If you operate through a company or trust and your income is largely generated through your own skills and effort, the ATO has put your arrangements firmly on its radar.
A recent ATO Spotlight bulletin from Small Business Assistant Commissioner Tony Poulakis highlighted the release of Practical Compliance Guideline PCG 2025/5. The guideline clarifies how the ATO views arrangements that involve routing personal services income through a structure rather than receiving it directly, and what it considers low risk versus what will attract scrutiny.
If this sounds like your business, it is worth understanding exactly where you stand.
What Is Personal Services Income and Why Does It Matter
Personal services income, or PSI, is income that is generated primarily through the personal efforts, skills, or reputation of one individual. Think consultants, contractors, professionals, and tradespeople operating through a company or trust structure.
Operating through a company or trust is often entirely legitimate and provides real commercial benefits including asset protection, flexibility, and succession planning. The ATO is not targeting these structures simply for existing.
What it is targeting is how income is distributed once it flows into those structures.
Where income is primarily generated by one person's efforts, the ATO is concerned about arrangements that divert profits away from that individual in order to reduce tax.
Even where a business legitimately qualifies as a Personal Services Business under the tax rules and falls outside the strict PSI attribution rules, the ATO has made clear that the general anti-avoidance provisions in Part IVA can still apply if the arrangement is primarily tax-driven.
If Part IVA applies, the consequences go beyond higher tax. Significant penalties and interest charges apply on top of any liability.
A quick note on Part IVA. Part IVA is Australia's general anti-avoidance provision. It gives the ATO the power to cancel the tax benefit of any arrangement where the dominant purpose was to reduce tax - regardless of whether the arrangement is technically legal under other tax rules. It is broad, powerful, and it applies even where a business has legitimately qualified as a Personal Services Business. If the overall arrangement looks primarily tax-driven rather than commercially motivated, Part IVA can be invoked.
What the ATO Considers Low Risk
The ATO's guidance focuses heavily on whether the individual who generates the income receives an appropriate share of the profits.
- The individual who performs the work receives most of the economic benefit through salary, wages, bonuses, director fees, or trust distributions
- Profits retained in a company are held for genuine and short-term commercial purposes
- Family members or associates are only paid reasonable amounts for work they have genuinely performed
A practical example: retaining profits in a company to fund the purchase of new equipment in the near term could be viewed favourably, provided there is documented evidence supporting those plans and the business actually follows through.
The key word throughout the ATO's guidance is genuine. Commercially justifiable decisions, properly documented and actually implemented, sit in a very different category to arrangements that exist primarily to reduce the tax payable by the person who did the work.
What Will Attract ATO Attention
The ATO has specifically identified a number of higher-risk behaviours that will draw scrutiny.
- Splitting income with family members who have made little or no contribution to earning it
- Retaining substantial profits in a company without a genuine short-term commercial purpose
- Directing profits to entities or beneficiaries primarily because they are taxed at lower rates or carry tax losses
The greater the mismatch between who performed the work and who is ultimately taxed on the profits, the greater the likelihood of ATO review.
This is not a theoretical risk. The ATO has dedicated compliance resources to this area and PCG 2025/5 signals an active intention to pursue arrangements that do not meet its expectations.
A Window to Review and Adjust
The ATO has built in a transition period, which is worth taking seriously.
Businesses that genuinely review their arrangements and take active steps to move from higher-risk to lower-risk positions by 30 June 2027 are unlikely to face Part IVA action in relation to those arrangements if reviewed.
This is not an amnesty. But it is a genuine opportunity to get your house in order before the ATO comes looking.
The transition period is only meaningful if businesses use it. Waiting until 2027 to start the review process leaves very little time to make substantive changes and document them properly.
What to Review in Your Business Now
If you operate through a company or trust and derive income largely from your personal skills or efforts, a few questions worth working through now:
- Does the individual generating the income receive an appropriate share of the profits, and is this documented?
- Are retained profits supported by clear, short-term commercial reasons that are evidenced and followed through?
- Are payments to family members or associates genuinely commercial and proportionate to the work they actually perform?
- Would your current arrangements withstand ATO scrutiny if reviewed today?
If any of these questions give you pause, the time to address them is now, not after a compliance review is underway.
The Window Is Open - For Now
PCG 2025/5 gives business owners a clear framework for understanding where they sit and a defined window to make changes before the ATO takes a harder line.
If your structure involves distributing income generated through your personal efforts, now is the right time to check whether your arrangements would hold up under scrutiny. Reach out to the Trekk Advisory team to review your position and identify any changes worth making before the 30 June 2027 window closes.
A proactive review today is a far better outcome than a Part IVA dispute down the track. The window is open - but it will not stay that way.
Disclaimer: Trekk Advisory provides accountant-led tax, bookkeeping, and advisory services for Australian business owners. This article is general in nature and does not constitute personal advice. Please speak with a qualified adviser regarding your specific circumstances.
