The Australian Taxation Office (ATO) has turned up the heat on Personal Services Income (PSI), especially when income is earned through a company or trust and shared among family members.

If you’re a consultant, contractor, broker, or anyone who earns income through your own skills, it is worth reviewing your business structure to make sure it complies with the latest ATO approach.

What Is Personal Services Income (PSI)?

PSI is income that mostly comes from your own work, not from selling goods or owning income-generating assets. The definition of PSI is included in Part 2–42 of the Income Tax Assessment Act 1997 (ITAA97).

If your income is considered as PSI, the ATO generally wants it taxed at your individual tax rate, even if the income is paid into a company or trust. You may also lose access to certain business deductions like rent, loan interest, or payments to family members.

However, if your business qualifies as a Personal Services Business (PSB), the above PSI rules don’t apply. This can be established by passing specific tests or getting a PSB determination from the ATO.

How to Show You’re Running a Personal Services Business

To be considered a PSB, your business needs to pass one or more of the following tests:

  • Results Test – You’re paid to deliver a result, not just for time spent working. You provide your own tools or equipment and fix any problems at your own cost. As an example, taxpayers failed this test because they were paid hourly rather than for specific deliverables (Douglass v FCT and IRG Technical Services).
  • Unrelated Clients Test – You work with two or more different clients, and they come to you through your own marketing or public offers, not through a recruiter or agency. Fortunatow case established that services obtained through intermediaries, such as recruitment agencies, don’t constitute direct result of public offers.
  • Employment Test – You have others helping you with at least 20% of the main work (based on market value) or you employ an apprentice for at least half the year.
  • Business Premises Test – You have a dedicated business space that is separate from your home and your clients’ sites. Dixon case demonstrates how stringent this requirement is. This case suggests home-based businesses will have difficulty satisfying this test.

If 80% or more of your income comes from one client, you can only rely on the results test. If you don’t meet it, you’ll need an official PSB determination from the ATO.

What’s New in the ATO’s Approach?

The ATO’s new guideline (PCG 2025/5) changes the game. Even if you pass a PSB test, the ATO may still apply anti-avoidance rules (Part IVA) if it believes your income is being split and it results in the reduction of tax. The ATO is now looking at whether people are using companies or trusts to split income in ways that don’t reflect the real value of their personal work.

Below is an example from the PCG demonstrating circumstances where the ATO would consider the arrangement to be high risk in the application of anti-avoidance rules:

Kelly, a broker, earns income through a discretionary trust. She does all the work herself, but the trust distributes income to her and her family members. These distributions don’t reflect the real value of Kelly’s work. Even though her setup passes one of the PSB tests, the ATO may still treat this as income splitting and apply the anti-avoidance rules.

In short, passing the PSB tests isn’t a free pass anymore.

What You Should Do Now?

The PSI rules aren’t new. But the ATO’s renewed focus means it’s time for a health check.

If you earn most of your income from your own skills or expertise:

  • Review your business and trust structures
  • Make sure payments match the value of your personal work
  • Get professional advice before distributing income

Taking these steps now can help you stay compliant and avoid unexpected ATO scrutiny.

This article was written by Ivy Dedic, Senior Accountant at HLB Mann Judd Melbourne