Understanding Personal Services Businesses in the context of Part IVA

Understanding Personal Services Income and Part IVA: What it means for your tax structure

The Australian Taxation Office (ATO) has released (PCG 2025/5), which explains how closely it will look at certain business structures where income is mainly earned from an individual’s skills or effort.

This guidance is particularly relevant if you operate through a company or trust and earn what the ATO calls personal services income (PSI) – in other words, income that mainly comes from your own work rather than from assets or employees.

Even where a business qualifies as a personal services business (PSB), the ATO has made it clear that it may still apply anti‑avoidance rules (Part IVA) if it believes income is being redirected or held back mainly to reduce tax.

In simple terms, the ATO is asking:

Is the income being taxed in a way that fairly reflects the work done by the individual?

When the ATO is less likely to be concerned

The ATO has outlined several features that generally point to a lower‑risk arrangement, meaning it is less likely to devote compliance resources to reviewing it.

These include situations where:

• The net PSI ultimately ends up with the individual who did the work and is taxed at their personal tax rate.
• The individual is paid a salary or drawings that broadly match what they would earn in the open market for that type of work.
• Family members or associates are paid only for genuine work they actually perform, and the pay is reasonable for those services.
• Any delay in paying income to the individual is due to normal commercial reasons (such as timing issues) rather than tax planning, and the delay is short‑term.
• Superannuation contributions are made for the individual as an employee, with the genuine intention of building retirement savings.
• Profits are temporarily retained in the business for real business reasons, such as managing cash flow or purchasing assets, and those plans are genuinely carried out.

Put simply, if the structure reflects how a normal commercial business would operate, the ATO is less likely to raise concerns.

When the ATO is more likely to take a closer look

The guidance also highlights features that suggest a higher‑risk arrangement, where the ATO is more likely to investigate.

These include situations where:

• The net PSI is diverted to another entity (such as a company or trust) and taxed at a lower rate than if the individual received it directly.
• The individual is paid less than what would reasonably reflect the value of their work.
• The individual who performed the work does not receive any income at all.
• Profits are said to be retained for business purposes, but in reality, there is no clear commercial reason or follow‑through.
• Income is shared with associates mainly to reduce the overall tax bill.
• Associates or service entities are paid amounts that do not match the work or skills they actually provide.
• Large amounts of income are retained in the business beyond what is commercially necessary and later accessed for personal use (for example, through loans).

Importantly, the ATO has indicated that simply retaining income in a company or trust is itself a strong risk indicator, even if it is later accessed in a technically compliant way.

How PKF can help

At PKF, we work closely with business owners, consultants, and professionals to ensure their structures are both tax‑effective and compliant.

We can help by:

• Reviewing your current structure to identify any ATO risk areas.
• Ensuring remuneration arrangements reflect commercial reality and market rates.
• Helping you document genuine business reasons for retaining profits.
• Advising on appropriate payments to family members or associates.
• Aligning tax planning with long‑term business and personal goals, not just short‑term tax outcomes.
• Providing practical guidance before the ATO raises questions, rather than after.

Our focus is on clear, practical advice that helps you run your business with confidence, knowing your structure stands up to ATO scrutiny.

If you’re unsure whether this guidance affects you, a proactive review now can help avoid costly issues later.