The ATO is targeting accountants, architects, engineers, lawyers and other professionals!
The Australian Taxation Office (ATO) has released Practical Compliance Guideline (PCG) 2021/4 which finalises its compliance approach towards the allocation of profits from professional firms to an individual professional practitioner (IPP). The ATO is specifically concerned with arrangements involving the provision of services where the IPP redirects income to an associated entity, where it has the effect of altering their overall tax liability.
The final guideline is not very different to the draft guidelines which we had discussed in a previous article. It does however include some examples, changes to the risk assessment factor scoring (see below), and some other minor changes to clarify certain matters.
| As a reminder, a PCG is a written ruling on the way the Commissioner considers a relevant provision applies or would apply to entities generally or classes of entity. PCGs are not prepared for the primary purpose of expressing a view on the way a tax law provision applies. They represent guidance material on how the ATO will allocate its compliance resources according to assessments of risk and may outline administrative approaches that mitigate practical difficulties relating to the operation of tax laws. |
SUMMARY
The guidelines apply to professionals whose income is not covered by the personal services income (PSI) regime and will apply to (but will not be limited to) professionals within the following industries:
- Accounting
- Architecture
- Engineering
- Financial services
- Law
- Medicine
- Management consulting
To apply the risk assessment framework in PCG 2021/4, the arrangement must satisfy the following two ‘gateways’:
- Gateway 1 - there must be a genuine commercial basis for the arrangements in place.
- Gateway 2 - the arrangements must not contain any high-risk features listed in PCG 2021/4.
Once these gateways are passed, a risk rating is established based on scores allocated to the following factors:
|
Risk assessment factor
|
Score |
| 1 |
2 |
3 |
4 |
5 |
6 |
- Proportion of profit entitlement from the whole of the firm group returned in the hands of the IPP.
|
> 90% |
> 75% to
≤ 90% |
>60% to
≤75% |
≥ 50% to
≤ 60% |
> 25% to
< 50% |
≤ 25% |
- Total effective tax rate for income received from the firm by the IPP and associated entities⁶.
|
> 40% |
> 35% to
≤ 40% |
≥30% to
≤35% |
>25%$ to
< 30% |
> 20% to
≤ 25% |
≤ 20% |
- Remuneration returned in the hands of the commercial benchmark for the services provided to the firm.
|
> 200% |
> 150% to
≤ 200% |
> 100% to
≤ 150% |
> 90% to
≤ 100 |
> 70% to
≤ 90% |
≤ 70% |
Based on the score established, the arrangement will fall into one of the following risk zones:
| Risk zone |
Risk level |
Aggregate score against first two factors |
Aggregate of all three factors* |
| Green |
Low risk |
≤ 7 |
≤ 10 |
| Amber |
Moderate risk |
8 |
11 and 12 |
| Red |
High risk |
≥ 9 |
≥ 13 |
If the arrangement falls into the:
-
Green zone - the ATO will not apply compliance resources unless there are exceptional circumstances.
-
Amber zone - the ATO may contact the taxpayer to conduct further analysis in order to understand the arrangement and resolve any areas of difference.
-
Red zone - the ATO may contact the taxpayer to conduct further analysis and if the arrangement remains high risk, it may proceed to audit.
APPLICATION DATE
Generally, these guidelines will apply from 1 July 2022. Taxpayers with pre-existing arrangements however are able to continue to rely on the ‘suspended’ guidelines (which were published in 2015) for the years ending 30 June 2018, 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022, as long as their arrangement:
- Complies with those suspended guidelines
- Is commercially driven, and
- Does not exhibit any of the high-risk features outlined in PCG 2021/4.
The ATO are also allowing a transitional period for those IPPs to continue to apply the suspended guidelines to their arrangements until 30 June 2024.
WHAT'S THE NEXT STEP?
If you are in one of the industries above, it would be prudent to speak to your local Moore Australia advisor to see how this impacts you. Those not covered by the transitional period should review their arrangements immediately to ensure you are aware of your risks from 1 July 2022.