Are you a professional practitioner operating a medical/allied health, architectural, engineering, accounting, legal, or other professional firm?
This update is for you.
In March 2021 the Australian Taxation Office (ATO) released Draft PCG 2021/D2. This new draft guideline sets out the ATO’s proposed compliance approach to the allocation of professional firm profits.
Want to know if and how these new guidelines affect you?
Read more from your trusted Gold Coast Accountant team, Crest Accountants to find out.
Out with the old, in with the new
What were the previous (now suspended) guidelines? Let’s examine.
Essentially if an individual professional practitioner allocated business profits to themselves in a manner to satisfy one of the following three benchmarks, they were considered ‘low risk’ when it came to receiving attention from the ATO.
What were these benchmarks?
- Take home salary higher than their highest paid unrelated employee doing a similar job.
- 50% or more of the practitioner’s entitlement to firm profits taxed in the hands of the individual professional practitioner.
- The individual professional practitioner had an effective tax rate of 30% or more.
Making sense of the new changes
The new draft guidelines map out a method for individual professional practitioners to assess their risk profile to determine how likely they are to draw the attention of the ATO.
To qualify to apply these guidelines:
- As an individual professional practitioner, you must have either a legal or beneficial interest in the professional firm, plus full voting, management and income rights.
- The income must not be personal services income.
If you qualify, it’s time to see if you pass through the following two gateways.
The gateways and risk rating
What are the two gateways?
- Gateway 1 sees if there is a genuine commercial justification for the arrangements in place.
- Gateway 2 examines if the arrangements contain any high-risk features.
If you pass, the next step is to use the risk assessment scoring table to determine your relevant risk zone. There are three possible outcomes upon calculating your risk rating.
- Green – where an ATO review is unlikely.
- Amber – where the ATO may conduct further analysis.
- Red – where a review or audit by the ATO is likely.
Working closely with your Gold Coast business accountant can help you better understand and prepare for these changes and provide you with some clarity around where you currently stand.
Once finalised, these new guidelines will apply from the 1st of July 2021, however some individual practitioners will qualify for a grace period of up until the 30th of June 2023 to modify their existing arrangements and work to lower their risk. Keep in mind this ruling is still draft and there may be further changes.
Need help with business accounting? Contact Crest Accountants today for a Gold Coast business accountant team who are dedicated to your best interests in business.