ATO – IMPORTANT INFORMATION
Warning – ATO attack on professionals
The ATO has finally released its final version of the ATO approach on allocation of professional firm profits (PCG 2021/4) just days before the Christmas break with a start date of 1 July 2022. The ATO released its draft ruling at the start of 2021 and closed for consultation in March/April 2021. The ATO received papers from all the major professional bodies showing how inequitable the ruling is, but all that has fallen on deaf ears and the ruling remains relatively unchanged apart from some extra examples dealing with companies and unit trust structures.
The whole idea of the ATO putting a ruling into place came about when some high end lawyers decided to revert professional income to their self managed super fund through the use of Everrett assignments which caused the ATO to scrap the original restrictive but common sense ruling on professional profits. This was clearly subject to Part 4A which the ATO should have dealt with appropriately and leave the rest of the professionals alone. But no, they decided to sledge hammer all professionals by the acts of a few.
So the first question is – when you say professionals who do you mean? The ruling defines a professional as “ a member of a recognised profession”. Paragraph 33 of the ruling states for the purposes of the guideline, “the Australian Council of Professions provide a useful reference for defining a profession.” Indicators of a profession include:
- Those required to be accredited and adhere to ethical guidelines in order to enter and maintain practice;
- Those who are accepted by the public as possessing special knowledge and skills in a widely recognised body of learning derived form education, research and training at a high level
- Their behaviour and practice are beyond the personal moral obligations of an individual
- They uphold a high standard of behaviour in respect to services provided to the public and in dealing with professional colleagues.
The ruling states that these arrangements relate to professionals including but not limited to those providing services in the accounting, architectural, engineering, financial services, legal, medical and management consulting professions.
Who does it exempt – those subject to the Personal services income rules ie sole traders. Please note for medical professional you still need to comply with IT 2503 which basically states that medico’s trading through a structure must declare all the profit as wages each year. If you considered to be a professional medical practice then the owner medico’s in the practice would have to comply with this new ruling.
The ruling states that 2 gateways need to be passed, commercial rationale gateway and high risk feature gateway before you can rely on the risk matrix within the ruling. So any features to firm structures like dividend access shares, employee income shares, preferential profit share structures would cause the professionals to not be able to rely on the ruling. This would deem them to high risk of an ATO audit.
Once the gateways are passed 3 risk factors are included in a table:
- % of profit entitlement received by the professional
- % of effective tax rate of the professional and associated entities (eg bucket company and spouse/children)
- An optional commercial remuneration calculation
Once the 2 or 3 above have been calculated you will be assigned a number which would lead to a stop light rating of green, amber or red. Green is good and low risk of audit, amber is telling you to move to green and red is high risk of audit.
Several examples are included in the ruling which highlight examples of different structures and income taken by the professional. Its very clear from doing some numbers that the ATO wants the professional to take at least >60% of the income derived themselves either through wages, profit distributions or dividends yearly. It is very difficult get to the green zone without doing this by the way the ATO has developed their table. Based on doing some numbers the additional tax payable by going from red to green can be as little as $2,000-$3,000 depending on your circumstances. This seems an extreme approach to collect a few thousand more in tax.
The ATO has introduced some transitional arrangements for those who have been relying on the previous guidelines of 14/12/2017 which basically states that you can rely on the old guidelines until 30 June 2022. But from this date you must comply with this ruling. However, the ruling also states that some professionals who were considered to be low risk but due to this ruling would be high risk would have until 30 June 2024 to restructure and then abide by the ruling.
Clearly we see this as an attack on those professions who have significantly supported the country during the covid crisis – thanks you for your support ATO.
Those clients affected by the ruling – we are happy to help you work through your rating and possibly the need to restructure your firms remuneration model.
Please note these are the personal views of the writer of the article Simon Flowers