We note an article in the Australian Financial Review on Monday 16 February 2009 titled 'Tax Office takes aim at rorts by professionals'. The article includes quotes from Mark Konza that indicates the Tax Office is concerned some partners in professional practices are returning incomes that are lower than some of the employees in the firm. It is noted that many owner operated non-professional practice commercial businesses will pay the owner salaries less than what are being paid to some of their higher paid employees.
Would the Tax Office indicate whether they will be taking any action in relation to these other non-professional practice commercial businesses to increase the income of the owner operator?
If it is not intended to take such action could the Tax Office indicate the relevant differences between professional practices and these other commercial businesses?
Response
The Tax Offices recognises that the legal and accounting professions are an important part of the Australian economy and an important part of the Australian taxation system. Tax professionals influence all other sectors of our society on taxation matters.
Like all other important sectors of our economy, the Tax Office monitors the tax compliance of the legal and accounting professions. With those professions we have seen instances in the past of grossly excessive fees charged through service trust arrangements to shift income to lower taxed family members. Those practises have largely been resolved through our collaborative approach with the professions. The guide material we have issued suggests when taxpayers will be at low risk of audit on these types of arrangements (where their service entity fees are below indicative mark-up rates) and most cases reviewed show those indicative rates are being followed.
More broadly, the Tax Office’s interest in any taxpayer may be summarised as the need to understand the economic performance of the taxpayer, their comparative taxation performance and the reason for any material discrepancy. In that context, where taxpayers operate through different structures we look at the circumstances of the establishment of the structures to ensure they are properly implemented, including conformity with any regulatory, trade or professional requirements. Where amounts are paid to related entities we examine the commerciality of those arrangements. Where salaries paid to partners fall well below that of similarly qualified employees, the broader arrangement will be reviewed to assess any associated risk.
From year to year, the Tax Office evaluates the risk around all significant industries and practises. The highest risk areas are flagged in our annual compliance program as we are most interested in optimising voluntary compliance.
Meeting discussion
Deputy Commissioner, Mark Konza advised members that the legal and accounting professional project has been in place for a number of years, including involvement in the service entity project. Most of these are SMEs involved in turnover aspects. Currently, a small team is undertaking ongoing analyst work.
It was not intended to focus only on these professions, however, a large part of the work relates to these professions. Members were advised that a recent service trust case involved an engineering firm.
Arrangements have been seen where the 'legalities' and 'practice' do not align as well as they could and it was this comment that has been referred to in the media.
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