ATO cracks down on Personal Services Businesses 

The ATO has published a new guideline (titled PCG 2025/5), targeting Personal Services Business (PSB) structures that lack genuine commercial substance.  

PSI and PSB: The Basics 

Personal Services Income (PSI) = income mainly from your personal skills and effort (e.g. financial professionals, engineers, consultants, IT professionals, medical practitioners, lawyers etc). 

The PSI rules restrict income splitting and deductions UNLESS you meet one of four PSB tests.  

Personal Services Business (PSB) = if you pass one of four tests, the PSI rules don’t apply.  

Most people pass the “unrelated clients test” (2+ clients) and no more than 80% percent generated by one client OR “results test” (paid for outcomes, not time). 

What’s changed? 

The ATO published a guideline that highlights their approach to applying Part IVA (general anti-avoidance rules) to PSB arrangements that are artificial even if the PSI rules do not apply. t 

Follow this guideline in good faith and the Commissioner will administer the law accordingly. Structure your arrangements as low-risk and the ATO won’t review them. 

How the ATO will assess your risk 

Examples of low-risk arrangements (ATO review likelihood is low): 

• Net PSI distributed to the individual who earned it, taxed at their rate 

• Associates paid market rates for genuine work 

• Intention to temporary profit retention for genuine commercial purposes (e.g. to buy a business asset, hire new employees, working capital). Ensuring that intention is carried out. 

Examples of higher-risk arrangements (ATO likely to review and consider Part IVA): 

• Individual receives less than commensurate remuneration 

• Income split to family members not performing equivalent work 

• Profits retained without clear commercial purpose 

• Retained profits used for personal purposes such loans made to related parties.