September 4, 2014

Say hello ATO – Compliance Activity targets allocation of profits within professional services

In recent months, there has been an increase in activity by the ATO in respect to organisational compliance.

The ATO now has professional services firms* within their sights, following the release a set of guidelines to assess tax compliance risks and allocation of profits, specifically targeting the professional services industry.

The ATO have determined a number of risk assessment factors for remuneration of an ‘individual professional practitioner’ (IPP), with compliance activity around these criteria to come into effect from the 2014-2015 financial year.

Taxpayers will be rated as low risk, and will not be subject to compliance action on this issue, where their circumstances indicate they meet one of the following guidelines regarding income from the firm (salary, distribution of partnership or trust profit, distributions from associated service entities, dividends from associated entities or any combination of these):

  1. The IPP receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm. In determining an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or if there are no such employees in the firm, comparable firms or relevant industry benchmarks – for example, industry benchmarks for a region provided by a professional association, agency or consultant, and/or
  2. 50% or more of the income to which the IPP and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the IPP, or
  3. The IPP, and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.

If an organisation cannot satisfy any of the above guidelines, the IPP’s arrangement will be considered higher risk. In these cases, the lower the effective tax rate, the higher the ATO will rate the compliance risk posed by the arrangements and the greater the likelihood of ATO compliance action being commenced. For example, an arrangement with an effective tax rate of 15% will be rated as higher risk than one with an effective tax rate of 25%.

The release of these guidelines shows a continued effort by the ATO to target organisations who have failed to adhere to their compliance requirements.

Whilst we cannot provide advice on this matter, as your professional partner, we feel it worthy to bring to your attention to enable you and /or your tax advisor to undertake assessment of your tax compliance given the ATO’s stated position.

*These guidelines will apply to relevant arrangements within professional firms including, but not limited to, those providing services in the accounting, architectural, engineering, financial services, legal and medical professions.

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