ATO targeting personal service income businesses

The Australian Taxation Office (ATO) recently issued a new ruling, PCG 2025/5, which significantly changes the "safety" of using a company or trust to manage income earned from your own personal skills (Personal Services Income or PSI).

 

In short: The ATO view is that passing the "Personal Services Business" (PSB) tests is no longer sufficient for splitting income with a spouse or keeping profits in a company.

 

I have tried to simplify what the changes are below;

 

1. The "Old" Way of Thinking

 Previously, many professionals and tradespeople relied on passing the PSB tests (like the Results Test or the 80% Unrelated Client Rule), so they could retain profits in a company or split income with a spouse.

 

2. What has Changed?

 The new ruling says that even if you technically qualify as a "business" (a PSB), the ATO can still review you if they think the main reason you set up your company or trust was to pay less tax.

 

3. The "Red Flags" (High Risk)

 The ATO has divided arrangements into "Low Risk" and "High Risk." You are likely in the High Risk category if:

  •  Underpayment: You pay yourself a salary that is much lower than what you’d get in the open market for your skills.

  • Splitting: You pay a spouse or family member a salary or trust distribution that doesn't match the actual work they do.

  • Hording: You leave large amounts of profit in a company ("bucket company") indefinitely without a genuine business reason (like saving up to buy heavy machinery or a storefront).

  • Personal Use: You keep money in the company but then "borrow" it for personal use (like a home renovation or a holiday).

 

4. The "Safe Zone" (Low Risk)

 To stay in the ATO’s low risk zone, they generally expect to see:

  •  Market Salary: You pay yourself a salary that reflects the "commercial value" of your work (usually most of the profit).

  • Fair Pay for Others: If you pay a spouse, it’s only for actual work done and at a normal hourly rate for that task (e.g., admin or bookkeeping).

  • Total Distribution: Ideally, 100% of the profit (after genuine business expenses) is taxed at your personal marginal rate.

 

5. What Should You Do?

 The ATO is giving people a "grace period" to fix their structures.

 

  • Deadline: You have until 30 June 2027 to move into a "Low Risk" arrangement.

  • Action: If you have been retaining profits in a company or splitting income with a spouse through a trust, please contact us. You may need to increase your own salary or stop distributing to family members who aren't active in the business.

 

Editor: Please contact our office if you require assistance regarding the above, including in relation to also claiming deductions for improvement costs for certain assets.

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Accumulate Accountants + Business Advisors is a consulting firm located in Perth, Western Australia that provides a range of successful businesses with strategic business advice, accounting and taxation services.

www.accumulateperth.com

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