Effective from 1 July 2022, the ATO has released “Practical Compliance Guideline (PCG) 2021/4 – Allocation of professional firm profits – ATO compliance”. The PCG outlines the ATO’s compliance approach towards the allocation of profits from professional firms to an individual professional practitioner (IPP).
It is important to note that this is not new tax legislation, rather, the PCG is a risk assessment tool that provides guidance in addressing the practical implications of tax laws and the ATO’s administrative approach.
This compliance guideline has been introduced to address the ATO’s long-held concerns about the distribution of firm profits to IPP’s. Specifically, the ATO is concerned that not enough income is being taxed in the hands of the IPP and that too much income is being distributed to related parties of the IPP which reduces the overall tax liability for the family group.
The guidelines apply to professionals whose income is not covered by the personal services income (PSI) regime and will apply to (but will not be limited to) professionals within the following industries:
- Financial services
- Management consulting
The risk assessment framework contained in PCG 2021/4 provides a traffic light system for assessing your level of risk. If you fall into the green risk zone, you will be considered low risk and it is highly unlikely that the ATO would apply any compliance resources to reviewing your tax arrangements. Conversely, if you fall into the red risk zone, you will be considered high risk and it is more likely that the ATO would invest compliance resources to review your tax arrangements.
The factors taken into consideration in PCG 2021/4 to determine your level of risk can be summarised as follows:
- What is the commercial rationale for profit distributions and any other types of distributions/arrangements from the professional firm?
- How much income tax is paid by the IPP in their personal income tax return?
- How much tax does your family group pay as a whole?
- Are there any high-risk features within your group?
For many taxpayers, their arrangements will already comply with the guidelines and fall into the green risk zone. For other taxpayers, some changes may be required to their tax arrangements to ensure that they do not fall into the amber or red zone risk categories.
As we approach tax-planning time in the second half of the financial year, your HCQ advisor will review and consider the risk zone that you fall into if you receive professional firm profits.
If you would like more information on this issue now or if would like to discuss how PCG 2021/4 impacts you and your business, please do not hesitate to contact your Hall Chadwick QLD advisor.