Throughout your medical career, you’ve likely heard the terms Personal Services Income (PSI), Personal Services Businesses (PSB) and personal exertion income but may not have considered how these terms impact you.
In early December 2025, the Australian Taxation Office (ATO) released the final Practical Compliance Guideline (PCG) 2025/5 that sets out its compliance approach and highlights what is and what is not allowed when applying the anti-avoidance measures to PSI.
The ATO consistently release PCG’s as their way of illustrating their compliance focus around what they consider to be high risk areas of non-compliance within the tax law. Importantly, this new guideline does not change the long-standing rules but provides further clarification for medical professionals as to the ATO’s position and the arrangements they deem to be high-risk.
Definitions
As a handy refresher, we have provided the definitions of these key terms below:
| Key Term | Definition |
| Personal Services Income (PSI) | Is when the majority of the income derived by an individual is a reward for their personal efforts or skills, rather than being generated by the use of assets, sale of goods or from a business structure. Where the PSI rules apply, deductions may be limited. |
| Personal Services Business (PSB) | Is when an entity (individual, company, partnership, or trust) receives PSI and has passed the relevant tests to indicate that the PSI has been generated from a business structure. Where there is a PSB, there are no changes to the deductions that can be claimed against this income. |
| Personal Exertion Income | Income from personal exertion means an income amount that is earned, derived, or received by a person by way of payment for personal exertion. It is similar to PSI but lacks the majority requirement. |
The application of whether the PSI rules apply or not are complex and specific to each medical professional’s facts and individual circumstances. The complexity of these rules often leads to misunderstandings, and as a result the ATO has issued this PCG.
Why does PCG 2025/5 Matter?
The PCG outlines the ATO’s position on how our anti-avoidance rules (also known as Part IVA of the Income Tax Assessment Act 1936) can be applied regarding the taxation of PSI.
A common misunderstanding, particularly for medical professionals, is that satisfying the PSB tests allows them to treat their income as business income, which they then believe is completely outside of the Part IVA anti-avoidance rules.
This PCG confirms this misunderstanding is incorrect. Whilst qualifying as a PSB may result in the PSI rules not applying to you, this does not protect you from the ATO applying the Part IVA anti-avoidance rules to your arrangement.
Where a structure has been used with the dominant purpose of obtaining a tax benefit (whether retaining profits at a lower corporate tax rate or by diverting income to associates/family members), the ATO will intervene.
This PCG provides a risk framework for medical professionals to identify low and high risk arrangements to enable them to make changes as needed. In summary, some of the key indicators of risk include:
| Low-Risk Indicators | High-Risk Indicators |
| Net PSI is distributed to the individual who performed the services, and they are taxed at their marginal tax rate. | Net PSI is distributed to another entity so that the overall tax rate is lower than if the individual had received the income directly. |
| Remuneration paid to an associate for non-PSI type work is at an appropriate and commercial rate. | The net PSI (or part thereof) is split with an associate of the individual, thereby reducing the overall income tax liability. |
| There is an intention to temporarily retain the profits for working capital purposes and that intention is carried out. | Remuneration is paid to an associate that is not commensurate with the skills exercised or services provided by the associate. |
| There is a timing difference between the earning of the PSI and the distribution of the net PSI to the individual for reasons outside of the individual’s control and is not attributable to tax. This creates only a temporary deferral of tax to the following year. | The net PSI retained in the entity is greater than required for clear commercial purposes, and the retained funds are subsequently made available to the individual for their personal use. |
The above indicators confirm that the ATO’s focus is on the ‘dominant purpose’ of the arrangement and the need to provide commercial justification if profits are to be retained within an entity.
The ATO has established a transition period ending 30 June 2027 to allow medical professionals to review their current structures and restructure if necessary to align their operations within the low-risk categories. If you believe you may be in a high-risk category, we recommend that you consult with your tax advisor to discuss your situation and understand if restructuring is needed to minimise your exposure and risk of being targeted by the ATO.
Contact Pilot
If you would like to learn more about how this guidance impacts you or need support reviewing your arrangements, please contact Kristy Baxter or Angela Stavropoulos at taxmed@pilotpartners.com.au or on 07 3023 1300.