ATO Cracks Down on Personal Services Income Arrangements: Is Your Business at Risk?
The ATO is sharpening its focus on how taxpayers generating income from personal services deal with that income for tax purposes. In a recent Spotlight bulletin, Small Business Assistant Commissioner Tony Poulakis highlighted the release of Practical Compliance Guideline PCG 2025/5.
This guideline clarifies the ATO’s compliance approach to the “alienation” of personal services income (PSI) — essentially, arrangements which involve routing income earned through your personal skills and efforts via a company or trust, rather than receiving it directly.
Why the ATO Is Interested
Many business owners operate through a company or trust rather than earning income personally. In many cases this is entirely legitimate and provides commercial benefits such as asset protection, flexibility and succession planning.
However, where income is generated primarily from the efforts, skills or reputation of one individual, the ATO is concerned about arrangements that divert income away from that individual in order to reduce tax.
Even where a business is able to pass certain tests to be classified as a Personal Services Business (PSB) under the tax rules and falls outside the strict PSI attribution rules, the ATO has made it clear that general anti-avoidance provisions in Part IVA can apply if the arrangement is primarily tax-driven. If Part IVA applies then this can lead to higher tax liabilities as well as significant penalties and interest charges.
What Does the ATO Consider Low Risk?
The ATO’s guidance focuses heavily on whether the individual generating the income receives an appropriate share of the profits.
Generally, an arrangement is more likely to be considered low risk where:
- The individual who performs the work receives most of the economic benefit through salary, wages, bonuses, director fees or trust distributions.
- Profits retained in a company are kept for genuine and short-term business reasons.
- Family members or associates are only paid reasonable amounts for genuine work performed.
For example, retaining profits in a company to fund the purchase of new equipment in the short-term could be viewed favourably if there is evidence supporting those plans and the company actually follows through with these plans.
What Will Attract ATO Attention?
The ATO has specifically identified a number of higher-risk behaviours, including:
- Splitting income with family members who have made little or no contribution to earning that income.
- Retaining substantial profits in a company without a genuine short-term commercial purpose.
- Directing profits generating from someone’s personal services to entities or beneficiaries primarily because they are taxed at lower rates or because they have tax losses.
The ATO’s expectations in this area are very strict. The greater the mismatch between who performed the work and who is ultimately taxed on the profits from that work, the greater the likelihood of ATO scrutiny.
A Limited Opportunity to Review Existing Arrangements
The ATO has provided a transition period for taxpayers who genuinely review and adjust their arrangements.
Businesses that take genuine steps to move from higher-risk arrangements to lower-risk arrangements by 30 June 2027 are unlikely to face Part IVA action in relation to those arrangements if reviewed by the ATO.
This is not an amnesty, but it is an opportunity for business owners to proactively assess their position and make changes where necessary.
What Should Business Owners Do?
Now is an ideal time to review how profits are being distributed within your structure.
Questions worth considering include:
- Are retained profits supported by documented short-term commercial reasons?
- Are payments to family members commercially justifiable?
- Would your arrangements withstand ATO scrutiny if reviewed?
If you operate through a company or trust and derive income largely from your personal skills or efforts, it is important to review existing arrangements in light of the ATO’s updated guidance. A proactive review today may prevent costly issues tomorrow.
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