ATO focuses on profit allocation within professional firms

The Tax Office has become increasingly aware of professional firms exploiting different business structures to manipulate profits distributed to individual professional practitioners (IPP).

 

The Tax Office has issued guidelines regarding how professional firms may be assessed on their tax compliance risks associated with profit allocation.

 

The guidelines apply if:

• An IPP provides professional services to the firm’s clients 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 is structured as a partnership, trust or company; and 
• The income of the firm is not personal services income.

 

 

An IPP may be rated as low risk if one of the following guidelines are met:

• The IPP receives assessable income from the firm in their own hand as an appropriate return for the services rendered; and/or
• At least 50% of the income to which the IPP and their associated entities are collectively entitled 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.

 

To determine an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or if there are no such employees in the firm, comparable firms or relevant industry benchmarks.

 

For more information, click here.