The ATO has significantly increased its focus on Personal Services Income (PSI) — particularly where income is earned through a company or trust and then distributed to family members.
If you’re a consultant, contractor, engineer, specialist, broker, or anyone who earns income mainly from your own skills, now is the time to review whether your business arrangements align with the ATO’s latest position.
What Is Personal Services Income (PSI)?
PSI is income that is generated mainly from your personal efforts or skills.
The definition is set out in Part 2–42 of the Income Tax Assessment Act 1997.
Examples of PSI include:
- Consulting or professional services
- Contracting and labour hire
- IT development and technical work
- Commission-based roles (e.g., broking)
If your income is categorised as PSI:
- It must generally be taxed at your individual tax rate, even if paid to a company or trust.
- You may lose access to certain deductions, such as:
- rent
- mortgage or loan interest
- payments to family members
- business-related expenses that don’t directly relate to earning PSI
However, if you can show you’re running a Personal Services Business (PSB), the PSI rules do not apply.
How to Prove You Are a Personal Services Business (PSB)
You only need to pass one of the PSB tests to be considered a PSB:
- Results Test
You must be paid to produce a result, not for time or hours worked. You provide your own tools/equipment and fix any issues at your own cost.
- Unrelated Clients Test
You must have two or more unrelated clients, and they must come to you via:
- your own marketing
- your website
- tenders
- public advertising
Please note, case law establishes that services obtained through intermediaries such as a recruiter or agencies do not signify direct outcome of public offers.
- Employment Test
You engage others to perform at least 20% of the core work (based on market value), or employ an apprentice for at least half of the income year.
- Business Premises Test
You must maintain separate business premises that are:
- exclusively used for your business,
- not part of your home, and
- not located at your client’s site.
Important: The 80% Rule
If 80% or more of your income is sourced from one client, you can only rely on the Results Test.
If you fail the Results Test, you need to apply for an ATO PSB Determination.
What’s New?
(PCG 2025/5 ATO Guideline)
The ATO’s new practical compliance guideline, PCG 2025/5, outlines the ATO’s compliance approach to PSI and what they consider to be low risk or high risk arrangements.
Even if you pass a PSB test, the ATO may still apply Part IVA (anti-avoidance rules) if they believe you are:
- using a trust or company to split income; and
- the split does not reflect the value of your own work.
Example
Michael, a broker, operates through a discretionary trust.
He performs all of the work but distributes income to family members who did not contribute to the earning of the income.
Even though Michael’s trust passes a PSB test, the ATO considers this high risk and may apply anti-avoidance rules to tax all income to Michael personally.
What You Should Do Now
If most of your income relates to your personal skills, now is the time to review how your income is distributed in line with the updated ATO practical guidance.
✔ 1. Review your company or trust arrangements
Check whether income is being split or distributed in a way that doesn’t reflect your actual contribution.
✔ 2. Ensure your remuneration reflects your market value
You should be compensated at market value and remuneration below market value or profits retained without commercial purpose will be deemed as high-risk.
✔ 3. Reassess any family distributions
Don’t distribute PSI-linked income to family members who did not perform work.
✔ 4. Obtain professional advice
A tax adviser can review your structure, apply the PSB tests, and assess your risk rating in line with the ATO’s updated guidance provided in PCG 2025/5.
Final Message
With the introduction of PCG 2025/5 and the ATO tightening scrutiny around income splitting and PSI diverted through trusts and companies, now is the time for a PSI review to stay compliant and reduce risk.
If you require any assistance in understanding the taxation implications above, please contact your Hall Chadwick QLD advisor.
