New guidelines released by the Australian Taxation Office (ATO) will assess tax compliance risks associated with the allocation of profits from professional services firms operating in the accounting, architectural, engineering, financial services, legal and medical professions.
The guidelines apply if:
- An individual professional practitioner (IPP) provides professional services to clients of the firm, or is actively involved in the management of the firm and, the IPP and/or associated entities have a legal or beneficial interest in the firm;
- The firm operates through a partnership, trust or company, and
- The income of the firm is not personal services income.
The ATO will consider the application of the general anti-avoidance provisions in Part IVA of the income tax legislation, where business profits or income is distributed to associates without regard for the value of the services the IPP provided to the business. Whilst the guidelines provide a “safe harbour” for professional services firms that wish to avoid an argument, it is important to note that there is no clear legal authority for the position adopted by the ATO and many professional services firms will choose to ignore these guidelines.
Taxpayers will be rated as “low risk”, and therefore not subject to audit, where they meet one of the following guidelines:
- The IPP receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm - equivalent to at least the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or comparable firms or relevant industry benchmarks; or
- 50% or more of the income to which the IPP and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the IPP; or
- The IPP and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.
If none of the guidelines are met the ATO considers that there is a higher compliance risk (the extent of which depends on the effective rate of tax). The ATO suggest that compliance action may be commenced for those taxpayers identified in the higher compliance risk category.
The guidelines take effect from the date of issue (27 August 2014).
Finally, the ATO refer to legally effective structures in the guidelines. We understand that the ATO continue to actively investigate professional services firms where the actual conduct of the business does not reflect the legal structures put in place. The ATO cite examples of business cards and websites referring to the individuals as Partners whilst the legal structure involves associated entities as the partners.
Please also refer to the related May 2016 Sladen Article The ATO’s administrative treatment of acquisitions and disposals of interests in ‘no goodwill’ professional practices.
For more information on these issues please contact:
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105