Accountants and Business Advisers
The ATO has recently issued draft guidelines which set out its approach to dealing with the allocation of profits by professional firms.
They will apply to all professional firms including, but not limited to, those operating in the accounting, architectural, engineering, financial services, legal and medical professions.
The focus of the guidelines is at the individual practitioner level (rather than at a firm's legal structure) and the extent to which the practitioner receives income into their own hands. As such, firm structures such as partnerships of trusts and other legal structures are not the target of the ATO's attention.
The guidelines will apply for 2014-15 and later years, subject to a review in the 2016-17 year. They will be used by the ATO as an audit tool, to determine the risk of Part IVA anti-avoidance rules applying to the allocation of profits from a legally effective partnership, trust or company, which the income of the firm is business income, and not income from personal exertion.
The ATO accepts as a rule of thumb in IT 2639, that income will be derived from the 'business' of a professional practice, and not from personal exertion income, where there are at least as many non-principal practitioners as principal practitioners. Principal practitioners are those who provide professional services to clients or who are actively involved in the management of the firm, and they and/or their associated entities have a legal or beneficial interest in the firm.
Principal practitioners will be rated a low risk and not subject to compliance action if they satisfy one of the following guidelines:
A principal practitioner may legitimately choose to operate outside the guidelines but will be subject to enhanced risk of an ATO review or challenge. The further that a principal practitioner departs from the three tests, the higher the risk of ATO review.
The ATO approach here is similar to that it adopted with services entities, where the issue of guidelines resulted in most professional firms choosing to fall within the guidelines to avoid the time and cost of defending their arrangements.
Should you or your firm wish to discuss your firm's professional structure and the flow of income to your principal practitioners, please do not hesitate to contact your usual PKF Lawler advisor.
About the author - Scott McKay
Scott joined PKF Lawler Melbourne in 2012 as a specialist tax consulting partner to give the firm a broader focus in the delivery of tax consulting services.
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