The ATO has released the Practical Compliance Guide (PCG) 2025/5, providing updated guidance on how it approaches compliance for arrangements involving personal services income (PSI) earned through business structures such as companies, trusts or other entities.

In this article, LDB’s Sylviana Martinus and Krystal Siow examine the PCG 2025/5 and how this may affect you at tax time.

How the ATO assesses PSI arrangements

Where PSI is redirected or retained away from the individual who performed the services through a personal services entity (PSE) operating as a personal services business (PSB), the ATO refers to this as ‘alienation’. This guideline outlines how the ATO assesses the risk of these arrangements and when it may apply compliance resources, including consideration of Part IVA, or the general anti-avoidance rule.

A key feature of PCG 2025/5 is its risk-based framework. The ATO categorises arrangements into low or higher compliance risk depending on the likelihood of attracting scrutiny.

This assessment focuses on:

• how PSI is distributed
• whether profits are retained within an entity
• whether payments to related parties are commercially justifiable

The guideline sets out specific indicators to help determine where an arrangement sits on the risk spectrum.

What is considered low risk?

Arrangements are generally considered low compliance risk where:

• PSI is distributed to the individual who performed the services and taxed at their marginal rate
• remuneration paid to the individual and any associates reflects the value of the personal services provided
• any deferral of tax is temporary and driven by factors outside the individual’s control or supported by non-tax reasons
• PSI retained within the entity is temporary, supported by a clear commercial purpose, and that intention is followed through
• the PSE makes superannuation contributions on behalf of the individual, where they are an employee, for the purpose of providing a superannuation benefit

What increases the risk of ATO scrutiny?

Arrangements may fall into higher risk categories where there are indicators of tax-driven behaviour, including:

• PSI being distributed to another entity where it is taxed at a lower rate than the individual
• remuneration paid to the individual or associates not reflecting the value of services provided
• the PSE not distributing PSI to the individual who performed the services, or diverting it to associates who have not meaningfully contributed
• PSI being retained:
  • without an operational need
  • where the intention to retain is not carried out and there is no commercial justification
  • in amounts exceeding what is required for a clear commercial purpose and available for personal use

When will the ATO take action?

The ATO will use the risk level of an arrangement to determine whether compliance resources should be applied and whether Part IVA should be considered.

Entities with higher-risk arrangements are encouraged to review and adjust their structures before 30 June 2027. Where a genuine effort is made to move into a lower-risk position, the ATO has indicated it will not apply compliance resources under this guideline.

Does Part IVA apply to personal services businesses?

PCG 2025/5 reinforces that even where an entity qualifies as a personal services business and is not subject to the PSI rules, Part IVA can still apply.

If alienation arrangements result in a tax benefit, the ATO may apply the general anti-avoidance provisions regardless of PSB status.

Why correct PSI classification matters

It remains critical for individuals earning PSI to correctly assess whether they qualify as a PSB. Incorrect self-assessment, combined with reliance on alienation arrangements, may result in increased ATO scrutiny and potential application of anti-avoidance provisions.

Speak to an LDB advisor

At LDB, our accountants and advisors, based in Blackburn in Melbourne’s City of Whitehorse, can help you review your PSI arrangements and assess whether they align with the latest ATO guidance.

If you are unsure how PCG 2025/5 may affect your structure, we can work with you to reduce risk and ensure compliance.

Call us on (03) 9875 2900 or get in touch online to discuss your situation. You can also follow LDB on LinkedIn for updates on tax, superannuation and business advice.