Following a review which deemed that previous guidelines on the allocation of profits within professional services firms were being misinterpreted by some individual practitioners, Practical Compliance Guidelines (PCG) PCG2021/4 sets out the ATO’s future approach to assessing the risks associated with the arrangements and ownership structures used by professional firms, such as trusts and holding companies, and how business profits are allocated to the individual principal practitioners (IPPs) in those firms.
It also introduces a new annual risk assessment framework the ATO will use to determine whether it considers a firm’s profit distribution arrangements to IPPs either low, medium, or high-risk.
“Absent the application of anti-avoidance provisions, there’s no general principle of tax law that just because you work for – or have input into – a business, you have to be paid for the things you do,” Paul told CPA Australia INPRACTICE reporter Gary Anders.
“However, the first pillar [of the PCG] is that if you’re a professional and hold equity in a professional firm and provide services, then you ought to be somehow remunerated for what you do.
“What the ATO is saying is, ‘we can’t tell you the legal pathway that applies to a particular arrangement. But we want to use this document so our officers and taxpayers can get an indication of whether there’s a risk’.”
“The risk is that the ATO actually engages with the taxpayer using the compliance framework. That is not useful, as there is no attempt to explain how the ATO’s scoring matrix relates to the law. Fear of the tax collector to move behaviour is a very old story. This is just the latest chapter.”
Paul argues that professional firms and individuals should self-assess their risk and work out where they sit on the spectrum. From there, the organisation or individual can choose whether to adjust and if they have any concerns, contact the ATO.
Professional firms and individuals should self-assess their risk and work out where they sit on the spectrum. From there, the organisation or individual can choose whether to adjust and if they have any concerns, contact the ATO.