Earlier this year we alerted you to the release of draft guidance by the Australian Tax Office (ATO) in respect of professionals. The ATO has now finalised their guidance and earlier this week released Practical Compliance Guideline PCG 2021/4 which applies from 1 July 2022.
The guidance is concerned with whether there is a risk that income earned by an individual professional practitioner (IPP) from firm income or profits is not appropriately taxed in the hands of the IPP. The guideline will apply to a variety of professions including law, accounting, financial services, medical, architecture, engineering and management consulting. The framework in the guideline will be used to differentiate risk and tailor the ATO’s engagement with IPPs.
What you need to know
The information in our earlier alert is still largely unchanged, however the following points should be noted:
- the use and application of the guideline will be applied by the ATO from 1 July 2022, which is a deferment of 12 months from the previous expected start date.
- the guideline only applies where an IPP has received an amount of income from a practice which generates its income from a business carried on in a business structure that is not subject to the Personal Services Income (PSI) regime.
- the guideline applies to IPP equity owners who hold their interest directly or through an associated entity.
- it appears from the guideline that non-equity owners who are issued multiple classes of shares in a company or units in a unit trust may potentially be considered ‘high-risk’ due to the potential for income splitting. However, the ATO’s comments in this regard seem to be directed towards non-equity owners who bear no risk, have no right to vote and do not participate in the management of the firm.
- the guideline reinforces the fact that in order to be considered low-risk, the ATO will want the IPP to personally return more than 50% of the firm income received by the practitioner/related parties and pay tax at an average rate of more than 30%.
The publication of the guideline may cause taxpayers to review their existing arrangements and consequently, some taxpayers may modify their arrangement to prospectively come within the ‘low-risk’ green zone.
Taxpayers with pre-existing arrangements are able to continue to rely on the suspended Assessing the risk: allocation of profits within professional firm guidelines (issued in 2015, suspended in 2017) for the years ending 30 June 2018 through to 30 June 2022. This is on the understanding that their arrangement complies with those suspended guidelines, is commercially driven and does not exhibit features which are considered to be high-risk.
Furthermore, in recognition that certain IPP arrangements considered low-risk under the Suspended Guidelines may have a higher risk rating under the new guideline, the ATO are allowing a transitional period for those IPP’s to continue to apply the Suspended Guidelines to their arrangements until 30 June 2024.
The impact of the guideline is to put IPP’s on notice that their affairs will most likely be scrutinised by the ATO if they do not declare a sufficient share of practice income in their personal tax returns, thereby highlighting the importance of seeking professional advice as to how these guidelines may affect you. We recommend all affected professionals understand how their affairs will be seen by the ATO in light of the finalisation of this guidance.