In brief - Arrangements exhibiting high-risk factors addressed but clarity still needed
The Australian Taxation Office (ATO) has released its Assessing the risk: allocation of profits within professional firms interim guidelines for the year ended 30 June 2018. Practitioners in professional firms such as accounting, architecture, engineering, law, management consulting and medical practices will be affected.
In 2014, the ATO released guidelines for the year ended 30 June 2015 and later years, subject to review in 2017 (former guidelines). By 2017 the ATO had concerns that the former guidelines were being misapplied and decided to suspend their application from 14 December 2017.
Since then there has been consultation between the ATO and stakeholders with a view to the ATO providing new guidance later this year. As this process is incomplete, the ATO has released the interim guidelines for the year ended 30 June 2018.
Former guidelines set income splitting benchmarks
The former guidelines permitted professional practitioners to engage in income splitting within certain limits (benchmarks). The former guidelines applied to practitioners who held equity interests in professional services firms directly or through associated entities (usually partner or director level practitioners). The firm could be a partnership, trust or company and the income of the firm could not be personal services income of the practitioner.
The three benchmarks were:
- the income derived by the professional practitioner had to be at least the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm. If the firm did not have any employees providing equivalent services, you could use data from comparable firms or industry benchmarks
- the income derived by the professional practitioner had to be at least 50% of the firm's income to which the practitioner and their associated entities were collectively entitled
- the practitioner and their associated entities both had to have an effective tax rate of 30% or higher on the income received from the firm
It did not matter what form of income was derived by the practitioner.
If any of the benchmarks was satisfied, then the practitioner would be considered low risk and unlikely to be subject to ATO review provided no other compliance issues were evident.
Interim guidelines address arrangements exhibiting high-risk factors
For the year ended 30 June 2018, the ATO will continue to apply the former guidelines to arrangements in place before 14 December 2017 to determine whether practitioners are low risk, provided that certain "high risk" factors are not exhibited.
The high-risk factors are:
- lack of any meaningful commercial purpose regarding arrangements, including:
- disposal of an equity interest through multiple assignments
- the creation of new discretionary entitlements such as dividend access shares
- utilising amortisation leading to differences between tax and accounting income
- disregard for capital gains tax (CGT) consequences and inappropriate use of CGT concessions
- assignments where profit sharing is not directly proportionate to the equity interest held
- the creation of artificial debt deductions
- undertaking an assignment to dispose of an equity interest to a self-managed super fund
- assignments where the arrangement is not on all fours with the principles of Federal Commissioner of Taxation v Everett and Federal Commissioner of Taxation v Galland.
There are two observations that can be made.
The first is that the interim guidelines will not be available to practitioners who acquire equity interests in the firm, or where the firm is restructured, on or after 14 December 2017.
The second is that there is no further explanation of the high-risk factors so there is much uncertainty. In particular, the interaction between the high-risk factors and the existing provisions of the legislation such as the general anti-avoidance, CGT and superannuation provisions is unclear. Hopefully the final guidelines will clarify the position and will be available soon.Carlos Gouveia
Regulatory and financial services
Colin Biggers & Paisley
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