PSI Rules, Income Splitting and the ATO’s Latest Focus: What Professionals and Consultants Need to Know in 2026
- Future Accounting
- a few seconds ago
- 6 min read
Written by: Melissa Cunliffe
Personal Services Income (PSI) Australia rules are back in the spotlight as the Australian Taxation Office (ATO) increases its focus on income splitting and the use of companies and trusts by consultants and contractors.
For many professionals operating through a company or discretionary trust, the structure can provide asset protection and commercial flexibility. However, when the income generated is primarily the result of an individual’s labour, expertise or personal effort, the Personal Services Income (PSI) Australia rules may apply regardless of the structure used.
Recent ATO guidance and compliance activity signal a stronger focus on ensuring that income derived from personal services is taxed appropriately. Understanding how PSI works, and when income splitting may raise concerns, is increasingly important for business coaches, IT consultants, advisors and other professionals.
This guide explains what Personal Services Income (PSI) Australia means, how the rules apply, and what the ATO is currently targeting.
What is personal services income (PSI) in Australia?
Personal Services Income (PSI) Australia refers to income that is mainly a reward for an individual’s personal effort, skills or expertise rather than income generated from assets, equipment or employees.
A useful way to think about PSI is to ask whether the income would stop if the individual stopped working. If the answer is yes, the income is likely to be PSI.
Common examples include consulting, advisory services, coaching, specialist contracting or professional services where clients engage a particular individual for their expertise.
Importantly, Personal Services Income can be earned directly as a sole trader or through a company, partnership or trust. The structure used does not change the underlying nature of the income.
What happens if your income is classified as PSI?
If income is classified under the Personal Services Income (PSI) Australia rules, the tax law may effectively “look through” a company or trust structure and attribute the income back to the individual who performed the work.
This means:
The income is taxed in the hands of the individual who performed the services
Deductions available to the entity may be limited
Income cannot be freely distributed to family members or other beneficiaries
These rules exist to prevent individuals from reducing tax by diverting income generated by their personal labour into lower‑taxed structures.
Understanding the personal services business tests
The PSI rules do not apply where an individual or entity qualifies as a Personal Services Business (PSB).
There are four main tests used to determine this:
Results test – The contractor is paid to achieve a specific outcome and is responsible for fixing defects.
Unrelated clients test – The business provides services to multiple unrelated clients, often obtained through advertising or tenders.
Employment test – The business has employees or contractors who perform a significant portion of the work.
Business premises test – The business operates from separate commercial premises that are physically distinct from the individual’s home or clients’ premises.
Passing one of these tests can allow the business to operate more like a genuine enterprise rather than an extension of the individual.
Why income splitting is under the microscope
Income splitting occurs when income generated by one individual’s work is distributed to other people, often family members, who may be taxed at lower marginal rates.
Historically, many professionals operated through discretionary trusts or companies where profits could be distributed among family members.
However, under the Personal Services Income (PSI) Australia framework, this approach can raise concerns if the income is fundamentally derived from the effort and expertise of a single individual.
If income from personal services is diverted to associates who did not contribute to generating the income, the ATO may view the arrangement as inappropriate.
The ATO’s latest guidance on PSI and income splitting
The ATO has recently released updated guidance outlining how it will apply compliance resources to arrangements involving personal services entities.
This guidance emphasises that even if a business technically passes one of the Personal Services Business tests, anti‑avoidance rules may still apply where the primary purpose of the structure is to reduce tax.
The ATO is particularly focused on arrangements where:
PSI is distributed to family members
Profits are retained in companies taxed at lower corporate rates
Associates receive payments that do not reflect their actual contribution
Structures exist primarily for tax outcomes rather than commercial reasons
These developments mean many professionals should review their arrangements to ensure they align with the intent of the Personal Services Income (PSI) Australia regime.
What the ATO considers low risk
The ATO has indicated that arrangements are generally considered lower risk where:
The individual generating the income is taxed on that income
Payments to associates reflect genuine services performed
Salaries paid to family members are commercially reasonable
Profits retained in companies have a clear business purpose
In other words, if the structure reflects genuine commercial activity rather than tax minimisation, it is less likely to attract scrutiny.
Industries commonly affected by PSI rules
Under the Personal Services Income (PSI) Australia rules, certain industries are more likely to fall within the regime because income is heavily dependent on individual expertise.
Examples include:
Business coaching and consulting – Clients engage the individual for strategic advice or mentoring.
IT consultants and contractors – Many professionals work on project or day‑rate contracts where the value lies in their personal technical expertise.
Fractional CFO and advisory services – Businesses engage experienced finance professionals for their personal knowledge and experience.
In each of these examples, the income often stops when the individual stops working, which is a key indicator of PSI.
Example: when income is not personal services income
Not all income earned by an individual is classified as PSI.
The key question is whether the income is mainly generated by the individual’s labour or by assets, equipment or a broader business operation.
Truck owner‑driver example
Consider a contractor who owns a prime mover and trailer and contracts with logistics companies to transport goods.
Although the contractor is driving the vehicle, the income is generally not classified as Personal Services Income because the income is primarily generated by the truck and transport equipment.
In this scenario:
The truck is a significant income‑producing asset
The contractor operates a transport business
The income could still be generated if another driver operated the vehicle
Because the income is derived from the equipment and business operation rather than purely the individual’s labour, the PSI rules are less likely to apply.
Machinery operator example
Similarly, a contractor who owns and operates specialised machinery such as an excavator or crane hired to construction sites is typically running an equipment‑based business.
Clients are paying for the use of the machinery, not just the individual operating it.
Contrast example: business consultant income and PSI
Now compare this with a business consultant who operates through a company and provides advisory services.
Clients engage the consultant specifically for their experience, insight and expertise.
If the consultant stops working:
The income stops immediately
There are no significant assets generating revenue
The value lies in the individual’s personal expertise
Even if the consultant invoices through a company or trust, the income may still fall under the Personal Services Income (PSI) Australia rules because it is fundamentally derived from personal labour.
ATO red flags to watch for
With the renewed focus on Personal Services Income (PSI) Australia, the ATO has highlighted several arrangements that may attract closer scrutiny.
These include:
Income being distributed to family members who have not contributed to the business.
Family members receiving salaries or service fees that do not reflect their actual work.
Personal services income being retained in companies to access lower corporate tax rates.
Structures with little commercial purpose beyond reducing tax.
Situations where one individual performs all the work and generates all revenue.
What this means for consultants and professional service providers
The increased focus on Personal Services Income (PSI) Australia rules does not mean that using companies or trusts is inappropriate. Many structures are used for legitimate commercial reasons including asset protection, risk management and long‑term business planning.
However, professionals should ensure their arrangements align with how the PSI rules are intended to operate.
Reviewing structures early can help ensure that income attribution, remuneration and distributions remain compliant with ATO expectations.
Review your PSI position before the ATO does
For consultants, advisors and contractors, understanding how Personal Services Income (PSI) Australia rules apply to your business is essential to avoiding compliance risks.
If you operate through a company or trust and most of your income is generated from your personal expertise, it may be worth reviewing whether PSI rules could affect your tax position.
Our team at Future Accounting Group regularly helps professionals review PSI exposure, assess business structures and ensure arrangements remain commercially sound and ATO compliant.
If you would like clarity on how PSI applies to your situation, book an appointment with our team today. A proactive review can help ensure your structure supports your business goals while remaining fully compliant with Australian tax law.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
