What is Personal Services Income for medical and professional workers

Personal Services Income is income earned mainly from your personal effort, skill or expertise. If clients pay because of your work, knowledge or time, the income is treated as Personal Services Income.

Do Personal Services Business tests remove all ATO risk}

Personal Services Business tests may exclude PSI rules, but they do not remove ATO review. Part IVA still applies when a structure or arrangement appears to exist mainly for tax reduction rather than genuine commercial purpose.

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Understanding Personal Services Income (PSI) and ATO Guidelines for Medical Professionals PCG 2025/5

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Introduction

Personal Services Income (PSI) rules apply to many medical and professional service providers in Australia. These rules focus on income earned primarily from your personal effort, skill, and expertise.

The Australian Taxation Office (ATO) monitors this area closely because many practitioners operate through companies and trusts. While these structures are legal, they raise questions about how income should be taxed and whether "tax-driven" arrangements exist.

This article explains Personal Services Income in detail. It outlines the four Personal Services Business (PSB) tests, covers the ATO’s guidance (including the application of Part IVA), and identifies risk areas for medical professionals and contractors.

Most importantly, we set out clear steps to support compliance. This information is designed to help doctors, allied health providers, specialists, consultants, and contractors manage their tax obligations effectively.

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What Personal Services Income Means

Personal Services Income is income earned mainly from your labour or skill. If you perform the work yourself and the client pays because of your specific expertise, the income is likely classified as PSI.

These rules apply whether you operate as a sole trader, a company, a trust, or a partnership. The legal structure does not change the nature of the income. The key question is always: Who performs the work and what drives the income?

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When Income Is Personal Services Income

Income is classified as PSI when your personal labour is the main contributor to the fee. Examples include:

Medical consultations.
Patient treatment and surgery.
Reports and assessments.
Professional advice.
Contract work billed by time.

The common feature is personal involvement. If the income stops when you stop working, it is likely Personal Services Income.

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Income That Is Not Personal Services Income

Income is not PSI when other factors drive the earnings. These factors include:

Income derived from the use of business assets (e.g., heavy machinery).
Staff performing the principal work.
A business model that operates independently of your personal involvement.

For example, a clinic that employs several practitioners, nurses, and support workers earns business income. The income depends on staff, systems, assets, and client flow, shifting the classification away from PSI.

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The Personal Services Business Tests

A business that earns PSI may still avoid the strict PSI tax rules if it passes at least one Personal Services Business (PSB) test. These tests assess whether the activity is a "true business" rather than an arrangement used primarily to reduce tax.

There are four tests. Passing one is enough.

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1. The Results Test

The Results Test is the strongest test. To pass, you must meet all three conditions for at least 75% of your income:

Result: You are paid to produce a specific result.
Tools: You provide your own tools and equipment.
Errors: You fix any errors at your own cost.

Note: Most medical professionals do not meet this test because they are usually paid for time, consultations, or procedures rather than a defined "result." For this reason, the other tests are often more relevant.

2. The Unrelated Clients Test

You pass this test when:

You provide services to at least two unrelated clients.
You obtained these clients through public advertising or public offers.

The key point is how clients find you. Medical professionals who work through public listings, platforms, or a visible practice structure often meet this test. Those who depend on a single hospital or clinic for all their work generally do not.

3. The Employment Test

This test focuses on staffing. To pass, you must meet one of the following:

Principal Work: Others must perform at least 20% of the principal (market value) work.
Apprentices: You have one or more apprentices for at least half the income year.

Important: Administrative staff do not qualify for this test because they do not perform "principal work." However, a physiotherapy practice that employs several junior physiotherapists may pass this test.

4. The Business Premises Test

This test applies when you maintain dedicated business premises that are:

Owned or leased by you.
Used only for business purposes.
Physically separate from your private home.
Under your exclusive control.

Many medical professionals fail this test because they work in shared rooms or rooms provided by a third-party clinic or hospital.

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What Happens When You Do Not Pass a Personal Services Business Test

If you do not pass any of the four tests, the PSI rules apply. This has two key effects:

Deductions become restricted.
Income is attributed directly to the individual who performs the work.

The structure you use (Company or Trust) remains in place for commercial and legal reasons (like liability), but the income tax outcome changes significantly.

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Deductions Allowed Under PSI

You can still claim deductions that relate directly to earning the income. This includes:

Work-related tools and equipment.
Professional indemnity insurance.
Registration and compliance fees.
Training related to your present role.
Travel directly linked to service delivery.

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Deductions Not Allowed Under PSI

Under PSI rules, you generally cannot claim:

Home occupancy costs (unless very strict rules apply).
Payments to associates (spouses/family) who do not perform core work.
Expenses that provide a private benefit.
Motor vehicle expenses not connected to income generation.

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Tax Treatment Under PSI

When the PSI rules apply, the income is taxed in your hands at your marginal rate. This prevents:

Income Splitting: You cannot distribute this income to family members to use their lower tax brackets.
Profit Retention: You cannot retain profits within a company to access the lower company tax rate (currently 25% for base rate entities).

If the income relates to your personal work, the ATO expects you to be taxed on it personally.

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ATO Guidance and Part IVA

The Australian Taxation Office uses Part IVA of the Income Tax Assessment Act 1936 to address arrangements where tax benefits arise from structures designed solely to redirect PSI away from the individual.

Crucially: Passing a Personal Services Business test does not automatically protect you from Part IVA. The ATO still reviews the purpose, behaviour, and commercial alignment of your structure.

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Why the ATO Updated Guidance

The ATO has observed arrangements where:

Income flowed to family members who did not work in the business.
Companies retained PSI profits solely to access lower tax rates.
Trusts distributed PSI to beneficiaries with no involvement.
Structures produced lower tax outcomes without a genuine commercial purpose.

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How Part IVA Works

Part IVA focuses on the "dominant purpose" of the arrangement. The ATO reviews:

Why the structure exists.
Who performed the actual work.
Who received the income.
How profits are distributed or retained.
Whether the arrangement reflects commercial operations.

If the dominant purpose is tax reduction, the ATO may cancel the tax benefit and apply penalties.

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When Part IVA Applies (Even if You Pass a PSB Test)

Part IVA may apply when:

A company retains large profits that relate strictly to your personal work.
A trust distributes income to family members with no involvement in the business.
Service fees or management fees lack a commercial basis.
Contracts and documents do not match actual practice.

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Risk Areas for Medical and Professional Service Providers

Medical professionals and contractors face recurring patterns that trigger ATO attention.

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Using a Company or Trust for Locum or Contract Work

Many doctors and consultants operate through companies or trusts. These structures offer valid benefits such as liability protection and business continuity.

However, when the income is PSI, the ATO expects distributions to reflect the work performed. Retaining profits or distributing them to non-working beneficiaries significantly increases your audit risk.

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Room Rental and Service Fee Arrangements

Medical practitioners often work in rooms supplied by clinics, paying service fees or a percentage of billings.

Low Risk: If these arrangements reflect genuine market-rate support services.
High Risk: If they appear designed to shift income or reduce tax artificially.

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Income Splitting Through Trusts

Trust structures allow for flexible distributions. However, when income is PSI, distributions to family members who do not contribute to the work are a major red flag. In these cases, PSI rules generally override trust distribution resolutions.

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Documentation Requirements

Good documentation is your best defence during an ATO review.

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Contracts

Contracts should clearly explain:

The nature of the services.
Payment terms (results vs. time).
Responsibility for errors (indemnity).
Ownership of tools and equipment.

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Client Acquisition Evidence

If you rely on the Unrelated Clients Test, you need evidence of public offers or advertising. This includes:

Website presence.
Online directory listings.
Advertising material.
Agency arrangements.

This evidence proves your work is open to the public rather than tied to a single source.

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Staff and Support Records

Timesheets, rosters, and job descriptions support the Employment Test. These documents show who performs principal work and exactly how much they contribute.

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Annual Structural Review

Business activities evolve. Shifts in your client mix, staff involvement, and duties may change your PSI classification from year to year.

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Reviewing PSI Exposure

Your annual review should consider:

Which Personal Services Business tests you currently meet.
Whether your distribution policy aligns with your personal work.
Whether retained profits reflect genuine commercial needs (e.g., saving for equipment).
Whether documentation reflects actual day-to-day operations.

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Structuring for Commercial Purpose

Your structure should exist for reasons such as:

Risk management and asset protection.
Insurance efficiency.
Administrative support.
Growth planning.

If the structure exists mainly for tax benefits, your risk increases.

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How Trinity Accounting Practice Supports You

At Trinity Accounting Practice, we specialise in working with medical professionals, allied health providers, consultants, and contractors to navigate these complex rules.

PSI Assessment

We review your contracts, clients, and income streams. We identify whether your income meets the Personal Services Income definition and test your position against all Personal Services Business tests.

Structural Review

We examine your current structure, distribution policies, and profit retention. We assess whether the structure reflects commercial intention and recommend adjustments to ensure compliance.

Documentation and Compliance

We help you create practical contracts, service agreements, and policies. If the ATO reviews your affairs, we support you with clear documentation of your position.

Ongoing Support

We assist you as your business grows, advising on new contracts, staff changes, and investments to help you stay ahead of ATO guidance.

Conclusion

Personal Services Income rules ensure fairness when income depends on your personal work. These rules prevent income splitting and tax-driven structures that do not reflect commercial activity.

Remember, the Personal Services Business tests help determine whether a business operates independently of its principal worker, but Part IVA adds another level of scrutiny regarding "dominant purpose."

With clear documentation, commercial purpose, and regular reviews, you can manage your position effectively. Trinity Accounting Practice supports medical professionals and contractors through these rules, helping them remain compliant while operating efficiently.

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ATO referance link : https://www.ato.gov.au/law/view/document?docid=DPC/PCG2025D5/NAT/ATO/00001

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New guideline: Personal Services Business and the application of Part IVA

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Trinity Accounting Practice

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02 9543 6804
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www.trinitygroup.com.au

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