The Guideline
If you run your business through a company or trust, and most of the income comes from your personal skill or expertise, this is important.
The ATO’s new guideline (PCG 2025/5) makes one thing very clear.
Qualifying as a Personal Services Business (PSB) does NOT automatically mean you can split or retain profits to reduce tax.
What is a Personal Services Business?
A Personal Services Business (PSB) is a business that earns income mainly from personal effort or skills, but passes certain tests that mean the strict PSI attribution rules don’t apply.
To qualify as a Personal Services Business (PSB), your business must meet at least one of these tests:
- Results Test: You’re paid for completing a specific outcome, not just for hours worked. You provide your own tools and cover any costs to fix issues.
- Unrelated Clients Test: You work for two or more clients directly, not through recruiters or agencies.
- Employment Test: Others contribute at least 20% of the work, or you employ an apprentice for part of the year.
- Business Premises Test: You have a dedicated business location separate from your home or your clients’ sites.
If less than 80% of your personal services income comes from one client, and you meet one of the other PSB tests, you can self-assess as a PSB; otherwise, the PSI rules apply.
Common examples:
- Consultants
- Accountants
- Engineers
- Medical practitioners
- Brokers
- IT contractors
Many professionals operate as a PSB through a company or trust structure.
Historically, once you qualified as a PSB, advisers often considered income splitting options. That’s where the risk is now shifting.
What is Part IVA?
Part IVA is Australia’s general anti-avoidance rule.
It allows the ATO to cancel a tax benefit if:
- There is a scheme
- There is a tax benefit
- The dominant purpose of the arrangement is to obtain that tax benefit.
Unlike the PSI rules, Part IVA focuses on purpose and substance, not just technical structure.
Where the Risk Now Lies
The ATO’s position is simple:
If income is mainly generated by your personal effort, it should generally be taxed in your hands.
Higher risk situations include:
- Paying yourself below market salary
- Distributing profits to family members on lower tax rates
- Retaining profits in a company without clear commercial purpose
- Using trusts to split income while the principal isn’t fully remunerated.
Even if the structure was originally set up for asset protection.
What Looks Safer?
Lower risk arrangements typically involve:
- Paying yourself market value for your services
- Distributing net profits to the individual doing the work
- Retaining profits only for genuine commercial reasons
- Paying associates only for bona fide services at commercial rates
In short: If you did the work, you should be appropriately paid for it.
Why This Matters
This guideline doesn’t change the law. But it clearly signals enforcement intent.
If you operate a professional practice, consultancy, medical business, broking firm or similar structure, now is the time to review how profits are being paid and retained.
A proactive review is far easier than defending a Part IVA position later. The ATO has signalled that taxpayers who restructure their arrangements into the guideline’s low-risk parameters by 30 June 2027 are less likely to face retrospective Part IVA scrutiny.
If you’d like your structure reviewed, feel free to reach out.