Effective 1 July 2021
On 1 March 2021, the Australian Taxation Office (ATO) released Draft Practical Compliance Guideline PCG 2021/D2 Allocation of professional firm profits – ATO compliance approach (Draft PCG) that sets out the ATO’s proposed compliance approach to the allocation of profits by professional firms, in particular medical professionals and their practices.
The Draft PCG puts most previously acceptable arrangements into the moderate or high-risk category. The Draft PCG does not explain the reasons or necessity for this shift. The final will be issued in June 2021 to be made effective 1 July 2021.
ATO Concerns over “Redirection of Income” through structuring of Medical Professionals and their practices.
When SMART take on a new medical client we it is not uncommon that a restructure is required to ensure you complied with the ATO’s requirements around personal services income (PSI) income for medical practices, particlarly in relation to your service trust and family arrangements.
9 out of 10 medical professional clients that join SMART require restructuring because their prior accountants treated their businesses as normal business entities and ignored these specific medical rules.
Due to the organisational structure of professional firms, the ATO has concerns about firm arrangements involving the redirection of income from an Individual Professional Practitioner (IPP) to an associated entity, which could alter the IPP’s tax liability.
As such, the ATO is proposing a risk assessment framework to assessing compliance by IPP’s. In order for IPPs to access the framework set out in the PCG, some pre-conditions must be satisfied including meeting the following two ‘Gateways’:
| Gateway 1 | There is sound commercial rationale for entering into and operating the arrangement or structure; and |
| Gateway 2 | There must not be certain ‘high-risk features’ as set out in the PCG. |
If an IPP’s arrangement satisfies the pre-conditions, including both gateways, the ATO’s risk assessment framework can assist the IPP to understand the tax risks that their arrangement exhibits, depending on whether the arrangement is classified as a:
Generally, the lower the risk the IPP’s arrangement exhibits, the more favourable the ATO’s compliance approach will be towards the IPP.
Where an IPP’s arrangement fails to meet either or both of the two “Gateways”, the risk assessment framework set out in the PCG will not be available to the IPP and the Commissioner may seek to review the arrangement and apply the anti-avoidance provisions under Part IVA of the ITAA 1936.
Clearly the ATO has seen this with many IPP’s so these guidelines are being provided so taxpayers can ‘self-assess’ their risk in relation to profit allocation.
Our experience indicates the ATO will be focusing on this area for audit. Now they will have a tool to quickly assess their risk by asking taxpayers for their PCG self-assessment so they can decide whether to proceed their review further.
New Annual Assessment Documents Required
Under the new PCG, the ATO expect you to annually assess your eligibility to apply this Guideline which includes documenting
the assessment of your eligibility to apply this Guideline and review your eligibility as your business or arrangement changes.
Let others know!
The ATO has been bubbling on this for a while as it is a focus point for compliance review. Given it will be final by 30 June 2021 we will
be required to respond quickly.
At this stage we are working through the PCG requirements ourselves so we can have a clear plan to assist you in a efficient and cost
effective manner.
As previously mentioned, we often see redirection of income that is not in accordance with the ATO guidance. This results in client's
requiring a restructure to ensure compliance.
As many accountants are not familiar with the nuances of the ATO rules around medical professionals, we welcome the opportunity for a
conversation on how we can help you or your colleagues.
Get in touch
Please don’t hesitate to contact us on (03) 5911 7000 or via email if you'd like to set up a meeting, either via phone, online or in
person.
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