First, in respect of service arrangements they are continuing to monitor adherence to the ATO’s guidelines. As part of their monitoring processes they will be meeting with the 12 major law firms in September.
In examining whether firms are within the ATO’s guidelines they are focusing on “cost base” and “return on costs”. The main area of concern is that they are seeing since 2006 is that some firms, in an attempt to meet the ATO ratios are passing through the partnership or firm costs which should not be met by the service entity in an attempt to artificially lower “return on costs”.
The second area of focus is that since 2006 there has been a number of practices that have either incorporated or undertaken other structural change. Where CGT rollovers are not available issues have emerged in respect of the treatment of goodwill (ie the use of “no goodwill arrangements), work in progress, Division 13A, value shifting where shares have differing dividend rights and the acquisition and disposal of shares on a no gain basis. Arrangements that are being subjected to closer scrutiny are those transition cases where, following the conversion to the new structure, the partner’s income share is now minimal or zero and, in some cases there is evidence of behaviours such as double dipping of superannuation (via salary sacrifice and a claim in the new related entity).
In this area the ATO is in the main exploring the tax risks of these structures. However, it has commenced more focused reviews in a small number of cases. As part of a review of the issues associated with incorporation the ATO has sought submissions.