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ATO suspends guidelines for allocation of profits within professional firms

ATO suspends guidelines for allocation of profits within professional firms

By LIV Commercial Law section

ATO Practice Management Remuneration/Wages Taxation 

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The Australian Taxation Office (‘ATO’) has suspended the application of its Assessing the Risk: Allocation of profits within professional firms guidelines (‘the Guidelines’) and Everett Assignment web material pending review.
 
The Guidelines explained how the ATO would assess the risk of Part IVA of the Income Tax Assessment Act 1936 applying to the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income. The Everett Assignment web material concerned the application of the Guidelines when assessing the risk of such assignments for the purposes of Part IVA.
 
The Guidelines set out benchmarks which needed to be satisfied for the remuneration arrangements of an individual professional practitioner (‘IPP’) to be classified by the ATO as low risk. Taxpayers were required to meet one of the following benchmarks to qualify for the low risk rating:
 
Benchmark 1: Equivalent remuneration
The IPP receives assessable income from the firm in their own hands as an appropriate return for services provided to the firm.
Benchmark 2: 50% entitlement
50% or more of the income from the firm, to which the IPP and their associated entities are entitled, is assessable in the hands of the IPP.
 
Benchmark 3: 30% effective tax rate
The effective tax rate must be 30% or higher on both:
  • income from the firm to which the IPP is entitled; and
  • income from the firm to which the IPP and their associated entities are collectively entitled.
The ATO has advised that the Guidelines and Everett Assignment web materials were suspended due to concerns that a variety of arrangements, exhibiting high risk factors not specifically addressed within the Guidelines, were being entered into.
 
The LIV is currently consulting with the ATO on replacement guidance, which it anticipates will be introduced in mid-2018.
In the interim, practitioners or practices planning to enter into new arrangements are advised to contact the ATO at Professionalpdts@ato.gov.au or engage with the ATO via its early engagement portal.
 
Practices with existing arrangements pre-suspension of the Guidelines can access an archived version here, for reference.
 
 
Commercial Law Section
T: (03) 9607 9357

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