The #1 Mistake Doctors Make That Could Trigger a Tax Audit

As a medical professional, you’re no stranger to the pressures of running a practice and managing your finances. But there’s one thing many overlook: the impact of the Personal Services Income (PSI) rules. Ignoring these regulations can open the door to an ATO audit, hefty penalties, and potential tax avoidance charges. And trust me, no one wants that kind of drama.

Now, these rules aren’t new – but more and more people seem to be brushing them off. If this is the first time you’ve heard of them, it might be a good idea to have a chat with your accountant. Or even better, get a second opinion if you're unsure.

What is Personal Services Income (PSI)?

At its core, PSI refers to income you earn from personal effort or skills. For most medical professionals, this means income generated directly from the work you perform for your patients. It doesn't matter if you work as a sole trader, through a trust, a company, or a partnership – the income still falls under the PSI regime.

The key point here is that this legislation treats you like a quasi-employee. Even if you're working through a business structure, the income earned from your services is traced back to you, the individual. It’s a way of ensuring that the money you earn through personal work gets taxed as personal income.

Let’s put this into perspective with an example. Imagine Dr.X  is earning $500,000 from his practice. After expenses, that income is still considered personal income. So, it has to go on Dr. X’s personal tax return, even though it’s earned through a business structure.

Dr. X doesn’t have the luxury of leaving that income in his medical company to be taxed at a lower company rate, nor can he split that income with family members to reduce his tax. If he tries, the ATO will come down hard with penalties for tax avoidance.

Importantly, PSI does not apply to income from service fees generated from a  'service trust' which operates much like a serviced office providing services to the doctor.

Can I split my income if I trade through a company or trust?

If your professional fees are received via a Company or Trust the answer is No.  The  ATO will still look at the origin of the income. If it’s derived from your personal work, it’s PSI and must be attributed to you. A common myth is that if you're classified as a personal services business (PSB), you can split your income with family members. This is not true. If the ATO finds that you’ve incorrectly split income, they’ll likely treat it as tax avoidance and take action.

If I work at multiple practices, can I split the income because it’s from several sources?

No, it still counts as income earned from your personal services. The ATO doesn’t care how many practices you work at – if the income is from personal exertion, it’s PSI.

Can I pay my spouse a wage and superannuation?

Yes, but only if certain conditions are met  and your spouse provides services that are necessary for your practice, you can pay them a market rate wage. For Doctor's  they would have to pass the 'results' test i.e.. Get paid to produce a specific result, provide equipment (if required) and  fix mistakes at their  own cost. 

The payments to the Doctor's spouse in this case are tax deductible. You can also make super contributions for your spouse, even if the value of the work they perform doesn’t match the contribution, as long as it falls within the concessional cap ($30,000 for 2025). But, if your spouse isn’t actually doing any work, don’t even think about paying them.

Can a medical company protect me from patient lawsuits?

No. Many are advised to operate through a company for asset protection, but the reality is that the legal protection it offers isn’t much use if you’re being sued for professional failings (like malpractice). The company won’t shield you in those situations. It’s far more important to have solid professional indemnity insurance and assets held in the name of the 'low-risk' spouse to protect yourself, no matter how you structure your practice.

Finally,  don't get caught up in what your colleagues are doing. Their situation might be very different from yours, and the ATO won’t care about their choices when it’s your audit on the line. Every practitioner has their own unique circumstances and risk profile, so get advice tailored to your situation. If you need help please  to reach out to us by making an appointment.   

Chris Tolevsky has over 30 years experience in the medical and allied health fields.  He provides expert guidance on tax strategies, building and protecting wealth . If you’re interested in discussing how we can help you please book a complimentary consultation. 

Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable