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Warn clients now about what PCG 2021/4 means for allocations, accountants told.
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Higher tax or audit: the professional firm profits dilemma
15 November 2022
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Accountants should warn professional firms now that the ATO’s profit allocation guidance will probably result in a higher tax bill but ignoring it risks an audit, Change GPS says.
Anyone outside the “green zone” described in PCG 2021/4 would be reviewed and scrutinised, said David Boyar and Timothy Munro, CEO and founder respectively of Change GPS.
“Your clients can choose whether to be guided by it, but they must be helped to understand that if they ignore it, they may be reviewed and audited by the ATO,” said Mr Munro.
He expected an increasing number of reviews by the ATO over the next 18 months because to achieve a score in the green zone meant a client would probably confront an increased tax liability.
That was because to sit in that zone — which made a review or audit unlikely — their firm’s profit allocation arrangements had to achieve a score of seven or below based on the first two risk assessment factors, or under 10 if including all three.
Mr Munro said accountants should meet clients early in the financial year to discuss the issues and keep it separate from conversations about tax planning.
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Clients would need to plan for an increased tax liability but also have documents substantiating whatever arrangement applied.
“The best time is in the first quarter of every year, and then you do your tax planning in the last quarter,” said Mr Munro.
The ATO said that the guidance would apply from 1 July 2022 but those with pre-existing arrangements in which their clients had relied on previous suspended guidance had until 30 June 2024.
In terms of which clients are impacted by the document the ATO said: “The guideline sets out the ATO’s compliance approach to the allocation of profits or income from professional firms in the assessable income of individual professional practitioner.”
While the ATO did not provide a clear definition of who a professional was, it does say that it was a member of a recognised profession, as well as:
- Those who are required to be accredited and adhere to ethical guidelines in order to enter into and maintain practice in the relevant field.
- Those who are accepted by the public as possessing special knowledge and skills in a widely recognised body of learning, derived from research, education, and training at a high level and who are prepared to apply this knowledge and exercise these skills in the interest of others.
- Their behaviour and practice are beyond the personal moral obligations of an individual.
- They uphold a high standard of behaviour in respect to the services provided to the public and in dealing with professional colleagues.
“A builder who consults on construction projects and is a member of Master Builders Association is more than likely also going to be picked up by this so don’t assume this isn’t for your tradie clients,” said Mr Boyar.
Both Mr Munro and Mr Boyar emphasised the importance of accountants asking their clients about their memberships and speaking to them regarding their situation to confirm whether or not they fall under the guideline.
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