ATO Ramps Up Compliance Action on Personal Services Income Alienation
The Australian Taxation Office is targeting personal services income arrangements that divert earnings away from the individual who generated them. It has made its position unmistakably clear. PCG 2025/5 is now in force, and the ATO’s compliance focus is sharper than ever. Taxpayers who operate through personal services entities must act now — not wait for the ATO to come knocking.
What Is Personal Services Income and Why Does It Matter?
Personal services income, or PSI, is income derived mainly from an individual’s personal skills, labour, or expertise. Consultants, contractors, IT professionals, medical practitioners, and tradespersons are among those most commonly affected. When that income flows through a company or trust, the ATO will question whether the arrangement is appropriate. The individual who earned that income should receive and pay tax on it directly.
The PSI rules have always existed to prevent taxpayers from using interposed entities to access lower tax rates or split income with family members. What PCG 2025/5 makes clear, however, is that the ATO’s concern does not stop at the usual PSI attribution rules. It goes further — and that is where Part IVA enters the picture.
PCG 2025/5 and the Personal Services Business Risk Framework
Released in late 2025, PCG 2025/5 outlines the ATO’s compliance approach to personal services businesses and the application of Part IVA of the Income Tax Assessment Act 1936. Part IVA is the general anti-avoidance provision, and it is among the most powerful tools available to the Commissioner. It allows the ATO to cancel tax benefits obtained through arrangements entered into for the dominant purpose of reducing tax.
PCG 2025/5 sends a critical message. Qualifying as a personal services business under Division 86 of the Income Tax Assessment Act 1997 does not place an arrangement beyond scrutiny. Passing the results test, the unrelated clients test, or the employment test is not enough. If the underlying purpose of the structure is to minimise tax rather than reflect genuine commercial reality, Part IVA can still apply.
What Personal Services Income Arrangements Are Considered Higher Risk?
The PCG establishes a clear risk framework for personal services income arrangements, distinguishing between those the ATO considers low risk and those likely to attract compliance action. Higher-risk arrangements share a common thread — significant diversion of PSI away from the individual whose efforts generated it.
Keeping profits inside a company or trust at a lower tax rate, without genuine commercial justification, is a key concern. So too is distributing income to family members or associates who have not made a real contribution to the work performed. Paying the working individual a salary that falls well below the commercial value of their services, or using service fees and loans that lack an arm’s-length basis, will also draw attention. Where documents suggest one thing but the reality of the arrangement is another, the ATO will take particular notice.
What Does a Low-Risk Personal Services Income Arrangement Look Like?
On the other side of the ledger, low-risk personal services income arrangements are straightforward in principle. The net PSI is distributed to the individual who performed the work and taxed at their marginal rate. Any payments made to associates reflect genuine, commercially valued contributions. There is no artificial deferral of income and no retention of profits for the dominant purpose of obtaining a tax advantage. In short, the structure reflects the economic reality of who earned the income.
The ATO’s Compliance Action and What It Means for Taxpayers
The ATO has confirmed it is increasing scrutiny of higher-risk personal services income arrangements and that compliance action is coming. Assistant Commissioner Tony Poulakis has been direct — those with higher-risk structures are strongly encouraged to review their circumstances and take steps to address any PSI alienation risks before the ATO does it for them.
That said, the ATO has offered something meaningful alongside its compliance posture. Where a genuine attempt is made to move an arrangement into a low-risk position by 30 June 2027, the ATO has committed to not applying Part IVA if that taxpayer is subsequently selected for review. For those with significant diversions of PSI, the ATO has also flagged that amending prior years’ returns may be necessary as part of that process. This is a real opportunity — but it comes with a deadline, and it requires genuine action, not cosmetic change.
Who Needs to Review Their Personal Services Income Arrangements?
This compliance focus is not limited to any one profession or industry. Anyone who operates through a company or trust and derives income substantially from their own skills or efforts should be asking questions about their current arrangements. Medical and allied health practitioners, IT contractors, legal and accounting professionals, engineers, and tradespersons are all within scope. If the income would not exist but for the efforts of one individual, personal services income rules — and now Part IVA — are likely to be relevant.
What Should You Do Before the 30 June 2027 Deadline?
The transition window the ATO has provided is a genuine offer, but 30 June 2027 will arrive quickly. The first step is to understand how personal services income flows through your current structure and where it ends up. From there, it is worth assessing whether your arrangement carries any of the hallmarks of a higher-risk structure identified in PCG 2025/5.
Importantly, this is not work to undertake alone. Engaging a registered tax adviser now — rather than after receiving correspondence from the ATO — places you in the strongest possible position. If restructuring is needed, your adviser can help you take the right steps and document them properly, so that any compliance concession the ATO has offered is genuinely available to you.
The Bottom Line on Personal Services Income Compliance
The ATO’s personal services income compliance focus is real, it is escalating, and it is backed by one of the strongest anti-avoidance provisions in the tax law. Passing the personal services business tests is no longer a sufficient answer if the broader arrangement lacks genuine commercial substance. The window to act voluntarily is open — but it will not stay open indefinitely.
If there is any uncertainty about whether your arrangements are compliant, the time to get advice is now. Get in touch with MaxGrowth team today
This article is general in nature and does not constitute tax advice. Please speak with a registered tax adviser to discuss your specific circumstances.
