ATO Game Changer (in a bad way) – Allocation of Professional Firm Profits

Are you operating as a Professional Services provider… like a Lawyer, Accountant, Architect, Medical Professional?

If so, then a new “guideline” has been issued by the ATO which seeks to treat a greater amount of income as taxable in the professional’s name, and less in the hands of related parities or entities. Importantly, this is a new guideline, which is in addition to the existing Personal Services Income (PSI) Rules. So, an additional compliance measure to comply with.

You will hear more about this from Holmans in the coming months and particularly at Tax Planning.

But here is a quick summary:

  • The Guidelines are just that, “Guidelines” and not actually tax law. Rather the guidelines seek to help the ATO select Audit Targets. A covert way of achieving the same result some would say. Applies to businesses where you pass the standard PSI rules.
  • There are 2 “Gateway” tests to determine if you are an automatic risk, or whether you can apply the “Traffic Light” tests. Most clients will pass the Gateway requirements without too much hassle, though additional documentation is likely needed in Year 1.
  • There is then a Traffic Light system (Green is good, Red is bad) applied via 3 tests (“factors”)…. The ATO expect supporting documentation for your assessment.
  • These guidelines do not catch Trades or other business types… which the Accounting Profession have argued is discriminatory, but it appears to have fallen on deaf ears. Size of the business also seems to have been ignored.
  • Ongoing lobbying is occurring from multiple professions.
Risk assessment factor Score
Factor 1: Proportion of profit entitlement from the whole of firm group returned in the hands of the professional More than 90% More than 75% to 90%, inclusive More than 60% to 75%, inclusive 50% or more to 60%, inclusive More than 25% to less than 50% 25% or less
Factor 2: Total effective tax rate for income received from the firm by the professional and associated entities More than 490% More than 35% to 40%, inclusive 30% or more to 35%, inclusive More than 25% to less than 30% More than 20% to 25%, inclusive 20% or less
Factor 3: Remuneration returned in the hands of the professional as a percentage of the commercial benchmark for the services provided to the firm More than 200% More than 150% to 200%, inclusive More than 100% to 150%, inclusive More than 90% to 100%, inclusive More than 70% to 90%, inclusive 70% or less

The Traffic Lights – Don’t be in the Red column unless you have Audit Insurance and very good documentation.

Risk zone Risk level
(of an Audit)
Aggregate score against first 2 factors Aggregate of all 3 factors
Green Low risk 7 or less 10 or less
Amber Moderate risk 8 11 and 12
Red High risk 9 or more 13 or more

Reporting requirements or how the ATO intend to collect this information is still to be published. What we do know is that Tax Planning will be important tool for professional service providers in the coming years to ensure you don’t inadvertently fall foul of these guidelines and end up in the “high” audit risk category.

The ATO Guidelines in full are available here. Examples are also provided – Example 4 for example, outlines some of the complexities in undertaking the effective tax rate calculations.

Please do not hesitate to contact our office if you have any queries.

Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.

Need assistance and want to know more?
Contact Holmans today;

Holmans Noosa: (07) 5430 7600 or email
Holmans Maroochydore: (07) 5451 6888 or email