Many professionals in Australia rely on their own skills to generate income. Doctors, dentists, consultants, and accountants often earn money based on their personal ability to diagnose, treat, advise, or solve complex problems. As a result, the Australian tax system treats some of that income differently. The challenge for professionals is to work out whether the money they earn is considered Personal Services Income (PSI) and, if so, how it affects the way their business can be structured.

Understanding this distinction is important. If your income is classified as Personal Services Income, the law may limit your ability to split profits or claim certain deductions. If it is not, you may have greater flexibility to structure your practice in a way that protects your assets and improves your tax position, as long as everything remains compliant with the guidelines set out by the Australian Taxation Office (ATO).

Understanding Personal Services Income and Personal Services Business Status

Personal Services Income (PSI) refers to income primarily derived from your personal skills or efforts. This can apply even when the money is paid to a company or trust. If the income falls within the PSI rules, the ATO usually treats it as your personal income and restricts what the entity receiving the funds can do with it.

There are, however, situations where a professional practice may qualify as a Personal Services Business. This occurs when the practice meets one of the Personal Services Business tests. These include:

  • Having more than one unrelated client
  • Employing or engaging others to do the work
  • Operating from dedicated business premises

When a practice meets the requirements, it is treated as a genuine business rather than a structure designed around one person’s skills.

Once you qualify as a Personal Services Business, you have more room to use a wider range of tax and business structures. This allows you to manage profits in a more strategic way while still operating within the rules.

Structuring Options When Personal Services Income Does Not Apply

Professionals who fall outside the Personal Services Income rules have several structure types available to them. Each option serves a different purpose and offers a different balance of flexibility, compliance, and long-term planning.

  • Company Structure: Provides a flat tax rate of 25 percent for base rate entities. It is often a good choice for those who want to reinvest profits into their practice or prefer predictable tax outcomes.
  • Discretionary Trust: Can distribute income to family members or a related company. This distribution approach can help reduce overall tax, provided the arrangement reflects genuine commercial activity and the distributions follow the trust deed.
  • Service Trust: Plays a useful role in larger or more complex practices. It can hold separate operations such as staffing, administration, or premises. When set up correctly and priced at market rates, it helps improve asset protection and simplifies the management of business functions.

When these structures are designed well, they help build resilience, improve tax efficiency, and support future succession planning. It is important that each structure operates for commercial reasons rather than for the purpose of avoiding tax.

The ATO’s Approach to Profit Allocation for Professional Firms

Even when PSI rules do not apply, the ATO still reviews how profits are shared within professional practices. Professional firms are expected to show that their profit allocation reflects genuine commercial behaviour rather than arrangements that shift income purely for tax advantages.

The ATO’s Practical Compliance Guideline 2021/4 sets out how it assesses the level of risk in a firm’s profit distribution. A practitioner is generally considered low risk, which the ATO refers to as the green zone, when the structure meets at least one of the following conditions:

  • The practitioner receives payment for their personal work that matches the market rate for their profession.
  • The practitioner receives at least half of the total profit either directly or through related entities.
  • The total professional income is taxed at an effective rate of 30 percent or more.

When a structure meets any one of these measures and is free from artificial or contrived arrangements, the ATO usually does not review it further. This allows practitioners to operate with confidence while still staying within the rules.

A Practical Example of a Green Zone Arrangement

Imagine a doctor who earns five hundred thousand dollars a year through a family trust. She pays herself a salary of two hundred and twenty thousand dollars, which reflects standard pay for someone with her experience. The trust distributes the remaining profit between her spouse and a related company that pays tax at the twenty-five percent company rate. Once all income is considered, the effective tax rate rises above thirty percent.

Her salary is commercially reasonable and the overall tax outcome aligns with the ATO’s expectations. As a result, her structure sits comfortably within the green zone and is unlikely to attract further review.

The Value of Getting Professional Guidance

Choosing the right structure for a professional practice involves more than picking a tax rate. It requires a balance between compliance, commercial logic, and long-term planning. A structure that works well for a medical specialist might not suit a consultant, and a structure ideal for a small practice may not scale well as the business grows.

At A Plus Accountant, we support professionals across Australia by reviewing their existing arrangements, assessing Personal Services Income exposure, and designing structures that fit within the ATO’s guidelines. Our aim is to help clients build practices that are both tax effective and compliant, without taking on unnecessary risk.

If you’re considering a new structure or want to check whether your current setup fits within the ATO’s expectations, get in touch with our team. We can walk you through your options and help you build a structure that supports your practice now and into the future.