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01 Sep 14 Assessing the risk: allocation of profits within professional firms

The ATO has published guidelines which explain how it will assess the risk of Part IVA applying to the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income.

The ATO says it has formulated these guidelines after extensive consultation with legal and accounting professional bodies, in order to understand the commercial, structural and operational issues affecting professional firms in these industries and, more broadly, for their clients in other professions. As a result, these guidelines apply to relevant arrangements within professional firms including, but not limited to, those providing services in the accounting, architectural, engineering, financial services, legal and medical professions.

Under the heading "What are the ATO's concerns", the guidelines state as follows:

"In some cases, practice income may be treated as being derived from a business structure, even though the source of that income remains, to a significant extent, the provision of professional services by one or more individuals. In this context, we are concerned that Part IVA may have application, despite the existence of a business structure. In particular, we are concerned that Part IVA may apply to schemes which are designed to ensure that the IPP [individual professional practitioner] is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services. Where an IPP attempts to alienate amounts of income flowing from their personal exertion (as opposed to income generated by the business structure), the ATO may consider cancelling relevant tax benefits under Part IVA.

The ATO acknowledges that the general anti-avoidance provisions have historically been applied to assess individuals on income generated by their personal exertion or application of their professional skills, rather than profits or income generated by a business structure. However, we consider that Part IVA also has potential application where the IPP arranges for the distribution of business profits or income to associates without regard to the value of the services the IPP has provided to the business."

In a media release dated 1 September 2014, Deputy Commissioner Michael Cranston said:

"Professional practices may legitimately operate as a partnership of discretionary trusts or through similar structures. The ATO is reviewing remuneration arrangements used by accountants, lawyers and other professionals to make sure people are using these structures appropriately."

The media release notes that the ATO previously issued Taxpayer Alert TA 2013/3 entitled "Purported alienation of income through partnerships of discretionary trusts - on these type of arrangements".

For a copy of the guidelines, go here


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