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  • Assessing the risk: allocation of profits within professional firms

    We've published revised guidance for professionals when considering the allocation of profits by professional firms. The draft Practical Compliance Guideline PCG 2021/D2 follows consultation with peak professional bodies and concerns arrangements involving taxpayers who redirect their income to an associated entity from a business or activity which includes their professional services and it has the effect of altering their tax liability.

    Risk-based compliance approach

    The revised guidance explains our risk-based compliance approach, which requires two qualifying ‘gateways’ to be passed before applying the risk assessment framework.

    The gateways require those with non-commercial arrangements and those arrangements with high risk features, to engage with us before applying the guidance.

    Where an individual professional practitioner (IPP) passes the gateways, they then self-assess against the risk assessment framework to determine the type of compliance attention that will be given to their arrangement.

    The revised guidance combines three risk assessment measures into a single methodology. This gives an overall risk rating of low, medium or high risk, including:

    • the proportion of profit entitlement from the whole of the firm group that is returned in the hands of the IPP
    • the total effective tax rate for income received from the firm by the IPP and associated entities
    • the renumeration returned in the hands of the IPP as a percentage of the commercial benchmark for the services provided to the firm.

    Where arrangements featuring high risk features or lacking apparent commercial rationale are identified, we will treat the risk through the application of the integrity provisions, including Part IVA.

    When the PCG will apply

    The PCG will apply from 1 July 2021.

    What you should do

    IPPs who are contemplating entering into new arrangements or have concerns regarding potential high risk factors within their existing arrangements should email us at Professionalpdts@ato.gov.au

      Last modified: 01 Mar 2021QC 42218