If you operate a Personal Services Business (PSB), a company or trust through which you provide professional or trade services, you may have assumed that once you're outside the strict Personal Services Income (PSI) rules, you have free rein over how profits are split or retained. New ATO guidance makes clear that isn't the case: the general anti-avoidance rule, Part IVA, can still apply to profit allocation arrangements that shift or retain income away from the person whose skill and effort actually generated it.

The good news is the ATO has been explicit about what it considers low risk versus high risk. Here's what that guidance actually says.

Low risk: arrangements the ATO is comfortable with

Distributing net PSI to the person who earned it‍

If the net Personal Services Income earned by your business,, after allowable deductions, is distributed in the same income year to the individual whose services generated it (whether as salary, dividend, or otherwise), there's no tax benefit and Part IVA has nothing to bite on.

Paying a genuine salary to a family member‍

Your business can pay bona fide remuneration to an associate, commonly a spouse, for real work they perform, provided the amount is reasonable relative to the actual services they provide. This covers both principal work and administrative tasks. The critical word is genuine: the ATO expects to see evidence of an actual employment relationship, ideally a written agreement, along with proof the work was really done. Paying a spouse more than their work is worth is a red flag, not a low-risk feature.

Providing superannuation support for a family member who works in the business‍

Where an associate is genuinely employed by the PSB, super contributions made on their behalf are treated as low risk. even wherethose contributions, combined with a reasonable salary, exceed the market valueof the work performed. This reflects a long standing ATO position that using an entity structure for commercial reasons (for example, because clients won't contract directly with individuals) with no unusual features doesn't attract Part IVA.

Temporarily retaining profits for a clear commercial purpose and following through‍

The ATO accepts profit retention as low risk where there's a genuine business reason and the business actually does what it said it would. The guidance gives some illustrative examples:

• A medical practitioner's company retains funds one year specifically to buy a new practice management system, then pays out the leftover amount once the purchase is made.

• A  web designer's company retains funds during an industry downturn specifically to cover loan interest and wages, then uses it exactly for that purpose the following year.
• An IT specialist's company retains funds during the start-up phase to cover early cash flow gaps, consistent with a documented business plan.

In each case, what makes the arrangement low risk is the combination of a genuine commercial reason and actually carrying it out. Retaining profits "just in case," with no real plan, doesn't get the same protection.

Paying an associate a commercial return on a genuine investment in the business‍

Provided the return is proportionate to their actual investment risk and the person who did the work still receives asignificant share of the income.

A temporary, involuntary deferral of tax‍

The ATO's own example is a business owner retaining profits in the company because they're unable to work due to a serious medical procedure.

High risk: what draws ATO attention

Splitting income with someone who didn't earn it, purely to reduce tax

‍This is the core concern; net PSI ending up with a spouse, adult child, related trust, or bucket company where the recipient didn't provide meaningful services and the overall tax bill drops as a result.

Paying the person who did the work less than their services are worth

‍The ATO's position is firm here: you can't sidestep Part IVA by paying the test individual a benchmarked "market salary"if that amount is less than the actual net PSI they generated for the business.

Retaining profits for a stated commercial purpose and then not following through‍

If a business claims funds are being retained for working capital or a specific purchase, but the money isn't used for that purpose and keeps sitting in the company for no real reason (sometimes later accessed personally via a Division 7A loan), that undermines the commercial justification entirely.

Importantly, having one or two high-risk features doesn't automatically mean Part IVA will apply — the ATO looks at the overall picture, weighing up the balance of low-risk and high-risk factors. But the more an arrangement leans toward the high-risk end, the more likely it is to attract a closer look, particularly where the amounts involved are significant.

The takeaway

If your business is a PSB and you've been splitting income with family members or retaining profits in the company, it's worth testing the arrangement against these indicators specifically, not just relying on thefact that you qualify as a PSB in the first place. Genuine, documented arrangements that reflect real work and real commercial decisions are well supported by this guidance. Arrangements built mainly to reduce tax, without much behind them, are exactly what the ATO is now looking for.

This article is general information only and does not constitute tax advice. Whether a specific income-splitting or profit-retention arrangement is low or high risk depends on your individual facts. Contact Causbrooks to review your business structure against the ATO's current guidance.