ATO PCG 2025/5 – Personal services businesses and Part IVA
In the past, allocating some business income to a spouse or retaining profits in your company generally hasn’t attracted ATO attention where the Personal Services Rules were met.
However, under ATO Practical Compliance Guideline PCG 2025/5, these arrangements now need to reflect what would be considered commercially reasonable based on the work actually performed.
In simple terms, payments (including salary, distributions or other benefits) should be in line with what you would pay an independent third party doing the same role—taking into account time, skills, responsibilities and market rates.
Similarly, keeping excess profits in the company without a clear commercial reason—especially where it reduces or delays personal tax—may attract ATO scrutiny under Part IVA.
If arrangements go beyond what would be considered reasonable, or aren’t properly supported, the ATO may review and adjust them.
We recommend reviewing how income is allocated and any profit retention strategies to ensure they are commercially supportable and well documented.
Next steps
- Review current salary/dividend split vs market benchmarks
- Document commercial rationale (role, hours, value)
- Flag any high retained earnings for discussion
We ask that you review the examples in PCG 2025/5 (see link here) and advise if you wish to discuss. The ATO will look at compliance from 30 June 2027
Previously, allocating a portion of business income to your spouse and/or retaining profits within your Company has not drawn attention from the ATO if the Personal Services Rules have been met; however, under ATO Practical Compliance Guideline PCG 2025/5, both income splitting and the retention of funds must reflect commercially reasonable outcomes having regard to the underlying work performed and the economic reality of the arrangement.
This means remuneration (including any distributions or benefits) should be consistent with what would be paid to an unrelated party undertaking the same duties, having regard to factors such as time spent, skills, responsibilities, and market rates. Similarly, retaining excess profits in the Company without a clear commercial rationale—particularly where this defers or reduces personal tax—may attract ATO scrutiny under Part IVA. Amounts or arrangements that exceed a commercial benchmark or lack substantive justification may be subject to increased ATO review and potential adjustment. We therefore recommend reviewing proposed allocation and profit retention strategies to ensure they align with arm’s length principles and are appropriately documented.