Dermatologist through a trust: PSI attribution and income splitting
Dr Kim is a dermatologist who provides services through the Kim Family Trust. The trust has a corporate trustee and receives $350,000 in fees from one private clinic in 2024-25. Dr Kim works four days a week at the clinic, which provides rooms, nursing staff and equipment. She invoices the clinic hourly, is paid for time worked, and can be replaced by another doctor if she is unavailable. She does not advertise to the public and has no other clients. The trust employs a part-time receptionist and pays Dr Kim a salary of $120,000. The trust wants to distribute the remaining trust income to Dr Kim's husband, who earns $30,000, and their daughter, a full-time student with no other income. Dr Kim has no personal services business determination.
1. Do the PSI rules apply to the trust's income? Apply the personal services business tests.
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The income is personal services income because it is mainly a reward for Dr Kim's personal skills and consists of fees for her dermatology work. The trust is a personal services entity. The 80% rule is satisfied because 100% of the fees come from one clinic. That means the PSI rules apply unless a personal services business (PSB) determination or one of the PSB tests is met. The unrelated clients test fails: Dr Kim does not advertise to the public and has only one client. The employment test fails: the receptionist does not perform 20% or more of the principal work, and there are no other entities performing that work. The results test fails: Dr Kim is paid hourly for time worked, not to achieve a specified result, and the clinic provides the rooms and equipment. She can be replaced, which points to an employment-like arrangement. No PSB determination is in place. Therefore the PSI rules apply and the trust's PSI is attributed to Dr Kim.
2. What are the consequences for the proposed distributions to Dr Kim's husband and daughter?
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Because the PSI rules apply, the trust's PSI, less allowable deductions, is included in Dr Kim's assessable income. The trust cannot reduce tax by distributing the PSI to her husband or daughter; they are associates for PSI purposes. The salary of $120,000 paid to Dr Kim is deductible to the trust, but it is also assessable to her. The remaining PSI is attributed to her and taxed at her marginal rates. Distributions of the underlying trust income to the husband and daughter do not change the attribution. If the trust actually pays or credits the income to them, the trustee must consider whether the amounts are loans, unpaid present entitlements or distributions of other income. If the only income is PSI, there is no non-PSI income to distribute. The husband and daughter may still be beneficiaries, but the tax outcome is driven by the PSI attribution. The trustee should not treat the distributions as effective tax planning.
3. What changes could make the trust eligible for a PSB determination, and what evidence would be needed?
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The trust could qualify under the unrelated clients test if Dr Kim advertises to the public and provides services to two or more unrelated clients as a direct result of that advertising. She would need evidence of advertising, client engagements and independence. The results test could be met if her contracts are for a specified result or outcome, she provides her own tools and equipment, and she is responsible for rectifying defects. The employment test could be met if the trust engages one or more entities to perform 20% or more of the principal work, or engages an apprentice for at least half the year. A receptionist is not enough. Alternatively, the trust could apply to the ATO for a personal services business determination, but it must show the PSI is not mainly for personal services or that the arrangement is genuinely a business. The trust should also consider whether the clinic arrangement is employment-like; if Dr Kim is effectively an employee, the PSI rules are designed to prevent income splitting. Documentation of contracts, invoices, marketing, tools and staff is essential.