|---|---|
| Solo consultant, one main client, working from the client's premises | Very likely caught by PSI rules | Income generally attributed to the individual regardless of company structure |
| Solo consultant, multiple clients, works independently, sets own methods | May pass the results test | More structuring flexibility if the results test and other conditions are met |
| Consultancy with employees delivering client work | Generally not PSI | Standard business income rules apply, more structuring flexibility |
The Results Test and Other PSI Tests
The results test looks at whether the consultant is paid to produce a specific result, supplies their own tools and equipment, and is liable to rectify defects at their own cost, rather than being paid simply for their time and effort under direction. Passing the results test, or having less than 80 percent of PSI from one client alongside meeting other conditions, changes what deductions and income-splitting options are genuinely available. This is a factual test applied to the real working arrangement, not something a contract can simply declare into existence by using the right words.
Get Your Consultancy's Structure and Books Aligned
We help independent consultants understand how PSI rules actually apply to their situation and keep the books structured consistently with it.
Book a Free 20-Minute CallGST Registration: Compulsory Threshold and Voluntary Reasons
GST registration becomes compulsory once a consultant's turnover reaches the standard GST registration threshold, but many consultants register voluntarily well before that point, both for the credibility of appearing GST-registered to corporate clients and to claim input tax credits on business expenses like equipment, software subscriptions and a portion of home office costs. Voluntary registration is a genuine decision with a real trade-off (the admin of quarterly BAS lodgement) rather than something to default into or avoid without thinking it through.
| Consideration | Register for GST | Stay unregistered |
|---|---|---|
| Turnover | Above the compulsory threshold, or expected to be soon | Comfortably below, no near-term growth expected |
| Client type | Corporate clients who expect GST-registered suppliers | Small business or individual clients less concerned either way |
| Expenses | Significant equipment or software costs worth claiming input tax credits on | Minimal business expenses |
| Admin appetite | Comfortable with quarterly BAS lodgement | Prefers to defer the admin until compulsory |
Choosing a Structure: Sole Trader, Company or Trust
For a consultant genuinely caught by the PSI rules, the tax benefit of operating through a company or trust is often much smaller than commonly assumed, since PSI attribution can pull the income back to the individual regardless of the structure. Where PSI rules don't apply, or where asset protection and future business growth are bigger considerations than immediate tax optimisation, a company or trust structure can still make sense. This decision genuinely depends on individual circumstances and is worth a proper conversation with an accountant, rather than defaulting to whichever structure a friend in a similar field happens to use.
Deductions Available Under the PSI Rules
Even where PSI rules apply and limit income splitting, a genuine PSI-affected individual can still generally claim deductions that a normal employee could not, business-related expenses that would be allowable if the income were earned directly, superannuation contributions, and certain payments to associates for genuine services rendered. What is generally restricted is deducting expenses that only make sense as a business-splitting mechanism, rather than expenses that would be legitimately incurred regardless of the structure.
| Deduction type | Generally allowed under PSI rules | Generally restricted under PSI rules |
|---|---|---|
| Genuine business expenses (equipment, software, a portion of home office) | Yes, if actually incurred earning the income | N/A |
| Superannuation contributions | Yes, within standard contribution caps | N/A |
| Payments to a spouse or associate for administrative support they don't actually provide | No | Restricted, must reflect genuine work actually performed |
| Salary paid to family members as a general tax-splitting mechanism | No, unless it reflects genuine work at a commercial rate | Restricted |
The theme running through all of this is consistency between what is claimed and what actually happened in the business. PSI rules exist specifically to prevent structures whose only real purpose is to convert personal effort income into something that looks like business income for tax purposes, so the safest and most defensible position is always one that reflects genuine business substance, not a paper arrangement.
Bookkeeping Discipline Regardless of Structure
Whatever structure is chosen, the bookkeeping fundamentals stay the same: income and expenses recorded accurately and promptly, a clear separation between business and personal spending, and records that would hold up if the ATO ever reviewed whether the PSI rules were applied correctly. Consultants who blend personal and business expenses, or who reconstruct records once a year rather than keeping them current, make this review far harder on themselves than it needs to be, regardless of how sound their underlying structure actually is.
Common Mistakes Independent Consultants Make
- Assuming a company structure automatically reduces tax, without checking whether PSI attribution rules actually apply
- Registering for GST reactively, after crossing the threshold without noticing, rather than planning for it
- Blending personal and business expenses, making both bookkeeping and any future review much harder
- Never revisiting the structure decision as the business genuinely changes, more clients, employees, or business assets
What to Ask a Bookkeeper or Accountant Before Structuring Your Consultancy
- "Does my current or planned working arrangement likely pass the PSI results test?"
- "Should I register for GST now or wait until it's compulsory?"
- "Are you a registered BAS agent?" Verify at tpb.gov.au.
What This Typically Costs
Fixed monthly bookkeeping for an independent consultant generally runs from $250 to $600, scaling with transaction volume and whether payroll or a company structure adds complexity. Quoted after a free assessment of your actual situation, not a generic price list.
Revisiting the Question as the Business Grows
PSI status is not a one-time determination made at business formation and forgotten. A consultant who takes on their first employee, wins several new clients so no single one represents the bulk of income, or starts owning meaningful income-producing assets, may genuinely move out of PSI territory over time, opening up structuring flexibility that was not available at the start. The reverse is also true: a business that scales back down to one person working for a single client can drift back into PSI territory without anyone noticing until a review raises the question. This is worth revisiting annually with whoever prepares the tax return, not assumed to be settled permanently.
The Bottom Line
Personal services income rules are the single biggest factor most independent consultants underestimate when choosing a structure, and getting this wrong doesn't just cost an accounting fee, it can mean a structure was never actually delivering the benefit it was set up for. Understand where your work sits against the PSI tests first, then structure and keep books accordingly, rather than the other way around.