The ATO’s New Guidance on Personal Services Businesses: what it means, and what to do

The Australian Taxation Office (ATO) has released new guidance explaining how it looks at personal services businesses (PSBs) and when the general anti-avoidance rules – known as Part IVA – might apply. The aim isn’t to ‘catch people out,’ but to set clearer expectations so taxpayers and advisors can make well-informed, sustainable decisions.

If you are a consultant, medical professional, engineer, IT contractor, lawyer, tradie or other professional who earns that income through a separate legal entity (for example, a company or trust), this update is important for you.

Quick refresher: what is a personal services business (PSB)?

First, a simple definition. Personal services income (PSI) is money that mainly rewards your personal effort or skills. If the income would largely stop if you stopped working, it is probably PSI. Many people earn PSI through a company, trust or partnership rather than as a sole trader.

The law includes several PSB tests. If you meet one of these, you are treated as carrying on a personal services business. In plain language, the tests look for signs that you are operating more like a business than a one-person engagement. For example:

• Results test – you are paid for a result (not just hours), you provide your own tools/equipment, and you fix defects at your cost.
• Unrelated clients test – you have multiple, unrelated clients (not just one main payer)
• Employment test – you employ or contract others who meaningfully contribute to the fee-earning work.
• Business premises test – you maintain separate business premises used mainly for your work.

Passing a PSB test has important consequences for how specific PSI rules apply. But – and this is the focus of the new guidance – passing a PSB test doesn’t automatically mean every tax outcome is appropriate in all circumstances. The ATO’s guidance explains the risk factors it watches for and how it applies Part IVA where arrangements don’t align with genuine business substance.

Part IVA in plain English

Part IVA is the general rule that allows the ATO to address arrangements that produce a tax advantage where that advantage is the dominant purpose of the arrangement. Think of it as a “big picture” sense check: are we seeing commercial decisions that happen to have tax effects, or tax-driven steps that overshadow the commercial story?

If Part IVA applies, the law lets the ATO adjust the tax outcome to reflect what would likely have happened without the tax-driven steps.

What the ATO’s new guidance is saying

The new guidance doesn’t create new law. Instead, it sets out a practical risk framework for situations where PSI is earned through a company, trust or partnership that does meet a PSB test, and where income is then:

• Shared with associates (for example, family members) who aren’t contributing commensurately to the fee-earning work; and/or
• Retained in an entity without a clear business purpose.

The guidance groups arrangements broadly into lower-risk and higher-risk categories so taxpayers can self-assess and, if needed, adjust their settings.

Indicators of lower risk

• The individual who performs the work is taxed on most of the net profit that relates to their efforts – typically through a commercial salary or distribution that reasonably reflects their contribution.
• Any profits retained in the entity are held for clear, documented business reasons – for example, funding working capital, equipment purchases, genuine expansion, or meeting loan covenants.

Indicators of higher risk

• The working individual takes relatively low remuneration, while significant amounts are distributed to people who don’t contribute to the fee-earning work, or are left in a company without a clear business plan for using those funds in the business.
• Payments to associates don’t match the value of their contributions (e.g. administrative help being remunerated well beyond market rates).
• Profit retention appears aimed mainly at permanently lowering tax, rather than supporting identifiable business needs.

The message is constructive: align your structure and payments with the commercial reality of who creates the income and why funds are retained. When that alignment is clear and well documented, risk is reduced.

What does this mean in practice?

For many PSBs, the new guidance encourages a fresh look at how profits flow, and why.

• PSB status is still important – but not the whole story. Meeting a PSB test addresses the specific PSI rules, but Part IVA still applies if overall outcomes are tax-driven over commercial logic.
• Income sharing needs substance. If family members or related entities receive income, make sure it reflects real work, skills and responsibility, and sits within market-rate expectations.
• Profit retention should have a plan. Keeping profits in a company or trust can be sensible – provided you can point to a documented business use (budgets, capex (capital expenditure) plans, debt schedules, cash-flow forecasts etc).

Think of it as putting your commercial story front and centre. When the “what” (payments and retentions) matches the “why” (business needs and contributions), you are more likely to be in a comfortable place.

Practical steps to take now:

Here is a straightforward checklist you can work through:

1. Confirm whether you earn PSI.
   Ask yourself “would the revenue largely stop if I stopped working?” If yes, treat it as PSI and keep reading.
2. Identify which PSB test you meet.
   Note how you meet it (e.g. results-based contracts, multiple unrelated clients, employing others, or separate premises). Keep copies of contracts, rosters, supplier agreements, and photos or leases of premises as evidence.
3. Map how profit currently flows
   1. What do you take as salary or distribution?
   1. What do associates receive, and for what contribution?
   1. How much is retained, and what is the plan for those funds?
4. Benchmark remuneration
   Sense-check payments to you and any associates against market rates for comparable roles and responsibilities. Adjust where needed and keep a note of how you arrived at the figures.
5. Document the business reason for retention.
   If profits are staying in the entity, link them to specific needs: working capital targets, equipment purchases, expansion timelines, or debt reduction. Simple board/manager notes, budgets and cash-flow forecasts go a long way.
6. Tidy contracts and processes.
   Where possible, use results-based agreements, ensuring you carry suitable risk and responsibility for your work (including rectification obligations where appropriate), and keep clear job descriptions for any associates.
7. Schedule a review with your adviser.
   Ask for a quick risk assessment against the ATO’s indicators. If anything lands in a higher-risk area, agree on practical tweaks – for example, adjusting remuneration, refining how distributions are determined, or updating your documentation.

A positive take

This guidance is an opportunity to bring structure, payments and paperwork into alignment with how your business genuinely operates. When your arrangements reflect commercial reality – and you can show that clearly – compliance becomes more straightforward, planning becomes easier, and you can reduce the risk of surprises later.

Need clarity on how this affects you?

If you earn your personal services income through a separate legal entity (for example, a company or trust) and this this guidance could impact you, get in touch to organise an advice meeting. We will review your structure, assess your risk level, and map our practical next steps tailored to your situation.

Contact us to book a time today.