Allocation of Professional Firm Profits: ATO Compliance Approach

Are you a professional practitioner operating a medical/allied health, architectural, engineering, accounting, legal, or other professional firm?

This update is for you.

The Australian Taxation Office (ATO) have released Practical Compliance Guideline Draft PCG 2021/4. These guideline sets out the ATO’s 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?

1. Take home salary higher than their highest paid unrelated employee doing a similar job.
2. 50% or more of the practitioner’s entitlement to firm profits taxed in the hands of the individual professional practitioner.
3. 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.

They are:

• 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.

What next?

These new guidelines will apply from the 1^st of July 2021, however some individual practitioners will qualify for a grace period of up until the 30^th of June 2023 to modify their existing arrangements and work to lower their risk.

In light of these changes now may be a good time to review your current business structure and seek professional advice from your trusted Gold Coast business accountant.

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.