PCG 2025/5: What It Means for Personal Services Income (PSI) Workers

The Australian Taxation Office (ATO) has released Practical Compliance Guideline PCG 2025/5, which sets out its compliance approach to Personal Services Income (PSI) and the potential application of Part IVA (anti-avoidance provisions). While this guideline does not change the law, it signals a stronger compliance focus on certain arrangements that the ATO considers high-risk.  

What Is Personal Services Income (PSI)? 

PSI is income that is mainly a reward for your personal efforts or skills rather than from selling goods or using significant assets. The ATO generally considers income to be PSI if more than 50% of what you earn from a contract is for your labour, skills, or expertise. 

Common Examples of PSI workers include: 

• Consultants 

• IT contractors 

• Medical professionals 

• Engineers and designers  

However, if you are selling products (e.g. coffee) or materials comprise more than 50% of your sales, the PSI rules will not apply to you. 

If you earn PSI, special rules apply: 

• You may not be able to split income with family members. 

• You may have limited deductions compared to a normal business. 

• Even if you operate through a company or trust, PSI is usually attributed back to you personally. This means that you are taxed on the income in your personal return and cannot hold the profit in a company. 

What Does PCG 2025/5 Change? 

PCG 2025/5 does not change the PSI rules themselves, but it clarifies how the ATO will apply Part IVA (the general anti-avoidance rule) to arrangements involving PSI.

 
Key points: 

• Passing the PSI tests (e.g., results test, unrelated clients test) and qualifying as a Personal Services Business (PSB) does not guarantee safety. 

• The ATO will still apply Part IVA if it believes your structure’s dominant purpose is to obtain a tax benefit, such as:  

• Retaining PSI profits in a company at the 25% tax rate instead of paying them out. 

• Splitting PSI income to associates who did not perform the work.  

Risk Framework 

The new guidance does not introduce strict rules for what would be considered tax avoidance under Part IVA, but instead sets out some features of low risk and high risk arrangements. PCG 2025/5 introduces a risk assessment approach: 

• Low-risk arrangements: Income paid out promptly to the individual, reasonable commercial reasons for any retained profits.  

• Higher-risk arrangements: Retaining profits without a clear commercial purpose, income splitting to family members, or paying associates more than their market value.  

Why Does This Matter for PSI Workers? 

If you operate through a company or trust, you need to: 

• Determine if your business arrangement is a higher or lower risk arrangement. 

• Review your structure and ensure commercial reasons for any retained profits. 

• Avoid arrangements that look like income diversion. 

• Keep contemporaneous documentation explaining your decisions. 

Failing to do so could lead to: 

• ATO audits 

• Application of Part IVA 

• Additional tax, penalties, and interest 

Practical Examples 

You can see examples of low risk and high risk arrangements here. 

The information provided above is general in nature and does not take into account your specific circumstances, objectives, or financial situation. It should not be relied upon as tax, legal, or financial advice. Before acting on any information, you should consider seeking advice from a qualified professional who understands your individual circumstances.