ATO Turns Up the Heat on Personal Services Income: Could Your Structure Be Exposed?
The ATO is paying closer attention to how taxpayers who earn income from their personal services are treating that income for tax purposes. In a recent Spotlight bulletin, Small Business Assistant Commissioner Tony Poulakis flagged the release of Practical Compliance Guideline PCG 2025/5.
The guideline sets out the ATO’s compliance approach to the “alienation” of personal services income (PSI) — arrangements where income earned through an individual’s own skills and effort is channelled through a company or trust rather than received directly.
Why the ATO Is Paying Attention
It’s common for business owners to operate through a company or trust rather than earning income in their own name, and in most cases that’s entirely appropriate — it can offer real commercial advantages like asset protection, flexibility and a smoother path for succession planning.
The concern arises where income is really generated by one person’s effort, skill or reputation, and the structure is being used to divert that income away from them purely to reduce tax.
Even where a business meets the tests to qualify as a Personal Services Business (PSB) and sits outside the strict PSI attribution rules, the ATO has been clear that the general anti-avoidance rules in Part IVA can still apply if the arrangement is primarily there for a tax benefit. Where Part IVA is triggered, the consequences can include a higher tax bill along with meaningful penalties and interest.
What the ATO Sees as Lower Risk
The guidance centres on one core question: is the person doing the work getting an appropriate share of the profit? Generally, an arrangement sits in lower-risk territory where:
- The person performing the work receives the bulk of the economic benefit — through salary, wages, bonuses, director fees or trust distributions
- Any profit kept in the company is retained for genuine, short-term business reasons
- Payments to family members or associates are reasonable and reflect real work performed
As an example, holding back profit in a company to fund new equipment in the near term is likely to be viewed favourably — provided there’s evidence the plan is real, and the company actually goes ahead with it.
What Draws ATO Scrutiny
On the other side, the ATO has called out several higher-risk patterns:
- Splitting income with family members who contributed little or nothing to earning it
- Holding substantial profits in a company with no genuine short-term commercial purpose
- Directing profits from someone’s personal services to entities or beneficiaries mainly because they attract a lower tax rate or hold tax losses
The ATO’s bar here is high. The bigger the gap between who actually did the work and who ends up paying tax on the resulting profit, the more likely the arrangement is to draw attention.
A Window to Fix Existing Arrangements
The ATO has built in a transition period for taxpayers prepared to genuinely revisit and adjust their arrangements.
The ATO has indicated that where taxpayers make a genuine attempt to transition an arrangement to a low-risk position by 30 June 2027, it generally will not seek to apply Part IVA as part of a review of that arrangement.
This isn’t an amnesty — but it is a genuine opportunity for business owners to get ahead of the issue and make changes where they’re needed.
What Business Owners Should Do Now
It’s a good time to take a hard look at how profit is being distributed within your structure. Worth asking:
- Is retained profit backed by documented, short-term commercial reasoning?
- Would payments to family members hold up as commercially justified?
- Would the arrangement stand up if the ATO reviewed it?
If you operate through a company or trust and most of your income comes down to your own personal skills or effort, it’s worth reviewing your current arrangements against the ATO’s updated guidance. Getting ahead of this now could save a much costlier conversation later.