The Australian Taxation Office (ATO) is increasing its focus on how taxpayers who earn income from their personal skills, knowledge and expertise manage and distribute that income for tax purposes.

The ATO has recently released Practical Compliance Guideline PCG 2025/5, which outlines its compliance approach to arrangements involving the “alienation” of Personal Services Income (PSI). These arrangements generally involve income earned through an individual’s personal efforts being received by a company, trust or another entity instead of being directly recognised as the individual’s income.

Operating through a company or trust is common and can provide legitimate commercial advantages, including asset protection, business flexibility and succession planning. However, where income is mainly generated from one individual’s personal services, business owners should carefully consider whether their current arrangements remain appropriate under the ATO’s updated guidance.

Why Is the ATO Focusing on PSI Arrangements?

Many professionals and business owners use companies or trusts for valid commercial reasons. However, the ATO is concerned about arrangements where income generated from an individual’s skills, reputation or labour is redirected to other entities primarily to achieve a more favourable tax outcome.

The PSI rules aim to ensure that income generated mainly from an individual’s personal efforts is appropriately taxed. Although some businesses may qualify as a Personal Services Business (PSB) and fall outside certain PSI attribution rules, this does not mean the arrangement is automatically protected from ATO review.

The ATO has also highlighted that Part IVA general anti-avoidance provisions may apply where arrangements are implemented mainly to obtain a tax benefit. If Part IVA applies, taxpayers may face additional tax liabilities, penalties and interest charges.

What Arrangements Are Considered Lower Risk?

Under PCG 2025/5, the ATO considers whether the individual who performs the work receives an appropriate share of the financial benefits generated from those services.

An arrangement is generally more likely to be considered lower risk where:

• The individual receives most of the economic benefit through salary, wages, bonuses, director fees or appropriate trust distributions.
• Profits retained in a company are supported by genuine short-term commercial reasons.
• Payments made to family members or related parties reflect reasonable amounts for actual services provided.

For example, retaining company profits to fund equipment purchases, business expansion or other short-term commercial needs may be acceptable where there is clear evidence supporting the purpose and the company follows through with those plans.

What May Attract ATO Attention?

The ATO has identified several behaviours that may increase compliance risk, including:

• Splitting income with family members or related parties who have made little or no contribution to earning that income.
• Retaining significant company profits without a genuine commercial purpose.
• Allocating profits from personal services to entities or beneficiaries mainly because they have lower tax rates or available tax losses.

The key consideration is whether the person receiving the benefit has a genuine connection to the income generated.

Where there is a significant mismatch between the individual performing the work and the person ultimately taxed on the profits, the arrangement is more likely to attract ATO scrutiny.

Time 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 compliance action in relation to those arrangements if reviewed by the ATO.

This transition period is not an automatic exemption or amnesty. Instead, it provides an opportunity for business owners to proactively assess their structures and make changes where necessary.

What Should Business Owners Do?

Business owners who operate through companies or trusts and derive income mainly from their own personal skills or efforts should review their current arrangements.

Consider the following questions:

• Are retained profits supported by documented short-term commercial reasons?
• Are payments to family members or related parties commercially reasonable and supported by genuine work performed?
• Does the current structure appropriately reflect the contribution made by the individual generating the income?
• Would the arrangement withstand ATO review?

With increased ATO attention on PSI arrangements, reviewing existing structures now can help identify potential issues early and reduce future compliance risks.

Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

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This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Yvonne Shao @ Pitt Martin Tax