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.

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

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.