Personal Services Income (PSI) Through a Company or Trust: Why Passing the PSB Tests Does Not Eliminate Part IVA Risk

Many small business owners, IT contractors, consultants, doctors, and medical practitioners operate through a company or trust that qualifies as a personal services business. A common assumption is that once the Personal Services Business (PSB) tests are satisfied, the structure is effectively “safe” from further scrutiny.

In practice, that assumption can be dangerous.

Even where a company or Trust qualifies as a Personal Services Business (PSB), there can still be a real risk of an ATO review or audit under Part IVA, the general anti-avoidance provisions of the tax law. The focus shifts away from the mechanical Personal Services Income (PSI) rules and toward whether the structure reflects genuine commercial behaviour or whether it is primarily being used to reduce tax on income generated by personal effort.

This distinction is critical for professionals earning Personal Services Income (PSI), particularly where profits are retained, income is split, or associates are paid.

Why Passing the PSB Tests is Not the End of The Story

Qualifying as a Personal Services Business (PSB) simply means the PSI attribution rules do not automatically apply. It does not mean the arrangement is immune from further review.

The Australian Taxation Office has made it clear that Part IVA remains relevant even where PSB status exists. The key question becomes whether the way income flows through the structure aligns with commercial reality.

If income is mainly generated by the personal skills, effort, or reputation of one individual, the ATO will closely examine whether that individual is being appropriately taxed on that income, regardless of the structure used.

In simple terms, the structure must behave like a real business, not just exist as a vehicle to change who pays the tax.

What PART IVA is Really Targeting in PSI Structures 

Part IVA is not concerned with whether you used a company or trust. It is concerned with outcomes.

Where the dominant purpose of an arrangement is to obtain a tax benefit, such as reducing overall tax by diverting income away from the individual who earned it, the ATO may apply Part IVA even if the PSB tests are technically satisfied.

This is why two contractors with identical income can face very different outcomes depending on how their structure operates in practice.

The ATO looks at questions such as:

• Who actually earns the income through their labour or expertise?
  
• Who controls the work and bears the commercial risk?
  
• Where does the profit ultimately end up?
  
• Is the income flow consistent with normal commercial behaviour?
  

Lower Risk PSB Arrangements – Genuine Commercial Behaviour 

Lower risk arrangements tend to look boring from a tax perspective. They do not attempt to significantly alter who pays tax on income derived from personal effort.

Common characteristics include the following.

• The net PSI is ultimately distributed to the individual whose personal services generated the income and taxed at their marginal tax rate. While income may flow through a company or trust, the end result broadly mirrors what would have occurred if the individual earned it directly.
• The individual is paid a market-based salary or distribution that reflects the value of the work they personally perform. This remuneration is commercially realistic for their role, experience, and hours worked.
• Payments to associates are limited to genuine services that directly contribute to earning the PSI. For example, administration, bookkeeping, or practice management services that are actually performed and priced at commercial rates.
• Any delay between earning PSI and paying it out is temporary and driven by non-tax reasons. Short-term retention for cash flow timing, invoicing cycles, or payroll processing is generally not problematic.
• Superannuation contributions are made by the entity where the individual is treated as an employee, and those contributions align with normal employment arrangements.
• Profits are retained only where there is a clear commercial reason, such as funding working capital, managing cash flow volatility, or acquiring genuine business assets. Importantly, those plans are actually carried out, not merely stated.

These arrangements tend to demonstrate that the structure exists to operate a business, not to artificially redirect income.

Higher Risk PSB Arrangements – Likely to Attract ATO Scrutiny 

Higher risk arrangements are those where the structure produces a materially lower tax outcome than would reasonably be expected if the individual earned the income directly. These arrangements are more likely to be reviewed under Part IVA, even where PSB status technically exists.

Higher risk indicators commonly include:

• Net personal services income is distributed to another entity or individual, resulting in a lower overall tax outcome than if the individual had received the income directly.
• The individual receives less remuneration than would reasonably be expected for the value of their personal services, experience, or hours worked.
• No income, or only minimal income, is paid to the individual who actually performed the services.
• Profits are claimed to be retained for working capital or business growth, but there is no evidence that those funds are used for genuine commercial purposes.
• Income is split with associates or family members who did not genuinely contribute to earning the personal services income.
• Payments are made to associates or service entities that are not commercially reasonable for the services provided, or where the services are unnecessary or inflated.
• Personal services income is retained in a company or trust beyond what is commercially required and later accessed for private use, including through Division 7A loans.

These features often suggest that the structure is being used primarily to reduce tax rather than to carry on a genuine business.

Why Professionals are A Key Focus Area

Doctors, medical practitioners, IT contractors, engineers, consultants, and similar professionals are frequently reviewed because their income is often highly attributable to personal effort rather than scalable systems or capital.

Even where there are staff, rooms, equipment, or support functions, the ATO often views the professional’s personal skill as the primary income driver.

This makes profit retention, income splitting, and associate payments particularly sensitive in these industries.

What’s Next 

Passing the PSB tests is only one part of the analysis. For anyone earning personal services income through a company or trust, the real exposure often sits in how profits are paid, retained, and ultimately accessed. These issues are highly fact-specific, and small differences in behaviour can significantly change the ATO risk profile.

If you are unsure whether your current structure reflects genuine commercial behaviour or could attract attention under Part IVA, it is worth having it reviewed by an adviser experienced in PSI and PSB arrangements. The team at Investax regularly reviews these structures for contractors, consultants, and medical practitioners and can provide practical guidance before issues arise.

We offer a 15-minute free consultation to discuss your tax, property investment and business needs. Book your complimentary consultation now.

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