Understanding Personal Services Income (PSI) and Compliance Guidelines

PCG 2025/5: Is your business income, actually your income? 

The Australian Taxation Office (ATO) has released Practical Compliance Guideline PCG 2025/5, which provides important insights into how the Commissioner will approach compliance in relation to personal services income (PSI) and the potential application of Part IVA (general anti‑avoidance provisions) of the Income Tax Assessment Act 1936.

PSI is income that is received by you or an entity, primarily as a reward for  your personal effort or skills. A Personal Service Business (PSB) is one that meets the necessary legislative requirements of being conducted in a businesslike manner.

PCG 2025/5 reaffirms the ATO’s long held view that meeting the PSB tests does not in itself mean that profits are from ‘business’ and therefore able to be split between shareholders or beneficiaries, away from the key service providers. It does this by categorising arrangements as either low risk or high risk.

Is my PSE low-risk? 

The Commissioner’s indicators of low-risk arrangements are detailed below: 

• Net PSI is distributed to the individual whose personal exertion generates that income and it is taxed at their marginal rate;
• Remuneration received by the individual is substantially commensurate with the value of their personal services;
• Remuneration is paid to associates for bona fide services at a rate commensurate with the value of the services provided;
• There are temporary timing differences between generating the net PSI and receipt by the individual for reasons that are not tax related (e.g. need for working capital, other reasons outside of the control of the taxpayer); or
• A superannuation contribution is made for the benefit of the individual, who is an employee, for the purposes of providing a superannuation benefit. 

Essentially, an arrangement will be low risk if the benefit is ultimately passed to the individual providing the services and tax borne by them at their marginal tax rate in a timely manner. 

Is my PSE high-risk? 

The Commissioner’s view of indicators of high-risk arrangements include:

• Net PSI is distributed to another entity so that it is taxed at a lower rate than if the individual derived it;
• Remuneration received by the individual is not commensurate with the value of services provided;
• PSE does not distribute income to the individual generating the profits from the services provided;
• An intention to temporarily retain the profits for business purposes is not carried out and the retention carries on indefinitely;
• Net PSI is split with an associate reducing the overall tax liability on the profits earned;
• Remuneration is paid to an associate at an inflated value as compared to the value of the services provided; or
• Net PSI is retained in the entity indefinitely with no sound commercial purpose for doing so. Making funds available for personal use (e.g. by way of loan) may be construed to be a higher risk arrangement.

A number of examples are provided to explain when, in the view of the Commissioner, there has been a tax avoidance purpose, all of which are variations on either profits being diverted to associated entities or beneficiaries, utilisation of losses or retention of profits with a tax deferral purpose. 

Where to from here? 

PCG 2025/5 appears to be a further attempt by the ATO to curtail perceived income splitting arrangements. It follows the issue of PCG 2021/4 in respect of the allocation of professional firm profits and perceived Part IVA arrangements, however, is to be applied more broadly and may impact all service providers that have a controlling or key service provider. It is primarily focussed on closely held service providers where there is a single key service provider, such as medical practitioners, architects, IT consultants and engineers and does not apply to structures that leverage other employees or business assets to generate income, as such income may not be considered PSI.

At RSM we recommend

In our view there are prudent commercial reasons for structuring businesses through entities, not least the limitations of liability that are sought to be achieved through corporate structures. However, we recommend that PSBs consider their current structuring and document the commercial rationale for actions that they take, particularly in relation to those higher risk indicia:

• How key service providers are remunerated in line with market conditions;
• How associates are remunerated and the value of services provided;
• Commercial rationale for the use of the business structure and any extraordinary profit derived from the business structure itself; and
• Commercial rationale for profit retention or returns to other interest holders (e.g. shareholders / beneficiaries). 

The Commissioner states that compliance resources will not be applied to apply Part IVA to such arrangements where taxpayers make genuine attempts to move into low-risk arrangements by 30 June 2027. If after review of your business structures you are concerned that you have a high risk arrangement, you should consider what steps are able to be taken in order to lower the risk of your arrangements in line with the Commissioner’s indicia.