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Accountants and business leaders who hold equity positions in their firms and split profits between personal income and associated entities, have been urged to consider whether the arrangements put them in the path of the ATO.
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‘Shot across the bow’: ATO puts professional firm profit allocations on notice
03 February 2022
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Just before Christmas, the ATO issued its new approach to professional firm profits, with the release of the Practical Compliance Guideline PCG 2021/4 four years after the previous guideline on professional firm profits was suspended.
The guideline tries to create a risk assessment framework for professionals whose firm derives income from a business structure rather than personal services income of a professional, or income directly related to their personal exertion.
Pitcher Partners executive director Ashley Davidson said the guideline provides a broad outline of the ATO’s approach in applying additional scrutiny to business owners who share in the profits of a professional business.
The definition of professionals outlined in the guideline is that of the Australian Council of Professions, which includes elements such as accreditation, ethical guidelines that must be met to maintain practice, specialist knowledge and skills and a requirement of upholding a high standard of behaviour.
That definition, based on the membership of the ACP, includes not only lawyers, consultants and accountants, but doctors and dentists, surveyors and engineers, veterinarians, geologists, psychologists and others.
“The framework uses three risk zones, labelled green, amber and red, and the Commissioner has warned closer attention will be paid to those who fall in the red or amber zone,” Mr Davidson said.
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“The challenge for professionals is that a wide range of structures and arrangements, often set up for retention of talent or other legitimate commercial reasons, could now be considered riskier under the clarified guidelines.
“If you are a white-collar worker, and owner of a professional business or associated with one, and you derive income from a business that is not counted as personal services income, you may find you fall under the general scope of the guideline.”
Mr Davidson said the first step for professionals was to understand the risk profile of current arrangements and assess whether the ATO would consider it to be a commercially driven arrangement. It should also be examined for any features the ATO might consider to be “high risk”.
These two tests, known as gateways, had to be passed before a professional could apply the PCG to their situation.
“The new PCG doesn’t apply to existing arrangements until 1 July 2024, but after that date, you will need to pass both gateways before you can apply the new guidelines to your personal arrangements,” Mr Davidson explained.
“If a professional’s circumstances fail to pass either of these gateways, the ATO suggests it might view the arrangement as an attempt to redirect income away from the individual.”
For those planning to acquire equity in a professional practice, the new guidelines will apply from 1 July 2022, according to Mr Davidson.
“This guideline is a shot across the bow for business owners who share in profits, based on some fairly arbitrary distinctions as to whether the ATO considers them to be professionals or not,” he warned.
“Regardless, seeking advice to understand the scope of the PCG and how it might impact your tax position is critical.”
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