ATO to ramp up compliance action on PSI alienation

Poulakis cautioned that the ATO is increasing its scrutiny of higher-risk arrangements, particularly those involving significant diversion of PSI, and is strongly encouraging taxpayers to review their circumstances and take steps now to address any PSI alienation risks.

"Where you make a genuine attempt to move your arrangement to low-risk by 30 June 2027, we won't seek to apply Part IVA if you're selected for review," the Tax Office said.

Poulakis said the ATO's approach in this area represented a "targeted call to action" with the Tax Office urging taxpayers to promptly assess their circumstances and take any necessary action.

"We'll continue to review higher-risk arrangements, and will evaluate if you've taken, or are in the process of taking, genuine corrective action," he said.

Where the ATO selects an arrangement for review, the regulator said it will consider the voluntary steps the taxpayer has already taken to correct matters in deciding whether to pursue Part IVA compliance action.

"In short, this approach is about recognising taxpayers who act early and show they're genuinely trying to move to a low-risk position," Poulakis said.

"If a PSI review begins, between 28 November 2025 and 30 June 2027, we won't consider applying Part IVA where you can demonstrate that you've made a genuine attempt to move your alienation arrangement to low risk."

The ATO outlined that a genuine attempt involved taking timely, meaningful steps. This includes self-assessing whether PSI has been inappropriately diverted, taking action to address higher-risk behaviours and ensuring that the current year's return is compliant.

"For arrangements involving significant diversion of PSI, you may also need to correct previous years' returns. If you're selected for review, we'll discuss your circumstances with you, including any additional steps you need to take," it said.

Poulakis also advised businesses that movement along the business continuum doesn’t eliminate the risk of alienation, but it changes how it's assessed.

"We recognise that businesses evolve over time. As your activities grow, you may move along a spectrum, from a business that mainly relies on your personal services, to a broader professional practice supported by systems, staff and capital," he said.

"Different ATO guidance about income alienation arrangements applies at different points along that spectrum."

The ATO outlined that PCG 2025/5 applies where a PSB is being conducted and provides practical guidance on when Part IVA may apply where the net PSI is not distributed to the individual whose services generated the income.

"Where income is generated by a broader professional practice, rather than mainly by an individual’s personal services, the income isn't PSI. In these circumstances, we apply the professional firm profit allocation compliance approach in PCG 2021/4," it said.

"That approach accepts that some profit may be retained in the firm or shared with other entities, provided the individual is appropriately remunerated for their personal services."

The Tax Office said it would continue to prioritise education and guidance to support taxpayers to understand and meet their PSI obligations.

"For advice tailored to your tax and superannuation circumstances, speak to your registered tax practitioner," it said.