Will Setting Up a Company Save Tax?

Thinking About Setting Up a Company to Save Tax?

What sole practitioner psychologists need to know

Almost every month I have a psychologist ask me “Can I set myself up a company in order to save tax?”

You may even have considered it yourself. 

Afterall, company tax is only 25%.  Your top personal marginal tax rate (plus Medicare levy) can be over 45%. Surely, you could just “split” your income between the two and come out ahead?

It's a reasonable thing to wonder, and at first glance it looks tempting.

Unfortunately, it's not that simple.  There are some major considerations.

Personal Services Income

When most of your income comes from your own effort (like your assessments, your sessions, your expertise) the tax law treats it as Personal Services Income (PSI), no matter whether it's paid to you directly or to a company you own.

The default tax rule (Division 86) says PSI earned through a company gets attributed straight back to you and taxed at your personal rate anyway. So, the company structure changes nothing by default.

There's one way around this. If your practice qualifies as a Personal Services Business (PSB) by meeting tests around having several unrelated clients you found yourself, employing others to do a meaningful share of the work, or operating from your own business premises then this automatic attribution stops applying.

Part IVA

Even if your company genuinely qualifies as a PSB, it doesn’t give you a free pass to leave profit in the company purely to access the 25% rate.

The tax office has a separate, much broader general anti-avoidance provision called Part IVA which allows the ATO to cancel the benefit of the 25% tax rate if the arrangement looks like it exists mainly to reduce tax rather than for real business reasons.

Currently (PCG 2025/5), if the ATO believes you’re temporarily keeping profit in your company for a low risk genuine commercial reason such building working capital, covering upcoming wages or bills, saving for practice software or equipment, or funding a real expansion plan, it is unlikely to invoke Part IVA.

However, if you’re paying yourself a low salary and leaving the rest in the company with no real business reason for holding on to the money, the ATO considers there is a  high risk youre doing this purely to decrease your tax, and it can apply Part IVA.  This means you'd be taxed at your regular marginal tax rate and potentially with interest and penalties on top.

A word of  caution if you’re the only clinician in your solo-psychology practice

If you’re a true sole practitioner, the income exists because you do the work. A company with no staff, no independent client base, no separate premises and no goodwill beyond your own reputation is, in practice, still just a structure around your personal effort, even if it technically meets a PSB test.

In that situation, keeping profit in the company mainly to access the 25% rate is a real audit risk. If challenged, Part IVA is very likely to apply.

In short: the more your practice is “just you”, the harder it is to justify leaving money in the company for tax reasons. Any profit you do retain needs to be tied to a clear, immediate, documented business purpose, not simply because the company tax rate is lower.

So what’s the answer?

• Yes:  a genuine Personal Services Business can sometimes retain profit at the 25% rate.

• No: you can’t do it just because company tax is lower. That’s exactly what Part IVA is designed to stop.

• It depends:  on the substance of your practice and the real commercial reason for keeping money in the company.

Before setting up a company for this purpose, it’s worth considering:

• whether your practice actually meets the PSB tests,

• what a real, commercial reason for retaining profit would look like for your practice, and

• what records you’d need to support that like contracts, cash‑flow forecasts, minutes and timesheets. The ATO need solid evidence.

The bottom line

A company isn’t a shortcut to a lower tax rate.

Used properly, with a genuine business purpose and solid documentation, it can be a sensible structure.

Used mainly to take advantage of the 25% rate, it’s likely to unravel under audit, and you may end up worse off once tax, interest and penalties are added.

If you’re weighing this up, it’s worth talking it through with us first.

It’s far easier, and cheaper, to set it up correctly than to unwind it later.