Income splitting has long been a popular strategy for doctors looking to manage tax, cash flow and family finances more effectively. By using a company, trust or related entity, income from medical work can be retained, distributed, or paid out in ways that support broader financial goals, while still operating within the tax rules.
However, the ATO has now made its position very clear. With the release of Practical Compliance Guideline PCG 2025/5, income splitting arrangements involving doctors are firmly on the radar, and the focus is squarely on personal services income (PSI).
In simple terms, income splitting occurs when income earned by one person is redirected to others who pay tax at lower rates, commonly a spouse, adult children, a family trust or a related company. For doctors, this usually involves an interposed entity that contracts with hospitals, practices or other clients, while the doctor personally performs the work. This income is classified as PSI. And that distinction matters, regardless of how the structure is set up.
A Personal Services Business (PSB) is an entity (company, trust, or partnership) that earns income primarily through the personal efforts or skills of an individual, operating more like a business than an employee.
One of the biggest misunderstandings the ATO is addressing is the idea that qualifying as a Personal Services Business makes income splitting automatically acceptable. While PSB status can mean the PSI attribution rules do not apply, it does not provide blanket protection.
The ATO has been explicit that Part IVA of the Income Tax Assessment Act 1936 – the general anti-avoidance rules – may still apply. If the dominant purpose of an arrangement is to reduce tax by diverting PSI away from the doctor who actually earned it, the ATO can and will intervene.
PCG 2025/5 outlines several clear red flags. Arrangements are more likely to attract scrutiny where doctors are paid less than a commercial, arm’s-length rate for their work, or where PSI is distributed to family members or related entities that did not perform the services.
Allocating income based on marginal tax rates rather than genuine contributions is another key risk factor, particularly where the overall outcome is significantly less tax than if the doctor had earned the income personally. Trust distributions to spouses or
adult children without real involvement in the practice are repeatedly flagged as higher-risk scenarios.
The ATO has also made it clear what they are not concerned about. Lower-risk arrangements typically involve the doctor receiving all, or the vast majority, of the PSI and being remunerated in line with the value of their work. Payments to family members reflect real services performed and are made at market rates.
Profit retention within a company or trust may also be acceptable, but only where there is a clear, documented commercial purpose, not simply tax deferral.
If you earn the income, the ATO expects it to broadly flow back to you. Companies and trusts can still play an important role in asset protection, practice management and commercial planning, but using them to split PSI purely to reduce tax is now explicitly high risk.
If your structure hasn’t been reviewed recently, or income distributions don’t clearly align with who actually does the work, now is the time to take a closer look. Getting it wrong doesn’t just mean more tax, it can also mean penalties, interest and unwanted ATO attention. Contact our experts today for personalised advice