New guidelines for allocation of profits within professional firms
The ATO recently published revised guidance for professionals when considering the allocation of profits by professional firms.
The ATO is concerned about arrangements involving taxpayers who redirect their income to an associated entity from a business or activity which includes their professional services, where it has the effect of altering their tax liability. However, the use of companies, trusts and other business structures do not of themselves give rise to avoidance concerns.
ATO explains the risk-based compliance approach
The revised guidance PCG 2021/D2 explains how the ATO intends to apply the compliance approach when considering the allocation of professional firm profit or income in the assessable income of the individual professional practitioner (IPP).
The risk-based compliance approach requires two qualifying ‘gateways’ to be passed before applying the risk assessment framework. When an individual professional practitioner (IPP) passes the gateways, they then self-assess against the risk assessment framework to determine the type of compliance attention that will be given to their arrangement.
The revised guidance combines three risk assessment measures into a single methodology. This gives an overall risk rating of low, medium or high risk, including:
- The proportion of profit entitlement from the whole of the firm group that is returned in the hands of the IPP
- The total effective tax rate for income received from the firm by the IPP and associated entities
- The renumeration returned in the hands of the IPP as a percentage of the commercial benchmark for the services provided to the firm.
Where arrangements featuring high risk features or lacking apparent commercial rationale are identified, the ATO will treat the risk through the application of the integrity provisions, including Part IVA.
- Individual Professional Practitioner (IPP) is an individual who provides services to clients of the firm, or to the firm itself, in circumstances where the IPP and/or associated entities have a legal or beneficial interest in the firm.
- Personal services income (PSI) is income earned mainly as a result of personal efforts or skills of the IPPs, rather than being generated by assets or employees of the firm and is dealt with under the PSI rules in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997).
- Professional firms include, but are not limited to, those providing services in the accounting, architectural, engineering, financial services, legal and medical professions
- A professional is a member of a recognised profession.
Date of effect
Once finalised, this Guideline will apply prospectively from 1 July 2021.