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psi_classification skill

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This skill determines if income is PSI under Division 84 ITAA 1997 and evaluates PSB status and deduction restrictions for eligible entities.

npx playbooks add skill cleanexpo/ato --skill psi_classification

Review the files below or copy the command above to add this skill to your agents.

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SKILL.md
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---
name: psi-classification
description: Personal services income determination under Division 84-87 ITAA 1997 — PSI rules, PSB tests, and deduction restrictions
---

# PSI Classification Skill

Determines whether income received by a personal services entity (PSE) is personal services income (PSI) under Division 84 ITAA 1997, and whether the entity qualifies as a personal services business (PSB) under Division 87.

## When to Use

- Assessing whether contractor/consultant income is PSI
- Evaluating PSB status to determine deduction availability
- Checking if 80% rule applies (s 87-15)
- Running the four PSB tests for borderline cases
- Determining deduction restrictions under Division 86

## PSI Determination (s 84-5)

Income is PSI if it is mainly a reward for the **personal efforts or skills** of an individual. Key indicators:
- Would the income still be earned if the individual was not involved?
- Is the income from a contract that is mainly for the individual's labour?
- Is equipment or tools a significant part of the arrangement?

## PSB Tests (Division 87)

If income IS PSI, the entity may still be a PSB if it passes ANY ONE of these tests:

### 1. Results Test (s 87-18) — ALL THREE required
- Paid to produce a result (not just for time)
- Required to provide own tools/equipment
- Liable for defective work (rectify at own cost)

### 2. Unrelated Clients Test (s 87-20)
- PSI from 2+ unrelated entities
- Services offered to the public

### 3. Employment Test (s 87-25)
- Entity employs or engages others to do 20%+ of the principal work

### 4. Business Premises Test (s 87-30)
- Maintains business premises that are separate from client's premises AND home
- Premises at which the entity mainly conducts personal services activities

## Impact of PSI Rules (if not PSB)

| Deduction | PSB | Non-PSB (PSI rules apply) |
|-----------|-----|---------------------------|
| Salary/wages to associates | Allowed | Not deductible |
| Rent on premises | Allowed | Not deductible |
| Home office expenses | Allowed | Limited to individual-only costs |
| Entity maintenance costs | Allowed | Not deductible |
| Super contributions | Allowed | Attributed to individual |

## Engine Reference

- **Engine**: `lib/analysis/psi-engine.ts`
- **Function**: `analyzePSI(tenantId, financialYear, options)`
- **Output**: PSI determination, PSB test results, deduction restrictions, confidence score
- **Database**: `psi_analysis_results` table

## Legislation

- ITAA 1997, Division 84 — What is PSI
- ITAA 1997, Division 85 — PSI entities
- ITAA 1997, Division 86 — Deduction restrictions
- ITAA 1997, Division 87 — PSB tests

Overview

This skill determines whether income of a personal services entity (PSE) is personal services income (PSI) under Division 84-87 of the ITAA 1997 and whether the entity qualifies as a personal services business (PSB). It summarizes PSI indicators, runs the four PSB tests, and identifies deduction restrictions under Division 86. The output includes test results, deduction impacts, and a confidence score to guide client advice.

How this skill works

The engine inspects contract characteristics, income sources, client relationships, use of tools or premises, and whether others perform work for the entity. It applies the statutory PSI definition and evaluates the Results, Unrelated Clients, Employment, and Business Premises tests from Division 87. When PSI applies but PSB status is not met, the skill maps deduction restrictions per Division 86 and flags salary, rent, home-office, maintenance and superannuation treatment. The function analyzePSI(tenantId, financialYear, options) returns a structured determination and confidence metrics.

When to use it

  • Assess whether contractor or consultant income is classified as PSI for a tax year
  • Determine if a PSE qualifies as a PSB to preserve or restore deduction access
  • Check application of the 80% single-client rule when one client supplies most income
  • Evaluate borderline arrangements before claiming or denying deductions under Division 86
  • Provide clear evidence-based guidance for client engagements and contract design

Best practices

  • Collect full contract documents, invoices, and evidence of who provides tools or premises
  • Verify the number and independence of clients across the financial year for the Unrelated Clients test
  • Document any payment terms tied to results, provision of equipment, or liability for defects
  • Run the engine early in client onboarding to shape contracts that support PSB outcomes
  • Use the confidence score and review low-confidence items manually with supporting evidence

Example use cases

  • A contractor wants to know if income from a single long-term client is PSI and whether deductions are restricted
  • A consulting firm evaluates whether hiring subcontractors meets the Employment test threshold
  • An adviser checks whether a contractor’s separate business premises satisfy the Business Premises test
  • A tax practitioner assesses deduction exposure (rent, wages to associates, home office) if PSB tests fail
  • A client redesigns contract terms to strengthen the Results test and reduce PSI risk

FAQ

If income is PSI, can the entity still get deductions?

Yes — but only if the entity qualifies as a PSB by passing at least one of the Division 87 tests; otherwise Division 86 imposes specific deduction restrictions.

What triggers the 80% single-client rule?

The 80% rule applies when 80% or more of PSI in an income year comes from one client; this often prevents passing the Unrelated Clients test and attracts closer PSI scrutiny.