On 1 December 2025, the Australian Taxation Office (ATO) released Practical Compliance Guideline PCG 2025/5, setting out its compliance approach to Personal Services Income (PSI). The ATO have been progressively releasing PCG’s as a way of stating their compliance focus and providing some framework for what the ATO consider as high-risk areas of the law. It is important to note this is not a change in law and it has not been specifically written by the ATO to focus on the medical industry although there are specific examples that refer to medical practitioners.
For medical and allied health professionals operating through companies, trusts or partnerships, this PCG further clarifies the ATO’s position on the treatment of personal services income. While we have frequently discussed the potential for the ATO to tighten its view on income retention and splitting, this guideline formalises those concerns. It specifically targets arrangements where a practitioner claims Personal Services Business (PSB) status but directs income in a way that the ATO considers tax avoidance. If you’d like to know how Personal Services Income might affect your business, read our piece on Personal Services Income (PSI) – Does it apply to your structure?
The gap between PSB status and Part IVA
A common misunderstanding within the health sector is that satisfying the Personal Services Business tests (such as the results test or unrelated clients test) allows a practitioner’s income to be treated as business income.
PCG 2025/5 clarifies a critical distinction: qualifying as a PSB exempts you from the specific attribution rules under Division 86, but it does not protect you from Part IVA of the Income Tax Assessment Act 1936.
Part IVA is the general anti-avoidance provision. The ATO uses it where a scheme’s ‘dominant purpose’ is to obtain a tax benefit. The new guideline signals that even if you are a legitimate PSB, the ATO will intervene if your structure is used primarily to retain profits at a lower corporate tax rate or to divert income to associates/family members.
Assessing your risk profile
The guideline introduces a risk assessment framework, categorising arrangements into low and higher risk. For health practices, understanding where your current structure sits is essential. Importantly this is not a safe harbour regime.
Low-risk indicators
The ATO is less likely to apply compliance resources where:
- The net PSI is paid directly to the practitioner who performed the services (as salary or wages)
- The remuneration aligns with the commercial value of the services provided
- There is no artificial deferral of income within the entity
Higher-risk indicators
Arrangements face a higher likelihood of review if:
- Income is retained in the entity (company) without a clear commercial justification
- Income is diverted to associates (such as a spouse or family member) who are in lower tax brackets
- Payments are made to related parties for administrative support that exceed commercial market rates
- There is a significant disconnect between the income generated by the practitioner and the income distributed to them
The importance of commercial rationale
The ATO’s focus is on the ’dominant purpose’ of the arrangement. To remain compliant, individuals must demonstrate that their structure exists for commercial reasons, not solely for tax minimisation.
Documentation is your primary evidence. If your entity retains profits, for example, to fund future practice expansion, purchase medical equipment or manage cash flow fluctuations, this intent must be evidenced by actions.
We recommend a review of:
- Service agreements: Ensuring they clearly define the relationship between the practitioner and the entity.
- Invoices: Ensuring they reflect the reality of services rendered.
- governance documents: Including trustee resolutions and board minutes that explicitly state the commercial reasons for financial decisions.
Transitional arrangements
The ATO has established a transition period ending 30 June 2027.
This window allows practitioners to review their current structures and, if necessary, restructure their arrangements to align with low-risk indicators. The ATO has indicated that businesses proactively correcting their affairs during this period are unlikely to face Part IVA scrutiny for prior years. This favours voluntary compliance over audit activity.
Next steps
Tax planning for health professionals requires a balance between asset protection, commercial growth and strict compliance.
We advise all medical and health clients who have concerns around their current structures to:
- Review current remuneration models to ensuring they align with the services performed.
- Assess the practice structure against the new risk zones outlined in PCG 2025/5.
- Ensure all documentation regarding profit retention or distribution is up to date and reflects commercial intent.
For further information on personal services income for health practitioners see this article
- Personal Services Income: the fact from the fiction – William Buck Australia
- Does your practice structure still serve you?
- Practical Compliance Guideline 2021/D2 – the allocation of professional firm profits – William Buck Australia
If you are unsure how these guidelines impact your structure, please contact your local William Buck health specialist.
