The Consultant's PSI Puzzle and Home Office Apportionment
Priya is a sole trader IT security consultant. In FY2025 she invoiced three clients: Meridian Bank ($180,000, 70% of her time), Coastal Health ($60,000, 25%) and a one-off $8,000 job for a startup (5%). Meridian requires her on-site two days weekly and controls her ticket queue; Coastal lets her set her own hours and she subcontracts 20% of that work to a junior. Priya works 45 hours weekly from a 30 sqm dedicated study in her 180 sqm home. She claims 100% of mortgage interest ($42,000), rates ($4,000) and electricity ($3,500) as home office costs, plus $9,000 of new computer equipment written off immediately under the small business instant asset write-off, though she is registered for GST and her turnover is $248,000. Her accountant questions the PSI position and the occupancy claims.
1. Advise whether Priya's income is personal services income and whether a personal services business determination is available.
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Step 1 – Is it PSI? Income is PSI if it is mainly a reward for Priya's personal efforts or skills (s 84-5 ITAA 1997). All three engagements are paid for her expertise; the result test is not satisfied because she is paid for hours, not a delivered outcome.
Step 2 – The 80% rule. Meridian alone is 70% by value but 70% of her time; combined with the startup it exceeds 80% only if the clients are not associates. On these facts no single client reaches 80%, so the results test and unrelated-clients test are the relevant gateways.
Step 3 – Results test. Coastal satisfies it (she bears risk, provides own tools, is paid for outcome). Meridian does not: it controls her queue and requires attendance, indicating an employment-like relationship. Because the results test must be met for each engagement, Meridian income remains PSI.
Step 4 – Consequences. Meridian PSI is subject to the alienation and deduction limits: subcontracting costs and home office deductions attributable to that income are capped, and amounts paid to associates are non-deductible. Priya should seek a personal services business determination for Meridian under s 87-60 on the basis that she would not be treated as an employee, or restructure the engagement to evidence outcome-based payment. Note the 20% subcontracting to the junior on Coastal is deductible only against non-PSI or approved PSB income.
2. Assess the home office and equipment deductions, identifying the correct apportionment and any GST interaction.
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Occupancy expenses. Priya cannot claim 100%. Mortgage interest and rates are occupancy expenses deductible only to the extent the study is used exclusively for income-producing purposes. Using floor area: 30/180 = 16.7%. Interest $42,000 × 16.7% = $7,014; rates $4,000 × 16.7% = $668. Because the study is a place of business, she should consider the CGT main residence partial exemption clawback, as the study may be treated as a separate dwelling for the period of business use.
Running costs. Electricity should be apportioned on a reasonable basis - floor area combined with hours of use (45 hours/week is substantial). A defensible method is 16.7% of the business-use portion, giving roughly $585, supported by a diary.
Equipment. The $9,000 computer: the instant asset write-off threshold for FY2025 is $20,000 for small business entities with aggregated turnover under $10 million. Priya's turnover is $248,000, so she qualifies. However, she is registered for GST, so the asset is recorded net of the $818 GST credit, giving a $8,182 deduction. She must also confirm the computer is used wholly for business; if there is private use, only the business percentage is deductible.
Record keeping. She needs contemporaneous evidence for the hours and the floor plan; estimates alone risk disallowance and penalties.