New guidance for the allocation of professional firm profits

Anthony Poole


November 17, 2021


Effective from 1st July 2021, the ATO outlined their new proposed compliance approach to the allocation of profits for professional firms and medical practitioners.

The ATO has always had concerns about arrangements involving redirecting of income that includes income from professional services received by individual professional practitioners to associated entities to reduce the amount of tax liability, hence the release of the long awaited new Practical Compliance Guidelines (PCG).

The new Practical Compliance Guideline s is essentially statements the ATO make on how they will do their job administering taxation laws. The PCG  uses a two step approach to assess the tax risk, called ‘Gateways’, that must both be passed to be considered low risk.

Gateway 1 is designed to ensure there is a genuine commercial reason for the way arrangements are structured and profits are distributed. The second Gateway states that the arrangement must not contain any high-risk features.

If you pass these gateways, the PCG sets out a series of measurements relating to the allocation of your business’s profits between the owners and related parties. Applying these measurements results in a score for your business which places you in one of three risk zones: Green, Amber or Red. This will determine whether the ATO will pay further attention to your business in relation to its allocation of profits.

An example of how this will be administered across the three zones is as follows:
1. The more business profits being allocated to the owners will place you in the green zone
2. The less and less the profits are allocated to the owners and more to other related parties will push you in to the Amber & Red zone.
If you do find yourself in the Amber or Red Zone the ATO have made it clear in the PCG that they will investigate further which may result in audit.

To seek advice on where your current profit allocation sits please reach out to your advisor to get assistance on which zone you will land in. If it appears you may sit in the Amber or Red zone it may result in further tax planning conversations, which our specialists can help you with here at Poole Group.
Article written by Brooke Fenwick.
Please note – the above does not constitute tax advice and readers should seek advice for their individual circumstances from their trusted advisor.

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