The ATO’s New View on Personal Services Income, Companies & Trusts — What It Means for You
If you run your consulting, trade, medical or professional services business through a company or trust, and you personally are the one doing the work, the ATO has released a major guideline that you need to know about.
It’s called PCG 2025/5, and it sets out when the ATO will review — and potentially apply the general anti-avoidance rules (Part IVA) — to personal services income (PSI) earned through a company or trust.
This is a big shift, and it affects thousands of small businesses, contractors and professionals across Australia.
Let’s break it down in a simple, practical way you can actually use.
- First things first — what is Personal Services Income (PSI)?
PSI is income that’s mainly a reward for your personal efforts or skills.
Think of:
- consultants
- tradies
- IT contractors
- doctors and allied health
- engineers
- creatives
- brokers
- financial advisers
If the money comes in because you personally do the work — it’s PSI.
Often this income flows through:
- a company,
- a family trust, or
- a unit trust
…for asset protection, admin reasons, or because clients require it. Nothing wrong with that.
But the ATO is now saying: “Even if you qualify as a Personal Services Business (PSB), you still can’t use these structures to reduce your personal tax without a genuine business reason.”
- The misconception the ATO is targeting
Many people think:
“I pass a PSB test, so the PSI rules don’t apply — that means I can split income or leave profits in the company.”
Wrong.
PCG 2025/5 makes it crystal clear:
✔ Passing a PSB test does NOT protect you from Part IVA.
✔ The ATO can still apply anti-avoidance rules if you reduce your personal tax.
This is the heart of the guideline.
- What the ATO considers a low-risk arrangement
A “low-risk” arrangement is one where the income ultimately ends up being taxed in your hands, because you did the work.
You’re low-risk when:
✔ You pay yourself a proper commercial wage
Commensurate with your skills, experience, and industry norms.
✔ You distribute the net profit to yourself
Either as wages, director fees, dividends or trust distributions.
✔ Any income paid to associates is reasonable
For real work they actually perform.
✔ Any profits retained in the company are retained for a real commercial purpose
Such as:
- buying equipment
- covering a temporary downturn
- paying upcoming expenses
- funding a genuine expansion
…and crucially, that purpose is properly documented and actually carried out.
✔ Temporary delays are okay
If illness, timing issues or short-term admin delays cause a deferral, that’s fine.
In simple terms:
If you’re personally taxed on the income you personally earned, you’re safe.
- What the ATO considers higher-risk
This is where the ATO may review you under Part IVA.
You are higher-risk when you:
❌ Split PSI to family members who didn’t do the work
For example, distributing trust income to a spouse or adult children at lower tax rates.
❌ Underpay yourself
E.g., paying yourself $50k when you generate $300k+ in revenue.
❌ Retain profits in the company without a genuine business purpose
Especially where:
- profits build up indefinitely
- the real benefit is simply accessing the 25% company tax rate
- you later draw funds via a Div 7A loan or trust distribution
❌ Create unnecessarily complex structures
Where the only real outcome is tax minimisation.
❌ Fail to document the commercial reasons for your decisions
If it’s not documented, the ATO assumes it didn’t happen.
If the income is taxed at a lower rate overall than it would have been in your hands, the ATO may argue there’s a tax benefit — which is the trigger for Part IVA.
- PSB status does NOT give you a free pass
This is one of the most important parts of the guideline.
Even if your company or trust passes a PSB test, the ATO says:
You cannot use a PSB to divert, split, retain or shelter personal services income in a way that reduces your personal tax.
PSB ≠ protection from Part IVA
PSB simply means Division 86 (PSI rules) don’t apply.
Part IVA is a separate anti-avoidance rule — and it absolutely still applies.
- What you must do next
- a) Review your current structure
If you’re using a company or trust, check whether:
- the income is reported personally, or
- profits are being “parked” elsewhere.
- b) Ensure your remuneration is commercial
Pay yourself appropriately.
- c) Document every decision
Especially when retaining profits for commercial purposes.
- d) Avoid income splitting unless commercially justified
Associates should only be paid for actual work performed.
- e) If you’re unsure, seek advice before 30 June 2027
The ATO has signalled this as a transition period to get arrangements into a low-risk position.
- AD Partners can help you stay on the right side of the ATO
At AD Partners, we help small-to-medium businesses — especially consultants, builders, medical professionals, and contractors — structure their affairs safely and tax-effectively.
We can help you:
- assess whether your arrangement is low or higher risk
- document commercial justifications properly
- restructure if needed
- set a clear remuneration strategy
- put governance and record-keeping in place
If you want peace of mind before the ATO starts reviewing these arrangements more closely, reach out. We’re here to help you run a financially rewarding, tax-efficient lifestyle business — without risking a Part IVA review.
