Personal services income rules for medical practices

A medical practitioner operating through a company or family trust usually set the structure up for asset protection or income splitting. The personal services income rules exist to stop the second of those two reasons from working where the income is really a reward for one person's own effort, and for a practitioner who personally sees the patients, that is usually exactly what it is.

What makes income PSI

PSI is income that is mainly a reward for your own personal efforts or skills. It is a question about the character of the income, not about the entity that receives it: a company or trust can receive PSI, and when it does, the rules follow the income rather than the structure it was routed through.

The test is whether the income is earned mainly by personal exertion, rather than from selling goods, from substantial income-producing assets, or from a business that employs others to do the work. A practitioner who personally delivers the clinical service is almost always on the personal-exertion side of that line.

The four tests, and why one pass is enough

If the income is PSI, the restrictions are avoided only where the practitioner is a Personal Services Business, and that status comes from passing any one of four tests. A single pass is enough; there is no need to satisfy the others.

The results test. The one most practitioners actually pass, and the hardest to pass by accident. It requires all three of being paid to produce a specific result, providing your own equipment, and being responsible for fixing your own mistakes at your own cost. All three have to hold together, which is common in genuinely independent contracting and rare in an arrangement that looks like employment in substance.

The unrelated clients test. Requires services provided to two or more unrelated clients, obtained through direct outreach such as advertising or a public offer. Two clients alone is not enough on its own; the work has to have been won from the public rather than handed over by a single source.

The employment test. Requires the business to employ others who do at least 20% of the principal work. A practice nurse handling administration does not count towards it; the test is about who performs the principal work itself, not who supports it.

The business premises test. Requires premises used exclusively for the business, physically separate from any private residence, and used to see clients. A room inside your own home fails this test even where it is used only for work.

The 80% rule narrows two of the four

Where 80% or more of a practitioner's PSI comes from a single client and that client's associates, the unrelated clients test and the business premises test can no longer be used to self-assess as a Personal Services Business. The results test and the employment test are unaffected, so a practitioner in that position needs to pass one of those two, or apply to the ATO for a determination.

This is precisely the position a single-client contractor is in: someone who would otherwise rely on having a dedicated consulting room to pass the business premises test finds that test unavailable once one client accounts for 80% or more of their income.

What happens when PSI applies

Where none of the four tests is passed, the PSI rules apply in full. The income is attributed to the practitioner personally, regardless of which entity issued the invoice, and it cannot be split with associates such as a spouse or a family trust.

Deductions are limited too. Rent, mortgage interest and rates for premises occupied as a residence cannot be claimed, payments to associates for non-principal work cannot be claimed, and superannuation contributions for associates doing non-principal work are disallowed. The practical effect is that the structure costs money to run without delivering the tax benefit it was set up to provide.

Why medical practitioners are frequently caught

A GP or specialist operating through a service entity or family trust is close to the textbook PSI scenario. The practitioner personally delivers the services, the income is mainly a reward for their skills, and there are often no employees doing principal clinical work. That combination fails three of the four tests before the 80% rule is even considered, which is why PSI is one of the most consequential structural questions a practitioner operating through a company or trust can ask.

The question is worth asking before the structure is set up, not after. Unwinding a structure that never delivered the intended benefit is a materially bigger job, and a materially bigger bill, than getting the structure right at the start.

What to do next

Work through the PSI Rules calculator to check your arrangement against the four tests. It applies the tests as they are written; it does not apply the 80% rule or the ATO determination process, so a result that turns on the unrelated clients test or the business premises test should be checked against the 80% threshold before you rely on it. Where PSI genuinely applies, or where the answer is close, review the structure with an adviser who understands both the PSI rules and medical practice arrangements specifically.