Income splitting for medical professionals: a new era of ATO scrutiny

In November 2025, the Australian Tax Office (ATO) confirmed its stance on income splitting for medical professionals, issuing a detailed Practical Compliance Guideline (PCG) that reinforces how they interpret and apply tax law in this area. 

Income splitting is where medical professionals have their remuneration paid into a company or trust, and distribute the income to themselves and family members who may be taxed at lower rates.

In most cases this is considered tax avoidance, because the income was only received as a result of the medical professional’s individual effort. 

Grey areas exist where family members do actually work with the medical professional, such as helping with administration or bookkeeping. However, if their compensation is unusually high, the arrangement is likely to attract ATO attention.  

Personal services income vs personal services business

To explore the “grey areas” further, we need to consider the difference between personal services income (PSI) and a personal services business (PSB).

Most people are familiar with PSI questions on their annual tax return, which are designed to identify when an individual is billing under a company or trust even though they provide personal services similar to an employee. The rules seek to prevent people from diverting income which is mainly a reward for their personal skills or efforts to achieve tax benefits or claim deductions that wouldn’t otherwise apply.

A personal services business is effectively an exception to the PSI rules. A PSB (in a medical context) would refer to an entity operated by a medical professional that qualifies as a genuine business, rather than a conduit for personal services income. 

Some of the key tests that determine whether a business qualifies as a PSB are:

• The professional owns their results – such as a surgeon engaged under contract to perform operations. They’re only paid after successful completion, they use their own equipment, and are responsible for rectifying issues if they arise after surgery.
• They have unrelated clients – such as a medical specialist who provides services to multiple unrelated hospitals or clinics, so the business is earning income from different clients.
• They employ or contract others to do a reasonable portion of the work – such as a doctor who hires another doctor or a nurse to perform services during the year (so the practice is more than a one-person operation).
• They operate from a business premises – physically separate from their home, not shared with a client or medical group, and used to run the business and treat patients.

Meeting one or more of these tests could mean your business qualifies as a PSB and the PSI rules do not apply. 

However, classification as a PSB does not protect you from ATO scrutiny if you are income splitting to avoid tax. 

Here's why… 

Part IVA: The ATO’s tool for tax avoidance

Part IVA of the Income Tax Assessment Act 1936 allows the ATO to cancel any tax benefit from schemes where the dominant purpose is to avoid tax. This is the case even if an arrangement follows the letter of other tax laws.

The ATO considers a range of factors when deciding whether Part IVA applies. The new compliance guideline is helpful, because it seeks to clarify this process with detailed guidance and practical examples. 

For example, the guidance includes a series of low and high risk indicators that explain the types of arrangements more likely to attract ATO scrutiny.

Too much at stake

What are the risks of being caught out for income splitting? There’s no sugar coating it…they are severe. 

When the ATO cancels a tax benefit, they can apply it retrospectively for any number of years considered appropriate. So, if you’ve been improperly income splitting for 10 years and they nullify the whole period, you may be liable for all the tax you should have paid plus up to 100% in penalties. 

The new PCG confirms that taxpayers have until 30 June 2027 to move into a low-risk arrangement without concern for retrospective compliance action. With this in mind, rectifying any arrangement where tax avoidance is the primary motive should be a priority. 

Here are 3 steps you can take right now:

1. Review your structures

Sit down with an experienced business or tax adviser and ask them to ensure all your income arrangements comply with tax law and the new guidelines. You should be operating entirely within the ATO’s no-risk or low-risk zones. This includes any activities that could be seen as income splitting with a spouse. The PCG contains more guidance around whether profit splitting between spouses may or may not attract compliance attention, and your adviser can help you interpret this. 

2. Maintain clear documentation

If your actions could fall into the high-risk category, you’ll need to justify those decisions. For example, if you’re retaining profits in a company, keep a clear record of why you’ve chosen that approach and how the funds will be used. 

The PCG details the types of documents and records the ATO will expect, with a strong emphasis on contemporaneous documentation (keeping records in real time).

3. Don’t be complacent

In an era of automation and AI, the ATO has access to more data matching tools than ever before. With a vast pool of information and sophisticated methods for detecting non-compliance, they’re easily identifying red flags. Given the severe penalties, don’t assume you’ll fly under the radar. The ATO has both the data and the means to identify you now. 

If you’re a medical professional who’s unsure whether the new compliance guidelines apply to you, or whether your arrangements could be seen as income splitting, we can help. Our experienced advisers are across the latest ATO updates and can review your structures to assess your level of risk.

Taking this step now could help you avoid significant penalties, while ensuring your income is managed in a way that’s both compliant and tax efficient.

To learn more about the ATO’s new guideline, or to speak with a business or tax adviser from RSM, contact your local RSM office.