For many health professionals in Australia—such as GPs, allied health practitioners, and medical specialists—working as an independent contractor offers flexibility and control. But choosing the right business structure is critical to maximising income, managing risk, and staying compliant with the ATO’s Personal Services Income (PSI) and Personal Services Business (PSB) rules.
Here’s a guide to help you navigate the best structure for your needs.
Common Business Structures
- Sole Trader
- Simple and low cost to set up
- Income is taxed at individual marginal tax rates
- You personally bear all legal and financial risks
- PSI rules apply heavily—no ability to split income
- Company
- Taxed at a flat rate (25% for base rate entities)
- Limited liability protection
- Allows for income retention and reinvestment
- Greater compliance and reporting obligations
- May be impacted by PSI rules, limiting tax planning opportunities
- Trust (e.g. Discretionary Trust)
- Income can be distributed to beneficiaries
- Not ideal where PSI applies, as PSI must generally be attributed to the individual who earned it
- Can be part of an asset protection or investment structure
- Partnership (including service trust arrangements)
- Can be used in multi-practitioner clinics or with spouses/family members
- Risk of PSI still flows to the individual
Understanding Personal Services Income (PSI)
PSI is income earned mainly from your personal effort or skills. If 50% or more of the income received is for your personal labour or expertise, it may be classified as PSI.
If your income is PSI:
- You can’t split income with others (e.g., via trust or company)
- You can’t claim certain deductions usually allowed to a business
- You must attribute income to the individual who performed the service
What is a Personal Services Business (PSB)?
To avoid PSI restrictions, your contractor business must qualify as a Personal Services Business (PSB) by passing one of the ATO’s tests:
- Results Test (most definitive)
- You’re paid to produce a result, not just for your time
- You provide your own tools/equipment
- You’re liable to fix mistakes at your cost
- 80% Rule and Additional Tests
- Less than 80% of PSI comes from one client, and
- You have two or more unrelated clients, or
- You advertise and actively seek new work, or
- You engage others to help deliver your services
- Less than 80% of PSI comes from one client, and
Passing a PSB test gives you more flexibility in how income is structured and taxed.
What’s the Best Structure for Contractor Health Professionals?
The ideal structure depends on your specific circumstances, but here are some general guidelines:
| Situation | Suggested Structure | Why |
|---|---|---|
| Sole operator, low income | Sole Trader | Simple, low admin cost |
| Growing income, PSB test passed | Company | Tax efficiency, income retention, asset protection |
| Working in multi-practitioner practice | Company with service trust (if PSI rules don’t apply) | Potential income splitting and admin efficiency |
| Contractor failing PSB test | Sole Trader or Company (with caution) | Minimal tax benefit from structure; income flows to individual |
| Planning long-term growth | Company (if PSB applies) | Easier to build business assets, credibility, scale |
Key Takeaways
- PSI rules limit how you structure and distribute income from personal services.
- If you can pass a PSB test, you open the door to more tax-effective structures like companies or trusts.
- ATO scrutiny of health professionals is increasing, especially around income splitting and service arrangements—get professional advice before setting up.
- The right structure should balance tax efficiency, legal protection, and long-term goals.
Final Thoughts
If you’re a health professional working as a contractor, your business structure is more than just a formality—it affects your tax, compliance, and future planning. The PSI and PSB rules can be complex, but with the right advice, you can set up your practice for long-term success.
For personalised guidance, feel free to reach out to Healthbiz Accounting. We understand the unique needs of health professionals and are here to help you navigate ATO rules with confidence.