Tax for Professional Services Firms: How Accountants, Lawyers & Consultants Should Structure Their Business

Professional services businesses — accounting firms, law firms, management consultants, IT contractors, financial planners, and similar — face a unique set of tax considerations. Unlike product businesses, the primary asset is your knowledge and expertise, which creates specific challenges around the Personal Services Income (PSI) rules, income splitting, and business structuring.

This guide explains the key tax issues for professional services businesses in Australia and how to structure your affairs to minimise tax while remaining fully compliant.

The PSI Rules: The Biggest Tax Issue for Professional Services

The Personal Services Income (PSI) rules are the ATO's mechanism to prevent individuals from artificially diverting their personal income to a company or trust to reduce tax. These rules have a significant impact on how professional services businesses can be structured.

What is PSI?

Your income is "personal services income" if more than 50% of it is earned from your personal skills, expertise, or efforts. This covers:

• Consulting fees based primarily on your own expertise
• Legal fees for work you personally perform
• Accounting fees for your personal work
• IT contracting where you personally deliver the work
• Financial planning advice from your own expertise

The PSI Test: Personal Services Business or Not?

If your income is PSI, you need to determine whether you're running a Personal Services Business (PSB). If you pass the PSB test, the PSI rules don't restrict how you can structure your income. If you fail, the PSI rules apply — meaning income must effectively be attributed back to you personally, regardless of whether you operate through a company or trust.

You're running a PSB if you pass at least one of:

• Results test — you're paid for a specific result, supply your own tools/equipment, and are liable to fix defective work at your own cost
• Unrelated clients test — 80%+ of your PSI comes from two or more unrelated clients (and you market your services to the public)
• Employment test — you employ at least one person who works 20+ hours/week on substantive work (not administrative work)
• Business premises test — you maintain business premises separate from your home and clients' homes

Failing the PSB test means you cannot distribute trust income to low-tax beneficiaries or retain income in a company to benefit from the lower company tax rate — the income is attributed to you personally.

Business Structure Options for Professional Services

Sole Trader

Simple and low-cost. All income at personal marginal rates. PSI attribution rules apply the same way regardless — so structure offers no income-splitting benefit if PSI rules bind. Suitable for early-stage consultants and contractors testing the market.

Company

A company pays tax at 25% (small base rate entities). If you pass the PSB test, you can legitimately leave some profits in the company at the 25% rate rather than paying up to 47% personally. The gap between 25% and your marginal rate represents significant tax deferral.

However, you must pay yourself a commercial arm's length salary — the ATO scrutinises professional services firms that pay low salaries to high-income directors. The salary is deductible to the company and taxable to you.

Trust with Corporate Trustee

For professional services operators who pass the PSB test, a discretionary trust allows income to be distributed to family beneficiaries at their lower marginal rates. A spouse who isn't employed at their full capacity, adult children, or elderly parents can receive distributions — provided they're genuine beneficiaries and the arrangement isn't a sham.

The Section 100A provisions mean that trust distributions must reflect genuine economic benefit to the beneficiaries. Distributions to family members who don't genuinely receive or benefit from the funds are increasingly being challenged by the ATO.

Key Deductions for Professional Services Firms

Superannuation Strategies for High-Income Professionals

High-income professionals — particularly those earning $200,000+ — have specific superannuation considerations:

• Division 293 tax — if your income (including super contributions) exceeds $250,000, you pay an additional 15% tax on your concessional contributions. This means your effective super contribution tax rate is 30% rather than 15%. Still tax-effective compared to your 47% marginal rate, but worth understanding.
• Contribution caps — the concessional cap of $30,000 applies, but carry-forward rules allow you to make larger contributions if your super balance is under $500,000 and you have unused cap amounts from prior years.
• Salary sacrifice — for employees or company directors, salary sacrifice into super is one of the most tax-effective strategies available.
• Spouse contributions and splitting — if your spouse has a lower super balance, contributing to their super (up to the co-contribution offset threshold) or splitting contributions to them can maximise retirement outcomes.

Succession Planning for Professional Services Firms

Unlike product businesses, professional services firms often face succession challenges because the value is closely tied to key individuals. Key planning considerations:

• Is goodwill personal goodwill (not transferable) or business goodwill (attached to the practice)?
• Have you structured ownership to access the small business CGT concessions on an eventual sale?
• Do you have a buy-sell agreement if you have partners?
• Is your entity set up correctly for a future sale or IPO?