Medical Practice Structuring: PSI Rules Explained

What are personal services income rules and why do they matter for doctors?

Personal services income (PSI) rules apply when more than 50% of the income you earn comes from your personal skills, expertise, or efforts — rather than from a business structure, equipment, or employees. For most medical practitioners, this threshold is easily met. When PSI rules apply, the income is attributed back to you as an individual regardless of the entity it flows through — meaning your company, trust, or service entity cannot retain or divert that income to reduce your tax. Getting this wrong does not just create a tax adjustment; it can attract ATO penalties and interest on underpaid tax going back four years.

What is a service entity and when does it work for doctors?

A service entity — typically a company or discretionary trust — is interposed between a practitioner's practice company and the practitioner. The practice company pays the service entity a management fee for administrative services: reception, billing, lease of rooms, staff, equipment. The service entity retains a margin on those fees. This structure can legitimately shift income to lower-rate taxpayers (a spouse employed at market value, adult children, or a corporate beneficiary at 25% tax) if it is correctly implemented. The management fee must reflect genuine commercial market rates. Inflated fees that exist solely to strip income from the practice are exactly what the ATO targets in medical practice audits.

What is the 80% rule and how does it affect your structure?

The 80% rule states that if 80% or more of your PSI comes from a single client or their associates, you cannot pass the results test alone to escape PSI attribution. For many employed or contracted doctors — particularly those who service-in to a single hospital network or specialist group — this is a critical threshold. If you exceed 80% concentration, the income is PSI regardless of your structure unless you can demonstrate genuine business-like characteristics through the other PSI tests. Spreading clinical engagements across multiple entities, genuinely and not artificially, is the only structural solution.

What is the results test and who can use it?

The results test is the primary gateway out of PSI rules. To pass it, you must demonstrate that you are paid for achieving a specific result, you provide the equipment or tools needed to do the work, and you are liable for rectifying defects. For most salaried hospital doctors, the results test fails — you are paid for time, not outcomes. For VMO arrangements, fee-for-service billings, and private billing practitioners, the test is more arguable but requires careful documentation. Passing the results test requires more than a tick-box analysis; the facts of your actual engagement must support it.

What triggers an ATO audit of medical practice structures?

The ATO's Tax Avoidance Taskforce has made medical practice arrangements a priority. Common triggers include management fees paid to a service entity that significantly exceed what a genuine commercial operator would charge, income splitting arrangements where a spouse is employed but cannot demonstrate they performed work at the level of their remuneration, structures that appear to have been put in place primarily in the income year of a high billing year, and practitioners with turnover over $1 million paying an effective tax rate materially below their marginal rate. The ATO also uses data matching from Medicare, private health funds, and practice management systems to identify structures that don't align with reported income.

How do the main structures compare?

A sole trader arrangement is simple but offers no asset protection and taxes all income at personal rates — for a Melbourne specialist earning $450,000, this means the top marginal rate of 47% on a substantial portion of income. A practice company caps tax at 25% on retained earnings but requires an arm's length salary, superannuation at 12% of ordinary time earnings, and careful profit retention strategy. A service entity adds a layer of income splitting flexibility but requires genuine services to be rendered at market value. None of these structures is inherently better — the right answer depends on your income level, risk profile, family circumstances, and how tightly you want to manage compliance obligations each year.