Overview
The ATO released new draft guidance relating to the allocation of professional firm profits on 1 March 2021. The Draft Practical Compliance Guideline PCG 2021/D2 (the Draft PCG) explains how the ATO intends to assess the tax risk of individual professionals who operate professional practices and how they will allocate their compliance resources towards these professional individuals. The PCG is proposed to apply from 1 July 2021.
Prior Rules & Transition
The Draft PCG details that the ‘old’ guidance materials (which were suspended on 14 December 2017) will continue to have effect until 30 June 2021 for arrangements entered into prior to 14 December 2017. There is also further transitional period for arrangements entered into prior to 14 December 2017 until 30 June 2023. Effectively, if you have an ‘old arrangement’ the commencement date that should apply is 1 July 2023 (the 2023/24 income year).
Applying the PCG
The draft PCG specifies that you need to pass through two key gateways to use the framework. If you do not pass both these gateways you cannot use the risk assessment factors.
Gateway 1 — Commercial Rationale
The business structure’s design, and the way profits are distributed must be based on commercial terms. The Draft PCG sets out the various conditions to consider in reviewing the commercial substance of professional firm structures.
Gateway 2 — High-risk Features
The arrangement must not contain any of the following ‘high-risk’ features:
- those covered by a Taxpayer Alert;
- financing arrangements relating to non-arm’s length transactions;
- exploitation of the difference between accounting standards and tax law;
- arrangements where a partner assigns a portion of a partnership interest that are materially different in principle from Everett and Galland; and
- multiple classes of shares and units held by non-equity holders.
If you pass both gateways then you proceed to apply the risk assessment framework.
Risk Assessment Framework
The risk assessment framework uses the three criteria that were contained within the ‘old’ professional firm guidance material. It generates a score for each criterion for the professional and then calculates a total score to assess the person as either low, moderate or high risk.