Published: 8 December 2025 – Australia
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The ATO’s new Practical Compliance Guideline PCG 2025/5 is tightening the screws on income‑splitting and profit retention for personal services income. Here’s what doctors, tradies and other professionals need to know before 30 June 2027.
What’s happening?
The Australian Taxation Office (ATO) has quietly launched one of its most significant personal tax crackdowns in years – and it’s aimed squarely at professionals, contractors and tradies who channel their earnings through companies, trusts or partnerships.
Late in November, the ATO finalised Practical Compliance Guideline PCG 2025/5 – Personal services businesses and Part IVA of the Income Tax Assessment Act 1936. The guideline explains when the ATO will use the general anti‑avoidance rule (Part IVA) to attack income‑splitting and profit‑retention arrangements involving personal services income (PSI), even where the structure otherwise qualifies as a personal services business (PSB). [1]
In the days since, a wave of commentary has hit the profession:
- Yahoo Finance spotlighted a “major ATO crackdown on income splitting strategy used by thousands of Aussies to lower tax”, warning that popular structures used by doctors, lawyers and other high‑income professionals are firmly in the firing line. [2]
- Accountants Daily reported on “nothing new” in the underlying law, but confirmed the ATO has now locked in a final compliance guideline tying the PSI rules to Part IVA. [3]
- Specialist firms such as William Buck, RSM, Hayes Knight and health‑sector advisers have rushed out alerts, with some describing the new PCG as a “game changer” for income splitting. [4]
As at 8 December 2025, this is now a live ATO focus area – not a theoretical draft.
Quick refresher: Personal services income, PSBs and Part IVA
What is personal services income (PSI)?
PSI is income that mainly rewards your own labour, skill or expertise – for example:
- A doctor’s consulting fees
- A lawyer’s billable hours
- An engineer’s or IT contractor’s time‑based consulting income
If the income effectively dries up when you stop working, it’s likely PSI. [5]
You can earn PSI as a sole trader, or through a company, trust or partnership. The structure doesn’t change the underlying character of the income – that’s the starting point for the ATO.
Personal services business (PSB) tests
The law provides four tests that, if satisfied, mean your structure is treated as a personal services business and escapes the specific PSI attribution rules in Division 86:
- Results test
- Unrelated clients test
- Employment test
- Business premises test [6]
Passing one test may allow the entity (company or trust) to be taxed in its own right rather than forcing all income back to you personally under the PSI rules.
Where Part IVA comes in
For years, the ATO has maintained that Part IVA – the general anti‑avoidance rule – can still apply even if you pass a PSB test. That position is set out in rulings such as TR 2022/3, which states Part IVA may apply where a PSB uses income‑splitting to achieve a tax benefit. [7]
What’s new is that PCG 2025/5 turns this high‑level position into a detailed risk framework, spelling out when the ATO is likely to deploy Part IVA against PSI arrangements run through personal services entities (PSEs) like companies and trusts. [8]
PCG 2025/5 in a nutshell
Release timing and scope
- The guideline is dated 28 November 2025 and was published in the ATO’s tax professionals’ newsroom on 1 December 2025. [9]
- It applies to any personal services business where income is generated mainly from one individual’s efforts but is booked, retained or distributed through an entity (company, trust or partnership).
- It explicitly sits alongside earlier guidance on professional firm profit allocation (PCG 2021/4), but is broader in scope: PCG 2025/5 encompasses doctors, consultants, tradies and other service providers, not just classic “white‑collar” professional firms. [10]
The key question
The headline question ATO officers are now trained to ask is:
“Is your business income actually your income?” [11]
If the answer is “yes” but the structure causes a large chunk of that income to be:
- taxed at a lower company rate, or
- diverted to family members on lower marginal rates,
then you are exactly the kind of taxpayer PCG 2025/5 is aimed at.
Low‑risk vs high‑risk: What the ATO is really looking for
PCG 2025/5 sets out indicators of low‑risk and high‑risk arrangements for personal services entities. The more high‑risk indicators you tick, the more likely the ATO is to consider Part IVA and allocate compliance resources. [12]
Indicators of a low‑risk PSI arrangement
Commentary from RSM and others summarises the ATO’s low‑risk hallmarks broadly as follows: [13]
- Most net PSI ends up taxed to the individual whose personal exertion generated it, at their full marginal tax rate.
- The individual’s remuneration is commercially realistic – broadly comparable to what an equivalent sole practitioner would earn.
- Associates are only paid for genuine work, and at market‑rate remuneration for the hours or responsibilities involved.
- Profits retained in the entity are temporary and clearly commercial (for example, saving for major equipment or working capital), not indefinite hoarding.
- Superannuation and other benefits are consistent with what you’d expect in a genuine commercial employment or contractor setting.
In plain language: you can use a company or trust, but the benefit of that income needs to land with the person doing the work, on broadly normal tax terms, within a reasonable timeframe.
Indicators of a high‑risk PSI arrangement
By contrast, the PCG highlights factors that will push an arrangement into the “high‑risk” or Part IVA danger zone: [14]
- Large distributions to adult children or other relatives who don’t work in the business
- A spouse receiving substantial profits for minor admin tasks
- The main practitioner’s taxable income from the business being far below peers, despite generating similar billings
- Significant profits retained in companies year after year without a clear business purpose
- Distributions that swing dramatically from year to year with no commercial explanation
- Management or service fees that lack a commercial benchmark and appear designed mainly to reroute income
Hayes Knight’s analysis notes that the ATO will be most interested in arrangements where substantial PSI has been diverted to lower‑tax associates or locked inside an entity at 25–30 per cent tax rates, instead of being taxed at the practitioner’s marginal rate. [15]
Who is in the firing line?
Based on the ATO guidance and professional commentary to date, the crackdown is expected to hit:
- Doctors and medical specialists
- Allied health professionals (physios, psychologists, dentists, etc.)
- Lawyers and barristers
- Accountants and financial advisers
- Engineers, architects and consultants
- IT professionals and contractors
- Tradies and skilled trades (electricians, plumbers, builders) operating through companies and trusts
Practically, the ATO is focused on structures where one high‑earning individual generates most of the value, but the structure tries to spread that income across the family tree or trap it at a lower tax rate. [16]
Special spotlight: doctors and medical practices
Medical practitioners have become the poster child for the new guideline.
Medical examples inside PCG 2025/5
William Buck and health‑sector advisers point out that PCG 2025/5 includes specific examples dealing with medical specialists operating through companies and trusts. One widely cited example describes a specialist who bills patients through a company, but all net PSI is ultimately distributed to the doctor and taxed at their marginal rate – this is presented as a low‑risk model. [17]
The message is clear: if you use an entity but keep the economic outcome much the same as if you’d earned the income directly, your risk is lower. The more you use the structure to:
- underpay yourself, and
- overpay or distribute to non‑working family members,
the more Part IVA risk you attract.
Contractor companies vs genuine “tenant doctor” models
Recent articles in Medical Republic and Health & Life warn that subcontractor or “independent contractor” doctors operating via companies and trusts are now at the top of the risk spectrum, especially where those structures are also used to argue against payroll tax or superannuation obligations. [18]
By contrast, genuine tenant doctor arrangements – where:
- the practitioner operates as a self‑employed doctor with their own ABN,
- bills patients in their own name, and
- pays a commercial service fee to a separate service entity for rooms and admin support –
tend to align better with the ATO’s low‑risk indicators and state payroll tax guidance. [19]
Several commentators also warn that contractor‑type arrangements may expose some doctors to backdated GST, super guarantee and PAYG liabilities if they’re found to be more like employees in substance. While those issues sit outside PCG 2025/5 itself, the Guideline is being treated as part of a broader compliance push in the medical sector. [20]
“Nothing new” or a “game changer”? Why experts disagree
The profession is split on how revolutionary PCG 2025/5 really is.
The “nothing new” camp
Some tax specialists quoted in Accountants Daily stress that PCG 2025/5 does not change the underlying tax law. The PSI rules, PSB tests and Part IVA have been around for years, and the ATO has long argued that Part IVA can apply even where PSB tests are met. [21]
From this perspective, the Guideline mainly:
- packages existing concepts into a single practical document, and
- clarifies what the ATO regards as acceptable vs unacceptable income splitting and profit retention.
For many conservative practices who were already paying the main practitioner a market‑rate income and limiting distributions to non‑working family, the changes may indeed feel incremental.
The “game changer” camp
Others see PCG 2025/5 as a sharp escalation in the ATO’s appetite to actually run Part IVA arguments against common structures, particularly in the mid‑market and small business space.
- The National Tax and Accountants’ Association (NTAA) has described the new guidelines as a “game changer” for professionals and tradies who have historically relied on PSI and PSB status to justify income‑splitting. [22]
- The Australian Financial Review had already framed the ATO’s broader trust work as a “new trust crackdown”, underlining that income splitting through family trusts is under unprecedented scrutiny. [23]
From this angle, the big shift is not the law itself but the clarity and intensity of the ATO’s compliance stance – backed by a public PCG that gives auditors a ready‑made toolkit to justify Part IVA reviews.
Transitional relief: the 30 June 2027 window
One of the most important (and easily missed) parts of the commentary around PCG 2025/5 is the transition period.
Advisers such as Hayes Knight report that the ATO does not plan to apply Part IVA to past high‑risk arrangements where taxpayers make a genuine attempt to move into a low‑risk position by 30 June 2027. [24]
In practical terms, that means:
- You likely have about two income years to review and adjust your structure.
- The ATO expects to see documented steps showing that you have identified risks, sought advice and are moving toward a low‑risk arrangement.
- Simply “waiting and seeing” until after 2027 is likely to be viewed unfavourably if your structure ticks multiple high‑risk boxes.
This transition window is a major reason we’re now seeing a rush of webinars, alerts and client bulletins – including NTAA seminars scheduled from 8 December 2025 specifically on “New Guidelines Target Tradies and Professional Clients.” [25]
How to tell if your structure is at risk
While every case turns on its facts, here are practical self‑check questions professionals are being encouraged to consider:
- Who really earns the income?
- If one individual’s personal skills and effort drive most of the revenue, assume you are dealing with PSI.
- Where does the profit end up?
- After wages, super and genuine expenses, is a large chunk of profit staying in a company or flowing to family members who don’t do much (if any) work?
- Is your own pay realistic?
- If you’re the main fee‑earner but your taxable income is far lower than comparable sole practitioners, that’s a red flag.
- What do your distributions look like over time?
- Big swings in amounts paid to family members, with no change in their duties, can look like tax‑driven allocation, not commercial reality.
- Do you have a commercial story for retained profits?
- Retentions earmarked for specific investments, debt reduction or working capital can be easier to defend than “we just leave it in the company”.
- Does your documentation match reality?
- Engagement letters, service agreements, payroll records, contractor agreements and trust resolutions should all tell the same coherent story.
If several of these questions make you uncomfortable, your structure may sit closer to the high‑risk end of the PCG spectrum.
What should professionals, tradies and practice owners do now?
This is not the moment for panic – but it is the right moment for deliberate action.
1. Map your PSI exposure
- Identify which income streams are clearly personal services income and which are genuinely business‑based (reliant on staff, systems, assets). [26]
- For each PSI stream, list the entity that books the revenue and who ultimately receives the economic benefit.
2. Benchmark your remuneration
- Compare your personal taxable income from the structure with what an independent fee‑for‑service practitioner in your field would typically earn.
- If you’re significantly below a realistic market figure while your company or trust retains large profits or spreads income to family, that’s exactly what PCG 2025/5 is targeting. [27]
3. Review distributions to associates
- Check whether spouses, adult children or other relatives are receiving distributions or salaries that exceed their genuine contribution.
- Re‑set these to commercial levels where necessary, and document the basis for any payments.
4. Re‑examine profit retention strategies
- If your company has been accumulating PSI profits across many years, document why: future expansion, equipment purchases, risk management, etc.
- Where there’s no clear commercial reason, consider a staged plan to bring the arrangement into a low‑risk zone before 30 June 2027. [28]
5. For doctors and health professionals: clarify your model
- Work out whether you are:
- a genuine tenant doctor (self‑employed, billing patients under your own ABN and paying a service fee); or
- a contractor/employee‑like practitioner operating via a company or trust. [29]
- If you’re in the contractor/company category, take advice on PSI, Part IVA and payroll‑tax/GST exposures together, not in isolation.
6. Get advice and keep records
- PCG 2025/5 is technical. Working through it with a tax adviser who understands PSI, PSBs, trusts and Part IVA is strongly recommended.
- Keep file notes, emails and Board/trustee minutes demonstrating that you’ve considered the guideline and acted on it – that evidence could matter if the ATO reviews earlier years.
What this means for everyday taxpayers
While the headlines focus on “thousands of Aussies” caught in an income‑splitting crackdown, it’s worth stressing:
- Employees on PAYG salaries are not the target here.
- The focus is on people who have deliberately interposed entities between themselves and their work – often for good commercial reasons, but sometimes primarily for tax. [30]
For many professionals who already:
- pay themselves a robust market salary,
- only make modest, justified distributions to family, and
- use entities primarily for risk management and business continuity,
PCG 2025/5 will mostly mean more paperwork and clearer documentation.
For others, especially those with aggressive family trust distributions or large retained profits from PSI, it may mean a substantial re‑think of how their practice or business is structured.
The bottom line
The ATO’s new guideline PCG 2025/5 marks a decisive moment in Australia’s long‑running tussle over personal services income and income‑splitting:
- It confirms that passing the PSB tests is not a shield against the general anti‑avoidance rule. [31]
- It provides a clear roadmap of what the ATO regards as acceptable vs unacceptable PSI arrangements.
- It creates a transition window to 30 June 2027 for taxpayers to get their houses in order – but also signals that high‑risk structures will be fair game after that. [32]
For doctors, tradies, consultants and other professionals, the new reality is simple:
If the income depends on you, the ATO increasingly expects the tax bill to depend on you as well.
References
1. www.ato.gov.au, 2. au.finance.yahoo.com, 3. www.accountantsdaily.com.au, 4. williambuck.com, 5. www.trinitygroup.com.au, 6. www.trinitygroup.com.au, 7. www.ato.gov.au, 8. www.rsm.global, 9. www.hayesknight.com.au, 10. www.rsm.global, 11. www.rsm.global, 12. www.rsm.global, 13. www.rsm.global, 14. www.rsm.global, 15. www.hayesknight.com.au, 16. www.hayesknight.com.au, 17. williambuck.com, 18. www.medicalrepublic.com.au, 19. www.medicalrepublic.com.au, 20. www.medicalrepublic.com.au, 21. www.accountantsdaily.com.au, 22. www.linkedin.com, 23. www.afr.com, 24. www.hayesknight.com.au, 25. ntaa.com.au, 26. www.trinitygroup.com.au, 27. www.rsm.global, 28. www.hayesknight.com.au, 29. www.medicalrepublic.com.au, 30. neoskosmos.com, 31. williambuck.com, 32. www.hayesknight.com.au
