ATO income splitting crackdown: what professionals and business owners need to know

The Australian Taxation Office (ATO) has released updated guidance that could affect thousands of professionals, tradespeople, and small business owners who use trusts, companies, or partnerships to structure their income. If you're a lawyer, doctor, architect, accountant, IT professional, electrician, plumber, or any other skilled professional operating through a business structure, this is essential reading.

What’s the problem?

The ATO has identified an increase in the number of cases where professionals and skilled tradespeople operating their businesses through an entity structure which is a personal services business, have diverted income to associates (‘income splitting’) or retained profits in the entity (‘retention of profits’) to lower their tax liability. That is, the professional earns the income from their professional skills, but this income is either being distributed out to other people (in the form of a salary for work that is out of proportion to the contribution made) or retained in a company to avoid or lower the amount of tax that the professional would have paid had they recognised.

On 28 November 2025, the ATO released Practice Compliance Guidance PCG 2025/5 to address the issue of when the ATO is likely to take targeted compliance action.

What does the guidance say?

The PCG provides practical guidance on the types of arrangements likely to attract Part IVA. Part IVA is the general anti-avoidance provision in tax law – the ATO’s fallback if you are structuring specifically for the purposes of lowering or avoiding tax. For it to apply, the ATO must show:

1. You obtained a tax benefit from a scheme, and
2. The dominant purpose (or one of the dominant purposes) of the scheme was to obtain that tax benefit

The ATO will be more likely to apply Part IVA to high-risk arrangements where there are substantial distributions or payments made to the individual’s lower-tax associates (i.e., relatives, spouse, related trusts and companies, etc.)

If the anti-avoidance rules apply, then the Commissioner may cancel any tax benefit you have received from the arrangement  - hefty penalties may also be imposed.

However, the ATO has indicated that they will not apply Part IVA where taxpayers have made a genuine attempt to move into a low-risk arrangement by 30 June 2027.

The ‘red-flags’ for high-risk arrangements

• Distributions to adult children who don't work in the business
• Spouse receiving substantial distributions for minimal administrative work
• Your personal taxable income from the business is significantly lower than comparable sole practitioners
• Large profits retained in companies year after year without clear business purpose
• Distributions that fluctuate dramatically without corresponding changes in work performed

What do you need to do next?

If you earn personal services income and operate through a personal services business:

1. Review your current business structure and assess whether you are in a high-risk category
2. If you are, take advice on how to reorganise your structure
3. Put in place a transition program. The ATO recognises that this may take some time
4. Be in a low-risk position by 30 June 2027.

This process should be appropriately documented so that if the ATO comes calling you can demonstrate the actions initiated and the progress that has been made.

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Need help reviewing your position and what may be required? Contact Linda Jing at linda.jing@hayesknight.com.au or on 02 9661 6666.