Professional Firm Profits - ATO Compliance Approach

The ATO has issued draft guidelines contained in PCG 2021/D2 that explains their proposed compliance approach to the allocation of profits by professional firms based on a risk assessment model. In practical terms, the ATO is concerned about arrangements involving the redirection of income of an individual professional practitioner (IPP) to a related entity, resulting in a less than commercial remuneration and overall lower tax liability.

Professional firms include, but are not limited to, those providing services in the accounting, architectural, engineering, financial services, legal and medical professions.

The ATO has developed a scorecard approach (low, moderate, high) which may be used by the IPP and the ATO to understand what compliance attention will generally be given to the profit arrangement, which includes consideration of the following factors:

• Proportion of firm profit allocated to the IPP

• Effective tax rate on profit paid to the IPP and related entities

• Remuneration paid to the IPP comparable to the market

In order to apply the scorecard approach, the following 2 “Gateways” must be passed:

• The arrangement must be commercial

• No high- risk features exist (E.g. outstanding tax returns or liabilities)

Taxpayers are expected to assess and document their eligibility to apply the ATO guidelines on an annual basis.

We recommend that professional firms undertake a risk assessment of their profit arrangements before 30 June 2021 and take any necessary action.

Should you have any questions, or require further information, please contact John or Renee at DBS Accountants and Business Advisers on 3666 0684.