Professional Firms Allocation of Profits under review

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Professional Firms Allocation of Profits under review


The ATO has suspended the application of its guidelines in relation to the use of structures and Everett assignments as of 14 December 2017 which apply to professional practices including lawyers, architects and doctors.

In 2015 the ATO released guidance in relation to Everett Assignments and the safe harbour metrics it would apply when considering the splitting of income from professional partnerships.

The guidance adopted an effective “look through” approach to the income levels of the Individual Professional Practitioners (IPP).  The ATO provided three tests to determine whether a taxpayer is low or high risk.  These were 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 one or more of the above was satisfied then the ATO would 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.

The ATO historically stated that the guidelines would be reviewed in 2017 and as part of the process it has identified arrangements that go beyond the scope of the guidelines and demonstrate high risk factors, including the use of related party financing and self-managed super funds.

The use of self-managed superfunds has attracted the attention of the ATO across several areas due to the low tax rate within superannuation, the reduced ability to contribute into superannuation and whether the sole purpose test is met.

In suspending the arrangements, the ATO advised that professionals who have entered into arrangements before 14 December which comply with the guidelines and do not exhibit high risk factors can rely on those guidelines.

Arrangements entered into prior to 14 December exhibiting any of the high risk factors may be subject to review with any new guidelines apply prospectively.

If you are considering changing your structure whether it be in relation to a professional practice or not, contact your ESV engagement partner to sure the best structure is established for your business needs.