Assessing the risk of Allocating Profits

Assess RiskATO

Assessing the risk:
Allocation of profits within professional firms

The ATO has recently published Practical Compliance Guideline (PCG) 2021/4 – Allocation of professional firm profits – ATO compliance approach.

What is a ‘PCG’?

In its commitment to transparency and collaboration with the tax community, the ATO regularly drafts and publishes its practical administration approach to assist taxpayers in complying with relevant tax laws. Often, but not always, this is due to the relevant tax law or issue being complex, or as a result of prominent interpretations on the matter not being addressed.

What is PCG 2021/4 about?

The infamous tax issue of the allocation of profits from professional firms is contentious for good reason.

Example 1: Often after setting up shop, professional practitioners such as lawyers, doctors and even accountants, think “hang on, can’t I just allocate some of this profit to my non-working spouse?”.

The short answer: no. But why not?

Well if it were not specifically addressed by legislation and various guidance, you could have been able to. In reality, it will often fall into the scope of tax avoidance, rather than tax planning, as you, the professional practitioner, are avoiding tax by allocating it to your spouse despite it being earned by you.

thinking about tax profits

Isn’t that what the PSI rules cover?

In short, yes, partially. The Personal Services Income (PSI) rules were brought in many years ago to address arrangements such as, but not only, these. Essentially PSI rules seek to address this behavior on a broader scale, and are not limited to only professionals. In fact, the most common type of clients impacted by the PSI rules are tradesmen. This PCG is focused specifically on professional firms, partly due to the prevalence of professionals using different entity structures to shift or allocate profits amongst.

What does it mean for me?

If you are not involved in such activity, nothing. If you are, then it doesn’t necessarily mean what you are doing is against the law or involves avoiding tax.

This is where many taxpayers can become confused with published guidance – the objective is primarily to inform taxpayers of the Commissioner’s opinion, and how he will approach administration of such arrangements.

As with many matters within the realm of discussions concerning the Part IVA anti-avoidance provisions, it is important to ensure what’s being done is being done correctly and legally.

As always, Crown Tax is here to assist and we are happy to continue the discussion with you if you believe this guidance may impact you. Or, if you simply want to discuss your options for tax planning and structuring, please reach out and our specialists would be happy to assist.

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