In 2024, the ATO released Draft Practical Compliance Guideline (PCG) 2024/D2 initially expressing their view in considering the application of Part IVA (general anti-avoidance provisions) to alienation arrangements involving personal services entities. Moore Australia published some initial thoughts in an article published at that time here.
More than 12 months later the ATO have now finalised their view with the release of Practical Compliance Guideline PCG 2025/5 on 28 November 2025. The final PCG reaffirms the ATO’s view that Part IVA can apply even where the PSI rules do not, that is, even where a personal services entity (PSE) qualifies as a personal services business (PSB). While passing the PSB tests generally removes PSI attribution, the ATO is concerned that some taxpayers use PSBs to implement tax-effective structures that alienate income from the individual who earned it. The final guideline provides expanded guidance and clarity on:
- What arrangements are considered low-risk versus higher-risk;
- How the ATO will allocate compliance resources; and
- What taxpayers should do to avoid scrutiny.
PCG 2025/5 is particularly relevant for professionals such as consultants, IT experts, engineers, doctors and dentists but also has application to other professional trade industries such as plumbers, electricians etc. who operate through entities and retain profits or distribute income to associates.
ATO Concerns
The ATO is focused on arrangements that evidence:
- Retention of profits without commercial purpose: for example, leaving large profits in a company indefinitely without plans for reinvestment or business growth.
- Income splitting: distributing income to family members or associates taxed at lower rates, even if they provide little or no services.
- Diversion of income to entities with losses: using related entities with carried-forward tax losses to absorb PSI and reduce taxable income.
- Uncommercial remuneration: paying associates amounts that do not reflect the value of their contribution.
These arrangements undermine the integrity of the PSI rules and can result in significant tax advantages. Such practices are considered high-risk under PCG 2025/5.
ATO’s Compliance Approach
The ATO will adopt a risk-based approached when considering arrangements. For low-risk arrangements, if your structure aligns with low-risk indicators and you follow PCG 2025/5 in good faith, the ATO will allocate minimal compliance resources. This means fewer audits and less scrutiny.
Structures involving income splitting, unjustified profit retention, or diversion to loss entities will be higher-risk arrangement and attract attention with possible Part IVA application.
Next steps
Check your compliance under PCG 2025/5 and reduce your risk by:
- Reviewing the application of the PSI tests to your circumstances: Confirm whether the PSI rules apply and whether you pass the results test or other tests.
- Assessing your risk zone: Compare your arrangement against PCG 2025/5 examples.
- Documenting your commercial purpose: Keep clear records for retained profits and remuneration decisions. The ATO emphasises maintaining clear records to demonstrate commercial purpose. This includes business plans, board minutes, and evidence of genuine reinvestment strategies.
- Avoid income splitting: Ensure payments to associates reflect actual services.
- Plan for transition: Adjust arrangements before 30 June 2027.
- Seek professional advice: Consider obtaining written advice or ATO guidance for complex scenarios.
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Why does all this matter?
PCG 2025/5 is a critical guideline for taxpayers earning PSI through entities and signals the ATO’s intent to closely monitor arrangements that artificially reduce tax. By clearly defining low-risk and higher-risk zones, the guideline provides a roadmap for compliance and certainty. Taxpayers have until 30 June 2027 to restructure arrangements into low-risk zones. This gives time to review current practices and make necessary changes. Failing to align with these principles risk significant scrutiny, application of Part IVA, and potential penalties. Get in touch with Moore Australia now to assist.
