Consultants, IT professionals, engineers, doctors, dentists, lawyers and tradies may be affected by a new guideline from the tax office, says chartered accountant GAIL FREEMAN.

The ATO has recently released practical compliance guideline PCG 2025/5 which sets out the ATO’s approach to personal services income (PSI) and part IVA, the anti-avoidance provision of the Income Tax Assessment Acts.

This guideline expresses the ATO’s concerns that some people who earn PSI are using a personal service business (PSB) to alienate income from the individual who earned it to other family members who pay tax at a lower rate.

This guideline is highly relevant for professionals such as consultants, IT professionals, engineers, doctors, dentists and lawyers. It can also apply to tradies including plumbers, electricians, landscapers and carpenters who operate through entities to distribute income to associates who pay a lower rate of tax and those who may retain profits in the entity without passing them on to the person who provides the PSI.

In the guideline, the ATO has 17 examples that are either classified as low-risk or high-risk to indicate whether it is an arrangement in which they may be interested.

They are focusing particularly on retaining profits in the entity without using them for reinvestment or business growth, income splitting, namely distributing income to family members who are taxed at lower rates and may provide no professional service to the entity.

They are interested in diversion of income to entities with losses so that tax is not paid due to the losses brought forward and the other concern is uncommercial remuneration for associates by paying amounts that do not reflect the value of their contribution.

The outcome is that this can provide significant tax advantages to the entity. The ATO is reviewing these arrangements very carefully, initially honing in on the strategies it defines as high-risk strategies.

If you are running a personal service business it is important that you make sure that you are not likely to fall foul of the ATO’s requirements.

In order to minimise any potential risk to your business, I recommend that you review the application of the PSI rules to your circumstances. Read PCG 2025/5 and assess your own risk zone based on the examples.

You need to keep clear records on retained earnings and remuneration decisions so that you can illustrate a commercial purpose to what you are doing.

The ATO suggests this should include business plans, board minutes and evidence of genuine reinvestment strategies. The ATO recommends that if you need to make any changes you adjust your current arrangements before June 30 2027. Clearly, this is an area where you need professional advice once you have assessed your potential risk.

This guideline is not the law, but it indicates the ATO’s interpretation of the law.

PCG’s do not replace the law and they are not binding. It is likely, therefore, after July 1 2027 that there will be some cases on this topic so that there is some confirmed law. The purpose of this PCG is to make the ATO’s stand on PSB’s very clear. Any professional, particularly a high-income earner, using a company or trust to earn income needs to ensure that they will be compliant from July 1 2027.

If you need advice on PSI, PSB, or any other tax-related matter contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email [email protected] or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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