Personal Services Income (PSI) Rules for Lawyers in Australia
- Mar 16
- 6 min read
What Lawyers Need to Know Before Structuring Consulting or Contracting Income
More lawyers are moving beyond traditional employment and working as independent consultants, contractors or boutique legal practices.
Many operate through a company, trust or partnership to manage risk, flexibility and tax planning.
However, when a lawyer's income is mainly generated from their own expertise, the Personal Services Income (PSI) rules may apply.
These rules can significantly affect how income is taxed, regardless of the entity used to receive that income.
For lawyers considering consulting arrangements, contracting with firms or building their own legal advisory practice, understanding PSI is an important part of structuring correctly.
Key Takeaways for Lawyers
• PSI applies where income is mainly generated from a lawyer's personal expertise.
• Operating through a company or trust does not automatically avoid PSI rules.
• Lawyers may avoid PSI restrictions if they qualify as a Personal Services Business.
• Client diversification and proper structuring can influence whether PSI applies.
• Professional advice is often needed when setting up consulting or contracting structures.
What is Personal Services Income?
Personal Services Income is income primarily generated from an individual's skills, effort or professional expertise, rather than from a business structure, employees or assets.
For lawyers, PSI commonly arises where income is earned from:
• providing legal advice
• drafting legal documents or contracts
• appearing in court
• offering legal consulting or advisory services
• contracting to law firms or corporate legal departments
If the income depends largely on the work performed personally by the lawyer, it is likely to be classified as PSI.
Why PSI Matters for Lawyers
If the PSI rules apply, the Australian Taxation Office may treat the income as belonging directly to the individual lawyer, even when it is received through a company or trust.
This can limit certain tax planning opportunities, including:
• income splitting through a family trust
• retaining profits in a company at the corporate tax rate
• claiming some deductions available to businesses
The purpose of the rules is to ensure personal income cannot simply be redirected through another entity to reduce tax.
For lawyers establishing consulting practices or contracting arrangements, PSI is often one of the first structuring issues to consider.
When Lawyers Can Qualify as a Personal Services Business
If a legal practice satisfies certain tests, it may qualify as a Personal Services Business (PSB).
Where this occurs, the PSI restrictions generally do not apply.
There are four main tests:
1. Results Test
You may satisfy this test if:
• you are paid to achieve a specific outcome rather than billing hourly
• you provide your own tools or equipment
• you are responsible for correcting mistakes at your own cost
Many lawyers working on hourly billing arrangements do not meet this test.
2. Unrelated Clients Test
You may qualify if:
• you work for two or more unrelated clients, and
• those clients are obtained through advertising or public offers
Independent legal consultants who actively market their services often meet this test.
3. Employment Test
You may pass this test if:
• employees or subcontractors perform at least 20 percent of the principal work, or
• you employ an apprentice for at least half the income year.
4. Business Premises Test
This test may apply if the practice operates from premises that are:
• mainly used for the business
• physically separate from your home
• separate from your clients' offices.
The 80% Rule
Where 80% or more of income comes from one client, the PSB tests generally cannot be self assessed, except for the results test.
Instead, the individual may need to apply to the ATO for a Personal Services Business determination.
This situation commonly arises where lawyers:
• contract long term to a single law firm
• provide services exclusively to one corporate client.
Common PSI Scenarios for Lawyers
Contract Lawyers Working With One Firm
Lawyers who contract to a single law firm and charge hourly will often fall within the PSI rules.
Independent Legal Consultants
Lawyers working with multiple clients and marketing their services independently may qualify as a Personal Services Business.
Lawyers Using a Company or Trust
Even when income is received through an entity, the PSI rules can still attribute the income back to the individual lawyer.
What Happens if PSI Applies?
Where the PSI rules apply and the practice does not qualify as a Personal Services Business:
• income is taxed in the individual lawyer's name
• some business deductions may be restricted
• income splitting through trusts is not available
• company tax deferral strategies may not apply.
For lawyers structuring consulting practices or advisory businesses, understanding these implications early is important.
Structuring Options When PSI Is a Risk
Where PSI rules may apply, lawyers sometimes explore alternative structures to support a genuine business model.
One option that may be considered in some circumstances is the use of a management trust or service trust arrangement.
Under this structure, a separate entity may provide administrative and management services to the legal practice.
This can include services such as:
• administration and operational support
• marketing and client development
• office infrastructure and systems
• staff management and back office functions
Where implemented correctly and supported by genuine commercial arrangements, this type of structure can help demonstrate that the legal practice operates as a broader business rather than simply an individual providing personal services.
These arrangements must be structured carefully. The ATO will look closely at whether the arrangement reflects genuine business activity rather than simply attempting to redirect income.
Factors typically considered include:
• whether the legal practice has multiple clients
• how services are marketed and contracted
• whether the entities involved provide real services
• whether service fees reflect commercial market rates.
Strategic Structuring for Lawyers and Legal Consultants
For many lawyers moving into consulting, contracting or building boutique legal practices, the PSI rules are only one part of the broader structuring discussion.
The structure of the practice can influence:
• tax outcomes
• risk management
• profit distribution
• long term growth of the firm.
In many cases, lawyers benefit from reviewing their structure as their practice evolves. This may include assessing whether the current entity structure supports the growth of the practice, the client base and the commercial model of the firm.
For lawyers building independent practices or consulting businesses, structuring decisions made early can have long term financial implications.
Advice for Brisbane Lawyers Structuring Their Practice
If you are a Brisbane lawyer contracting to firms, consulting independently or operating through your own entity, it is worth reviewing whether the PSI rules affect your structure.
At Rise Accountants, we work with lawyers and professional service firms to help them structure their practices in a way that is compliant, tax effective and aligned with long term growth.
Our team regularly advises legal professionals on:
• PSI and Personal Services Business rules
• structuring consulting or advisory practices
• entity structures for professional firms
• tax planning and profit distribution strategies.
If you would like to understand how the PSI rules apply to your situation, our team can review your structure and provide practical guidance.
Book a discovery call with the Rise Accountants team to discuss your legal practice.
Frequently Asked Questions About PSI for Lawyers
Do PSI rules apply to lawyers contracting to law firms?
Yes. If most income is earned from the lawyer's personal work and the lawyer contracts to a single firm, PSI rules may apply.
Can lawyers avoid PSI by using a company or trust?
Not necessarily. If the income is primarily generated from the lawyer's personal services, the ATO may attribute the income back to the individual.
When does a lawyer qualify as a Personal Services Business?
A lawyer may qualify if they meet one of the Personal Services Business tests, such as working for multiple unrelated clients or employing others to perform part of the work.
Are PSI rules common for legal consultants?
Yes. Lawyers moving into consulting or contracting arrangements often encounter PSI rules, particularly when working with a single client.