Professional Partnerships Under Increased ATO Scrutiny

Professional Partnerships GREY3

Professional Partnerships Under Increased ATO Scrutiny


The ATO has issued draft guidance regarding the use of structures in relation to professional practices adopting an effective “look through” approach to the income levels of the Individual Professional Practitioners (IPP). This follows on from the Tax Payer Alert TA 2013/3 issued last year when the ATO which set out the ATO's concerns. 


The guidance does not replace or change the guidance previously provided by the ATO in respect of transactions between the professional partnership and the related service entity.  Those guidelines remain unaffected by the recent announcement.


Essentially, the ATO are concerned that the individuals who are actually undertaking the work as an IPP may not be returning the income levels that would otherwise be expected.  The ATO is using three tests to determine whether a taxpayer is low or high risk.  These are as follows:

  • IPP receives 50% or more of the income in their own hands from the firm;
  • IPPs & associates effective rate of tax 30% or more; and
  • IPP receives an “appropriate return” for services provided.  Reference to professional staff in firm who provide equivalent services (i.e. salaried partners) or comparable firms.


If 1 or more of the above is satisfied then the ATO will generally consider the taxpayer to be low risk and therefore unlikely to be the subject of direct compliance activity.  Where none of the above tests can be satisfied then the taxpayer is categorised as high risk and is likely to face compliance activity.


Within the high risk category there is a further refinement of risk levels with taxpayers who have a lower effective rate considered to be higher risk. 


The ATO has made it clear that it is seeking test cases and that it intends to apply compliance resources in the 2014-15 years and beyond.  The ATO has indicated that the arrangements could potentially fall under the anti avoidance legislation.  Accordingly, we suggest that those firms and the respective IPP that could fall into the higher risk category review their current arrangements.


Should you have any queries in relation to the above guidance or your investment and trading structures generally please contact your relevant ESV engagement partner on 9283 1666.


Article by David Prichard