Personal Service Income rules and the retiree consultant: why the company structure often doesn't help

For Australian retirees and pre-retirees who continue some form of professional work in retirement — consulting, contracting, board service, advisory work, professional services — a common structural choice is whether to operate as a sole trader or through a company (or trust) structure. The intuition that a company structure must produce tax benefit (because company tax rates are lower than top personal marginal rates) is widespread but, for most retiree consulting situations, wrong. The Personal Service Income (PSI) rules under Part 2-42 of the Income Tax Assessment Act 1997 close the loophole the intuition assumes exists, attributing income to the individual at their marginal rate regardless of the structure used. For most retirees doing consulting work, the company structure provides no tax benefit over direct sole trader operation. Understanding why — and when the structure may still be appropriate on non-tax grounds — is one of the more useful pieces of self-employment planning for retirees.

The PSI framework addresses situations where income is mainly a reward for an individual's personal efforts or skills, but is routed through an interposed entity (company, trust, partnership) for tax-planning purposes. Without the rules, an individual could earn fee income through their own consulting company, retain the income in the entity at the company tax rate (currently around 25% for base rate entities or 30% for others), and benefit from the gap between the entity rate and the individual's marginal rate (up to 47% including Medicare levy). The PSI rules close the gap by attributing the income to the individual when applicable.

The framework has four tests to determine whether the entity is conducting a genuine Personal Services Business (PSB), in which case the PSI rules don't apply, or whether PSI rules apply and income is attributed to the individual.

The results test asks whether income is paid for producing a specific result (rather than for time or effort), with the contractor providing tools and equipment and being liable to rectify defects at their own expense. Project-based fixed-fee engagements often pass; hourly billing arrangements typically don't.

The unrelated clients test asks whether at least 75% of the entity's services income comes from two or more unrelated clients, with the clients obtained through advertising or by offering services to the public generally. For retirees doing work for one or two former colleagues or specific known clients, this test typically fails.

The employment test asks whether at least 20% of the work is done by employees other than the principal. Most retiree consulting practices are sole-operator-equivalent with no employees, failing this test.

The business premises test asks whether the entity has business premises exclusively used for the business. Most retirees consult from home, often a dedicated home office, but this rarely qualifies under the strict premises test.

If the entity passes any one of the four tests, it is conducting a PSB and the PSI rules don't apply — the entity has the broader flexibility expected of business operations (income retention, broader deductions, structuring options). If the entity fails all four tests, the PSI rules apply and the company is essentially a pass-through for tax purposes despite being a separate legal entity for other purposes.

For most retirees doing solo consulting work for established clients, all four tests typically fail. Established client relationships mean the unrelated-clients test fails — retired professionals often consult for former employers, colleagues, or known clients, not through advertising or general public offering. Sole-operator structure means the employment test fails — most retiree consulting is done by the retiree alone. Home-based work means the business premises test typically fails. Time-based billing means the results test often fails. The practical conclusion: most retiree consulting structures fall under PSI, and the company provides no tax benefit over direct income.

When PSI rules apply, several specific consequences follow. Income is attributed to the individual at their marginal tax rate, not retained in the entity. Deductions allowed against PSI income are restricted to those that would be allowed for an employee — generally work-related expenses, professional development, some equipment depreciation. Broader business deductions (passive expenses, home expenses for non-work purposes) are not allowed. The entity must withhold PAYG on the attributed income at the individual's marginal rate. The entity continues to exist as a legal entity but is functionally a sole trader for tax purposes.

The entity structure can still provide non-tax benefits even when PSI rules apply. Limited liability separates the consultant's personal assets from business liabilities (subject to professional indemnity insurance considerations) — protecting against client claims. Professional appearance — clients sometimes prefer to engage with a corporate entity. Ease of subcontracting — a company can engage subcontractors more cleanly than a sole trader. Insurance and registration — PI insurance, public liability, and other arrangements may be cleaner through a company. For retirees considering structure choice, these non-tax considerations may justify the company even where tax benefit is absent. The decision should be made deliberately, with awareness that tax benefit is not the driver.

For retirees doing consulting work, the most valuable tax-planning lever is super contribution coordination. Income attributed to the individual under PSI rules is included in their assessable income, against which deductible contributions can be claimed (subject to caps). Where the retiree has unused carry-forward concessional contribution caps (subject to the $500,000 TSB threshold), contributions can absorb substantial consulting income at concessional rates. For pre-retirees in their final working years and into early retirement consulting, this is often the highest-leverage planning lever — substantially more valuable than the structure question.

For retirees on Age Pension doing consulting work, the Centrelink dimension matters. Net income from self-employment is included in the income test. The Work Bonus may apply to certain employment income but not necessarily to all self-employment. PSI attribution doesn't directly change Centrelink position, but income recognition and timing affect ongoing entitlement. For retirees coordinating consulting income with Age Pension, the timing and quantum of receipts affects fortnightly entitlement.

A few common pitfalls. Establishing a company expecting tax benefit when PSI rules apply — the structure costs money to operate (ASIC fees, accounting, compliance) without producing tax benefit; net cost. Not understanding the four tests — some retirees pass a test (e.g., work has multiple genuinely unrelated clients) without realising it gives them PSB status. Confusing PSI rules with PAYG withholding — different rules; both may apply. Ignoring deduction restrictions under PSI — broader business deductions claimed by mistake create compliance risk. Not coordinating with super contribution strategy — consulting income is a CC contribution opportunity; missing it produces avoidable tax.

For retirees considering or doing consulting work in retirement, the tax structure question deserves explicit analysis. Most will end up with sole trader operation as the simplest and effectively tax-equivalent option to a PSI-affected company. Some will have legitimate non-tax reasons to use a company structure, accepting that tax benefit is absent. A few — those with genuinely diversified client bases, results-based engagements, or other PSB-qualifying features — will benefit from PSB status and the broader flexibility it provides. Specialist tax input is typically valuable in determining which category applies.