Personal Services Income (PSI) and PCG 2025/5: What Medical Professionals and Contractors Need to Know
By Trinity Accounting Practice | Beverly Hills, Sydney NSW
Personal Services Income (PSI) rules apply to a broad range of medical professionals, allied health providers, specialists, consultants, and contractors across Australia.
These rules exist to ensure that income earned primarily from your personal skill, effort, and expertise is taxed appropriately — regardless of the legal structure through which you operate.
The Australian Taxation Office (ATO) monitors this area closely. In 2025, the ATO released updated guidance through PCG 2025/5, which clarifies how it will treat Personal Services Business arrangements and the application of Part IVA — the general anti-avoidance provision of the income tax law.
This guide explains the PSI rules in plain language, outlines the four Personal Services Business (PSB) tests, identifies high-risk areas for medical professionals and contractors, and sets out the practical steps you need to take to protect your position.
What Is Personal Services Income?
Personal Services Income is income earned mainly from your personal labour, skill, or expertise.
If you perform the work yourself and a client pays you because of your specific expertise — not because of assets, equipment, or other staff — the income is likely classified as PSI.
Crucially, the legal structure you use does not change the nature of the income. Whether you operate as a sole trader, a company, a trust, or a partnership, the ATO asks the same fundamental question:
Who performs the work, and what drives the income?
📎 ATO Reference: Personal Services Income
📖 Related reading: What Is Personal Services Income (PSI) in Australia?
When Income Is Classified as PSI
Income is PSI when your personal involvement is the primary driver of the fee. Common examples include:
- Medical consultations and patient treatment
- Surgery and specialist procedures
- Professional reports and assessments
- Contract work billed by time or per session
- Professional advice and consulting services
The common thread: if the income stops when you stop working, it is almost certainly PSI.
When Income Is Not PSI
Income is generally not PSI when other factors drive the earnings, such as:
- Business assets generating returns (e.g., diagnostic equipment, property)
- Staff performing the principal work (e.g., a clinic with multiple employed practitioners)
- A business model that operates independently of your personal involvement
A clinic that employs multiple practitioners, nurses, and administrative staff earns business income. The earnings depend on systems, staff, and client flow — not solely on one individual's effort — which shifts the classification away from PSI.
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The Four Personal Services Business (PSB) Tests
A business that earns PSI may still avoid the restrictive PSI tax rules if it passes at least one of the four Personal Services Business (PSB) tests. These tests assess whether the activity is a genuine business rather than an arrangement used primarily to reduce tax.
Passing one test is sufficient.
📎 ATO Reference: Personal Services Business tests
Test 1 — The Results Test
The Results Test is the strongest and most definitive test. To pass, you must meet all three conditions for at least 75% of your PSI:
- Result — You are paid to produce a specific, defined result
- Tools — You provide your own tools and equipment to complete the work
- Errors — You are responsible for rectifying defective work at your own cost
Most medical professionals do not meet this test because they are typically paid for time, consultations, or procedures — not a defined "result" with liability for correction.
For this reason, the remaining tests are generally more relevant for practitioners.
Test 2 — The Unrelated Clients Test
You pass this test when:
- You provide services to at least two unrelated clients
- You obtained those clients through public advertising or public offers (not via a single referral source or hospital arrangement)
The key consideration is how clients find you. Medical professionals who maintain a visible public practice — through a website, directory listings, or advertising — often meet this test.
Those who source all work through a single hospital, clinic, or labour hire arrangement generally do not.
Test 3 — The Employment Test
This test focuses on staffing. To pass, you must meet one of the following:
- Principal Work — Other people perform at least 20% of the principal (market value) work
- Apprentices — You employ one or more apprentices for at least half the income year
Important: Administrative and reception staff do not qualify because they do not perform "principal work." However, a physiotherapy practice that employs qualified junior physiotherapists, or a medical practice with employed doctors, may meet this test.
Test 4 — The Business Premises Test
This test applies when you maintain dedicated business premises that are:
- Owned or leased by you (not a third party)
- Used exclusively for business purposes
- Physically separate from your private home
- Under your exclusive day-to-day control
Many medical professionals fail this test because they work in rooms supplied by a third-party clinic or hospital, or they share facilities that they do not exclusively control.
What Happens When You Do Not Pass Any PSB Test
If you do not pass any of the four tests, the PSI rules apply in full. This produces two significant consequences:
1. Deductions become restricted
You can still claim expenses that directly relate to earning the income, including:
- Work-related tools and equipment
- Professional indemnity insurance
- Registration and compliance fees
- Training directly related to your current role
- Travel directly linked to service delivery
You generally cannot claim:
- Home occupancy costs (unless very strict conditions apply)
- Payments to associates (spouse or family members) who do not perform core work
- Expenses that provide a private benefit
- Motor vehicle expenses not connected to income generation
2. Income is attributed directly to the individual
The income is taxed at your personal marginal rate — regardless of the structure you use.
This prevents:
- Income splitting — you cannot distribute the income to family members in lower tax brackets
- Profit retention — you cannot retain profits within a company to access the lower corporate rate (currently 25% for base rate entities)
The structure remains in place for commercial and legal reasons (such as liability protection), but the income tax outcome changes significantly.
ATO Guidance — PCG 2025/5 and Part IVA
In 2025, the ATO released PCG 2025/5, providing updated practical guidance on Personal Services Business arrangements and the application of Part IVA of the Income Tax Assessment Act 1936.
📎 ATO Reference: PCG 2025/5 — Personal Services Business and the application of Part IVA
Why the ATO Updated Its Guidance
The ATO has observed arrangements where:
- Income flowed to family members who performed no work in the business
- Companies retained PSI profits solely to access the lower corporate tax rate
- Trusts distributed PSI to beneficiaries with no business involvement
- Structures produced lower tax outcomes without any genuine commercial purpose
PCG 2025/5 signals that the ATO is taking a more active and structured approach to reviewing these arrangements.
How Part IVA Works
Part IVA is the general anti-avoidance rule in Australian tax law. It focuses on the dominant purpose of an 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 genuine commercial activity
If the dominant purpose of the arrangement is tax reduction — rather than a legitimate commercial objective — the ATO may cancel the tax benefit and apply significant penalties.
When Part IVA Applies — Even if You Pass a PSB Test
Critically, passing a Personal Services Business test does not automatically protect you from Part IVA scrutiny.
Part IVA may still apply when:
- A company retains large profits that relate strictly to your personal work, with no genuine commercial reinvestment purpose
- A trust distributes income to family members who have no involvement in the business
- Service fees or management fees lack a genuine commercial basis or market-rate justification
- Contracts and documentation do not accurately reflect what actually happens in practice
High-Risk Areas for Medical and Professional Practitioners
The ATO has identified recurring patterns that attract attention in this sector.
Using a Company or Trust for Locum or Contract Work
Many doctors, specialists, and consultants operate through companies or trusts. These structures offer valid commercial benefits — liability protection, business continuity, and administrative efficiency.
However, when the income is PSI, the ATO expects distributions to reflect the work performed.
Retaining profits in a company beyond genuine business needs, or distributing them to non-working family beneficiaries through a trust, significantly increases your audit risk under both the PSI rules and Part IVA.
Room Rental and Service Fee Arrangements
Medical practitioners frequently work in rooms supplied by clinics, paying service fees or a percentage of billings.
- Lower risk — arrangements that reflect genuine market-rate support services with proper documentation and commercial justification
- Higher risk — arrangements that appear designed primarily to shift income to a lower-taxed entity, particularly where the fee is not commercially justifiable
Income Splitting Through Trusts
Trust structures allow for flexible income distributions. However, when income is PSI, distributions to family members who do not contribute to the work are a significant red flag.
In these cases, the PSI rules generally override trust distribution resolutions — meaning the income is attributed back to the individual professional regardless of what the trust deed or trustee resolution says.
📖 Related reading: Family Trust vs Discretionary Trust
📖 Also see: The Ultimate Guide to Professional Practice Structures
What Documentation You Need
Good documentation is your most effective defence during an ATO review or audit.
Contracts
Your contracts should clearly establish:
- The nature and scope of the services provided
- Payment terms — whether based on results or time
- Responsibility for rectifying errors (indemnity obligations)
- Ownership of tools and equipment used in the work
Client Acquisition Evidence
If you rely on the Unrelated Clients Test, you need clear evidence of public advertising or public offers. This includes:
- Website with visible public-facing content
- Online directory listings (e.g., Healthengine, industry directories)
- Advertising material (digital or print)
- Agency or platform arrangements that make your services publicly available
This evidence demonstrates that your work is open to the market — not tied to a single employer or referral source.
Staff and Support Records
If you rely on the Employment Test, maintain:
- Timesheets and rosters showing hours worked by each employee
- Job descriptions clearly defining principal work responsibilities
- Payroll records showing wages paid to employees performing core work
These documents demonstrate who performs the principal work and in what proportion.
Annual Structural Review
Your PSI classification is not fixed. As your practice evolves — client mix, staffing levels, premises arrangements — your position against the four tests may change from year to year.
Your annual review should consider:
- Which PSB tests you currently meet, and whether your evidence supports that position
- Whether your distribution policy aligns with the work actually performed
- Whether retained profits reflect genuine commercial needs (e.g., equipment purchases, working capital)
- Whether your contracts and documentation accurately reflect current operations
📖 Related reading: Difference Between Employees and Independent Contractors
Structuring for Commercial Purpose
Under PCG 2025/5, the ATO expects your structure to exist for genuine commercial reasons, such as:
- Risk management and asset protection
- Insurance efficiency
- Providing administrative and operational support
- Planning for practice growth or succession
If the primary reason your structure exists is tax reduction — rather than these commercial objectives — your risk exposure under Part IVA increases substantially.
The key test is always: could you explain your structure to the ATO with reference to genuine business reasons, beyond tax outcomes?
📖 Related reading: Why Does Business Structure Matter?
📖 Also read: Understanding Division 7A Loans
How Trinity Accounting Practice Supports Medical Professionals and Contractors
At Trinity Accounting Practice, we specialise in working with medical professionals, allied health providers, specialists, consultants, and contractors to navigate PSI rules, PCG 2025/5, and the broader compliance landscape.
PSI Assessment
We review your contracts, client arrangements, and income streams to determine whether your income meets the PSI definition and test your position against all four Personal Services Business tests.
Structural Review
We examine your current structure, distribution policies, and profit retention strategy — assessing whether the arrangement reflects genuine commercial intention and recommending adjustments to ensure ongoing compliance with ATO guidelines.
Documentation and Compliance
We help you establish practical contracts, service agreements, and internal policies. If the ATO reviews your affairs, we provide clear documentation of your position and support you through the process.
Ongoing Support
As your practice grows, we advise on new contracts, staffing changes, premise arrangements, and investment decisions — keeping you ahead of ATO guidance as it evolves.
Our services for professionals include:
We work with professionals across a range of specialised niches:
Book a PSI and Structure Review
If you are a medical professional, contractor, or allied health provider operating through a company or trust, now is the right time to review your position against the PSI rules and PCG 2025/5 guidance.
A short consultation can clarify your risk exposure and identify the documentation and structural adjustments needed to protect your position.
Trinity Accounting Practice
📍 159 Stoney Creek Road, Beverly Hills NSW 2209
📞 02 9543 6804
📅 Book an Appointment with Ramy Hanna
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Disclaimer: This article provides general information only and does not constitute professional tax advice. Tax laws are complex and subject to change. Always consult with a qualified registered tax agent regarding your specific business circumstances before making financial decisions based on tax considerations.
