Personal Services Income for Doctors & Dentists: Your Questions Answered

If you work as a doctor, dentist, locum, or contractor, particularly through a company or trust, you have certainly come across the term Personal Services Income (PSI), one of the most important tax concepts affecting healthcare professionals in Australia.

For many healthcare professionals, it is one of the most misunderstood areas of Australian tax law, and getting it wrong can be costly.

This guide answers the most common questions we hear from doctors and dentists about PSI rules in Australia, including what is personal services income, how the Personal Services Business (PSB) tests work, what happens if the rules apply to your income, when to seek professional advice, and more. Let’s explore answers for them here.

What is Personal Services Income (PSI)?

Personal services income is an income you earn mainly through your individual skills, knowledge, or efforts, rather than through the sale of goods or assets.

Personal services income for dentists and doctors commonly includes:

• Medical consulting
• Dental services
• Locum work
• Contracting arrangements
• Specialist services
• Sole practitioner work

Under the Australian Taxation Office’s (ATO) definition, your income is classified as PSI when more than 50% of what you receive under a contract is for your personal effort or skills. For most doctors, dentists, locums, and healthcare contractors, this threshold is easily met.

For example:

A locum doctor contracted to provide services at multiple clinics may earn PSI because the income depends on their personal expertise and labour.

A common misconception is that using a company or trust automatically avoids PSI rules. It does not. The ATO can still treat your income as PSI if it flows through a business entity, called a Personal Services Entity (PSE).

The PSI rules are specifically designed to prevent individuals from using such structures to reduce their personal tax obligations unless they genuinely qualify for an exemption.

Does PSI Apply to Doctors and Dentists in Australia?

Yes, PSI rules in Australia apply to the majority of doctors and dentists, particularly if you work as a locum, contractor, or through a private practice structure.

Here are some common examples where PSI is likely to apply:

Even if you are running a thriving private practice, the ATO’s approach to personal services income for medical professionals focuses on whether income is genuinely tied to a business or to the individual personally.

Understanding this distinction is the starting point for any sound tax strategy. If you want tailored advice on how PSI affects your specific situation, our team provides specialist tax advice for doctors and tax advice for dentists across Western Australia.

What is the Difference Between PSI and a Personal Services Business (PSB)?

PSI (Personal Services Income) is a classification of income, specifically, the income derived from your personal skills or efforts. And PSB (Personal Services Business) is a tax status that can exempt you from the PSI rules for a given income year.

Think of it this way: PSI describes what your income is; PSB status determines whether the restrictions that normally come with that income apply to you.

In short, if you pass the ATO’s personal services business tests, the PSI rules, including restrictions on deductions and income splitting, do not apply to your income for that year. If you do not qualify, they do.

Further guidance is available through the ATO Personal Services Income guidance.

What Are the PSB Tests and How Do I Know If I Pass?

There are four Personal Services Business tests set out by the ATO. Passing one (plus satisfying the 80% rule where required) allows you to self-assess as a PSB for that income year.

The 80% Rule

Before looking at each test, it is important to understand the 80% rule.

This rule states that no more than 80% of your PSI in an income year can come from a single client (and their associates). If more than 80% comes from one source, you cannot use most of the PSB tests unless you also apply for a PSB Determination from the ATO

This is particularly important for healthcare professionals who work predominantly at one hospital, clinic, or dental practice. Now, let’s understand all four PSB tests.

What Happens if the PSI Rules Apply to My Income?

If the PSI rules apply and you do not qualify as a PSB, there are important tax consequences:

• Income attribution: Your income is attributed back to you as an individual, even if it has been paid to a company or trust.
• Restricted deductions: You cannot claim many deductions you might otherwise claim through a business entity. Expenses such as rent, mortgage interest, and some home office costs are typically off the table.
• No income splitting: You cannot distribute income to a spouse, family member, or beneficiary at a lower tax rate via a trust or company.
• Personal tax rates apply: The full income is taxed at your marginal rate as an individual.

For example:

A doctor earning $400,000 through a discretionary trust, hoping to split income with their lower-earning spouse, may find the ATO attributes all $400,000 back to them personally if PSI rules apply and no PSB status is confirmed. The expected tax savings disappear, and penalties may apply if the return was filed incorrectly.

This is one of the most common consequences of personal services income for doctors operating through a discretionary trust.

That’s why having the right accounting advice for doctors and dentists makes the difference between a structure that saves tax and one that creates liability.

Can I Still Use a Company or Trust if I Earn PSI?

Yes. A company or trust can still be used for operational, legal, or administrative reasons. But it is important to understand what having a structure does and does not do for you.

If the PSI rules do apply:

• The income is attributed back to you personally, regardless of the entity
• You cannot use the structure to split income with associates or beneficiaries
• Certain deductions available to the entity are disallowed

If you qualify as a PSB:

• The PSI restrictions do not apply for that income year
• You can legitimately retain income in the structure
• You have more flexibility around distributions and deductions

Having a company or trust is not a problem, but the issue is whether you have correctly established your PSB status.

How Do I Apply for a Personal Services Business Determination (PSBD)?

A Personal Services Business Determination (PSBD) is a formal decision made by the Commissioner of Taxation that grants you PSB status for a specific income year, even if you cannot self-assess as a PSB using the standard tests.

You may want to apply for a PSBD if:

• You are uncertain whether you will pass any of the four PSB tests
• Unusual circumstances (such as a pandemic, illness, or industry disruption) prevented you from passing a test you would otherwise meet
• You passed the Unrelated Clients Test but failed the 80% rule due to circumstances beyond your control

The application is submitted directly to the ATO, and the Commissioner will review your situation and determine whether PSB status is appropriate. If granted, you receive a PSBD notice that exempts you from PSI rules for that year.

Given the complexity of the application and the nuances the ATO considers, we strongly recommend getting specialist healthcare tax advice from Smith Coffey before lodging a PSBD request.