How lenders read personal services income on a contractor home loan: the PSI rules, company and trust income, day rates and the documents to bring.
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Personal Services Income · Contractors · Home Loans
Take an illustrative case: an IT consultant has billed one client through her own company for three years. When she applies for a home loan, the lender reads her personal return, not the company's revenue. Here is why that happens, and what it can do to the figure she borrows against.
Quick Answer
When the personal services income rules apply, a contractor's income is taxed as if earned personally, so a home loan lender reads the income on the contractor's own return and notice of assessment rather than the revenue of the company or trust that invoiced it. Some lenders will annualise a day rate instead, and the One Doc home loan is the fallback when neither route fits. The personal services income glossary entry covers the definitions.
Also called: PSI, personal services income rules, PSI regime. "PSI" is the income; "the PSI rules" are the tax provisions that decide how it is taxed.
What is personal services income?
Personal services income is income you earn mainly from your own skills or effort, rather than from selling goods, using assets or running a business whose staff produce the work. Business.gov.au draws the line simply: income from a contract is PSI when more than half of the income is for your labour or skills, as its personal services income page states at the time of writing. IT contractors, engineers, consultants, designers and locum health professionals are the usual examples.
PSI is a tax concept, not a lending product. No lender offers a "PSI loan". What changes is where your income shows up in your paperwork, and that decides which figure a lender can use when it assesses a self-employed home loan. The definition questions on their own (who is affected, what the rules do, whether you can still use a company) are answered in the personal services income glossary entry. This insight stays on the lending side.
How do the PSI rules work, and when do they apply?
The PSI rules apply when you earn personal services income and you are not running a personal services business under the ATO's tests. When they apply, the income is taxed as if you earned it personally, even if a company, trust or partnership invoiced the client and banked the money. The tests, stated generally at the time of writing:
- The results test. You are paid to produce a result, you supply your own tools and equipment, and you are responsible for fixing defects. Pass it for most of your income and the rules generally do not apply.
- The 80 per cent rule. If you fail the results test and 80 per cent or more of your PSI comes from one client and its associates, you generally cannot self-assess as a personal services business and would need a determination from the ATO.
- The other tests. If less of your PSI comes from one client, the unrelated clients, employment and business premises tests can still make you a personal services business.
A sole trader earning PSI and a contractor invoicing through a company or a trust sit under the same rules. The structure changes how the income travels to you, not whether the rules apply, and the trade-offs between structures are covered in sole trader vs Pty Ltd vs trust. Whether you pass any of these tests is a question for your accountant, not your broker. What a broker can tell you is how each outcome reads on a loan file, and that is where the next section goes.
How do home loan lenders read income from a company or trust when the PSI rules apply?
When the PSI rules apply, lenders read the income attributed to you on your own tax return and notice of assessment: the personal return, not the company's revenue. The company might show strong invoicing, but the question an assessor asks is how much of that reached you as assessed taxable income, because that is the figure the ATO has already checked.
That cuts both ways. Attributed income is usually simple to verify, since it sits on your personal return and lines up with your notice of assessment. Money the entity holds back is a different story. The rules are designed to stop PSI being sheltered as retained profit, and where a company does keep funds, many lenders will not count retained company profit toward your income unless they assess the company's financial statements alongside yours, which varies by lender.
PSI rules on
- Income is attributed to you and taxed in your personal return
- The lender reads your personal return and notice of assessment
- Some deductions are denied, so the taxable figure can sit closer to what the contract pays
- Profit left in the entity is usually not available to the assessment
PSI rules off
- Income can be taxed in the company or trust
- The lender reads the entity's financials plus your wage, dividends or distributions
- Wider deductions can push taxable profit below the cash the business earns
- Add-back and retained profit policies come into play, varies by lender
Neither outcome is better for borrowing as a rule, but the first usually means one return to read and the second means more documents to assemble. Whose income you are proving when you trade through a company or trust is set out in the low doc home loan income documents guide, and trust distributions on a home loan file are covered in trust-held business income on a One Doc home loan.
Can the PSI rules lower your borrowing power?
The PSI rules can lower your borrowing power, though usually through what surrounds the income figure rather than the figure itself. Lenders test serviceability on income they can verify, and three things about PSI tend to shift what they can verify.
- Denied deductions. The rules deny some deductions, such as certain home occupancy costs and payments to associates for work that is not your principal work. A higher taxable figure is not bad for a loan on its own, since lenders start from taxable income, but more tax is paid on it, so it is not extra money either.
- Attribution timing. Income is attributed in the year the entity receives it. If your rate rose after your last lodged year, the tax-return figure lags what you now earn.
- No income splitting. PSI is attributed to the person who did the work. If a spouse previously received a share through a trust or company, that share drops off their return, and household income on paper can fall even when the contract pays the same.
The table below shows the same illustrative contractor read two ways. The figures are round and invented, not lender policy.
| Step | Day-rate method | Tax-return method |
|---|---|---|
| Income source | Current contract and rate letter | Personal return and notice of assessment showing attributed PSI |
| Figure used | Illustrative $800 a day, annualised to around $160,000 to $185,000 depending on the working weeks a lender counts | Illustrative $150,000 of attributed income from the latest lodged year |
| Deductions | Usually none taken from the rate; the lender applies its own tax and expense calculations | Whatever the PSI rules allowed was already deducted before the taxable figure |
| What can reduce it | A short remaining contract, gaps between contracts, a rate below the lender's minimum | An old lodged year, a lower earlier year, super or costs the entity paid before attribution |
| Documents | Contract, rate letter, recent invoices or payroll company payslips | Personal returns, notices of assessment, the entity's return if requested |
How a lender then checks that income against your expenses and commitments is set out in the responsible lending assessment for self-employed borrowers, and the borrowing power calculator gives an indicative starting figure.
Will a lender use your day or hourly rate instead of tax returns?
Some lenders will use your day or hourly rate instead of tax returns, but only under a contractor policy, and not every lender has one. Under those policies the lender takes a day rate annualised, at lenders that offer it, over a set number of working weeks, then applies its own tax and expense calculations. Hourly rates are annualised on the hours in the contract, usually capped at a standard working week.
The conditions are where files pass or stall. Lenders typically want a minimum period of contracting, commonly a minimum contract history that varies by lender, plus a current contract with time left on it or a record of renewals, and work in the same field you were in before. Some contractor policies accept income paid to a sole trader or through a payroll company but revert to the tax-return method when the contract runs through your own company or trust.
In deals I've seen, the day-rate route works best for a contractor whose rate has risen since the last lodged return, or whose latest return carried a gap between contracts. When the tax-return figure is higher and current, it usually wins. The point is to pick the method your documents support, not the one that produces the largest number.
What documents do contractors earning PSI need for a home loan?
A contractor earning PSI usually needs the contract, a rate letter or recent invoices, and personal tax returns with notices of assessment, plus the company or trust return where the income passes through an entity. Which items a lender leans on depends on the method it uses.
- Current contract. The rate, the term, the end date and any renewal option.
- Contract history. Earlier contracts or a letter from your agency showing continuity in the same field, which supports your trading history.
- Invoices and statements. Recent invoices and the matching business bank statements, so the rate on paper shows up as deposits.
- Personal returns and notices of assessment. Commonly the latest one or two lodged years, varies by lender, showing attributed PSI.
- Entity documents if asked. The company or trust return and financial statements, especially where the PSI rules do not apply and the entity's profit matters.
- ABN details. Your ABN and GST registration dates, which lenders use to date your self-employment.
A lender's credit assessment moves faster when the contract, the invoices and the returns tell the same story. If they do not, a short note from your accountant explaining the gap usually saves a round of questions.
What if you have only just started contracting?
If you have only just started contracting, a lender will usually weigh how long you worked in the same field before the switch, because a new ABN backed by years in the same role reads very differently from a career change. With no lodged return as a contractor yet, the tax-return method is not available, so the file rests on the contract.
Contractor policies at some lenders accept a short ABN history where the contract and the industry experience are strong, varies by lender. Where they do not fit, a one doc home loan assesses income from a single document instead. Contractors whose income comes mainly from a truck or other equipment are in a different position, since that income is usually not PSI; the owner-driver subcontractor income insight covers how lenders read it.
To see which route your file supports before a lender sees it, check eligibility first. More on self-employed borrowing sits in the Business Owners Hub.
PSI changes where your income appears, not whether you earn it. When the rules apply, your income is taxed as if you earned it personally, so lenders read your personal return and notice of assessment, and profit left in your company or trust usually does not count. Denied deductions, attribution timing and the end of income splitting can all move the figure. Some lenders offer a day-rate method instead, and the One Doc path covers contractors who fit neither.
Key takeaway: ask your accountant whether the PSI rules apply to you, then choose the income method your contract and returns both support.Frequently Asked Questions
The 80% rule for personal services income says that if 80 per cent or more of your PSI comes from one client and its associates, and you do not pass the results test, you generally cannot self-assess as a personal services business. In that case you would need a determination from the ATO to be treated as one, at the time of writing. Whether it applies to you is a question for your accountant; the personal services income glossary entry covers the wider rules.
An example of personal services income is the fee an IT contractor earns for writing code for one client, where the payment is mainly for the contractor's own skills. A consulting engineer, a freelance designer or a locum doctor paid for their own work earn PSI too. Income that comes mainly from a truck or other equipment usually is not PSI, as the owner-driver subcontractor income insight explains.
Attributed personal services income on a payment summary is the PSI your company, trust or partnership received for your work that the rules treat as yours, so you include it in your own tax return. Lenders read it as personal income because it sits on your return and notice of assessment rather than the entity's financial statements. How your figure was calculated is a question for your accountant.
A contractor can get a home loan on a day rate with lenders that run a contractor policy, which annualises the rate over a set number of working weeks. Not every lender offers one, and some only accept the method when you are paid as a sole trader or through a payroll company. Where it does not fit, the One Doc home loan is another path.
How long you need to be contracting to get a home loan varies by lender, and many weigh your experience in the same field before you started contracting as heavily as your time on an ABN. Contractor policies commonly ask for a minimum contract history, while the tax-return method needs at least one lodged year as a contractor. Your trading history and current contract decide which route is open.
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