PCG 2025/5: The ATO Redraws The Line on Personal Services Income

ASF TAKEAWAYS: For years, advisers have been telling clients that passing the Personal Services Business (PSB) tests was the end of the story. PCG 2025/5 confirms — very clearly — that it isn’t. In late November 2025, the ATO finalised Practical Compliance Guideline PCG 2025/5, setting out how it will apply Part IVA (the general anti‑avoidance rules) to personal services income (PSI) earned through companies and trusts, even where the entity qualifies as a PSB.

This is not a law change. But it materially changes the risk profile for thousands of professionals, contractors and trades operating through entities.

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WHAT IS PERSONAL SERVICES INCOME (PSI)?

PSI is income that is mainly a reward for an individual’s own labour, skills or expertise.

In practice, if the income would largely stop if you stopped working, it is probably PSI. Typical examples include:

• medical and allied health professionals

• accountants, lawyers and consultants

• engineers and IT contractors

• tradespeople operating on their own skill and labour

Importantly, PSI does not stop being PSI just because it is earned through a company or trust. The character of the income follows the individual, not the structure.

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WHAT IF YOU ARE OPERATING AS A PERSONAL SERVICES BUSINESS?

Historically, many advisers treated the PSB tests as a safe harbour. If you passed:

• the results test, or

• the unrelated clients test, or

• the employment or business premises tests

…then the PSI attribution rules generally didn’t apply.

PCG 2025/5 explicitly dismantles the idea that this equals protection.

The ATO’s position is now unambiguous:

Even where a personal services entity qualifies as a PSB, Part IVA can still apply if the structure is used to divert, retain or split income in a non‑commercial way.

In other words: PSB status does not legitimise income splitting.

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WHAT PCG 2025/5 ACTUALLY DOES?

PCG 2025/5 sets out a risk‑based compliance framework showing when the ATO is more likely to apply compliance resources to PSI structures.

It focuses on “alienation arrangements” — situations where income generated by an individual is:

• retained in an entity, or

• diverted to associates, or

• taxed at a lower rate

without a clear commercial justification.

The ATO categorises arrangements as low‑risk or higher‑risk.

Low‑risk PSI arrangements (ATO not interested)

Broadly, an arrangement will sit at the lower‑risk end where the outcome aligns with commercial reality, including where:

• the individual is paid market‑appropriate remuneration

• income is ultimately taxed in the hands of the person doing the work

• associates are only paid for genuine services at commercial rates

• profits are retained only temporarily for working capital or business needs

• superannuation is paid for the individual as an employee

If the structure produces much the same tax outcome as earning the income directly, the ATO indicates it will generally allocate minimal compliance resources.

Higher‑risk arrangements (where Part IVA comes back)

The ATO is far more concerned where structures involve:

• income splitting to family members on lower tax rates

• long‑term profit retention with no commercial justification

• paying the main service provider materially below market value

• diverting income to loss entities or passive associates

These are the arrangements PCG 2025/5 clearly flags as higher‑risk and more likely to attract review under Part IVA.

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WHAT THIS MEANS IN PRACTICE?

For PSI entities, PCG 2025/5 is a clear warning shot, not a sudden ambush.

The ATO has published extensive examples, risk indicators and a transition period (to 30 June 2027) for taxpayers to realign their affairs.

But the direction of travel is unmistakable:

• income follows the individual

• structures must reflect commercial reality

• “we’ve always done it this way” is no defence

For professionals and tradespeople operating through companies and trusts, the question is no longer “Do we pass the PSB tests?”

It is now:

“Would this arrangement still make sense if tax was not a factor?”

If the answer is no, it’s time to revisit the structure — before the ATO does.

If you want more details or assistance, please reach out to the ASF team.