Maxim Forum

Important New ATO Guidelines effecting Professional Services Business - 17th March 2021

How the profits are allocated by professional firms has been a particular area of focus for the ATO for quite some time now. The ATO is concerned about arrangements where a taxpayer, who is a partner or owner of a professional practice, receives compensation that is artificially low, arrangements can’t be justified commercially or are considered to exhibit ‘high risk’ features.

For years up to 30 June 2021 the original guidelines require that any one of the following requirements must be met to be ‘low risk’ of an ATO review or audit:
- the individual is assessed and taxed on at least 50% of the total income that they and their associated/related entities are entitled to from the practice; or
- the individual and their associates all have an effective 30% tax rate for their income from the practice; or
- the individual is assessed on income that is at least the remuneration that is paid to the highest level of professional employees providing equivalent services to the firm, or if there are no such employees, their income must be compared to that of comparable firms or relevant industry benchmarks.

The ATO has recently released new guidelines that will apply from 1 July 2021 requiring the partners or owners of professional practices to be sure that all arrangements are commercially-driven and don’t exhibit ‘high risk’ features, and to undertake a risk assessment using a matrix that is based on:
- the profit the individual is assessed on as a percentage of their total profit entitlement and
- the total effective tax rate that they and their associates pay on their total profit entitlement.

There is the option to extend the risk assessment to include the remuneration paid to the individual as a percentage of the commercial benchmark for the services that they individually provide to the firm.

Where a partner or owner has a higher risk under the new guidelines than under the original guidelines, the ATO is allowing a grace period should they choose to modify their arrangements to lower their risk. As an interim measure they can continue to apply the original guidelines until 30 June 2023, provided that their arrangements are commercially driven and are not considered to have ‘high risk’ features.

As you will appreciate these rules are complex and even though they are subject to change before they are finalised we would welcome the opportunity to discuss how these new draft guidelines may impact you, so please feel free to reach out to us.