[Article] PCG 2021/4 – Recent changes to the Allocation of Professional Firm Profits

The sleeping bombshell in the accounting industry right now is the Australian Taxation Office’s issuance of PCG 2021/4. The Practical Compliance Guidelines, which take aim at professionals in the financial, legal, medical, engineering, and many other consulting services industries, will have dramatic ramifications on these professions. As it means that many will be left paying more tax in order to avoid further scrutiny by the ATO.

It also leaves accountants across Australia with the unenviable task of communicating the outcome of the changes to clients. So it is critical for firms to be well-prepared to help those affected to understand what the guidance means and what their options are moving forward.

The guidance at a glance

The guidelines which were released just before Christmas following four years of consultation, set out the ATO’s approach regarding the allocation of profits from professional firms in the assessable income of individual professional practitioners (IPPs).

The ATO says the guidelines have been created because it is concerned with whether there is a risk that income earned by an IPP is not appropriately taxed to the IPP. Specifically, where there are arrangements involving taxpayers who redirect their income to an associated entity, and it has the effect of significantly reducing their tax liability.

To determine whether the PCG applies, professionals must assess two ‘gateways’ to evaluate whether an arrangement has a sound commercial rationale and that it does not include certain high-risk features.

If the gateways are satisfied, a risk assessment framework can then be used to rate IPP arrangements as low (green), moderate (amber) or high (red) risk.

And the ATO has warned that closer attention will be paid to those who fall in the red or amber zones.

The use of companies, trusts and other business structures do not themselves give rise to avoidance concerns, as there may be entirely valid non-tax-related reasons as to why an IPP receives less of the business' profits than would otherwise be the case. However, the challenge for professionals is that a wide range of structures and arrangements, often set up for legitimate commercial reasons, could now be considered riskier under the guidelines.

What can you do for your clients?

While the guidance is not tax law, it enables the ATO to communicate how it will apply its audit resources where tax laws are uncertain. Consequently, accounting firms need to ensure both their teams and their clients fully understand the impacts of the framework, so that they can position themselves in an acceptable risk position for dealing with the potential of an ATO audit.

By setting up processes to educate teams and inform clients of the changes, firms can not only help ensure they are not unfairly blamed for higher tax liabilities, it also allows clients to appropriately plan for the increased payments they will be required to make.

Furthermore, it shows clients just how proactive and well-prepared their firm is to keep them out of the crosshairs of the ATO.

Learn more about how to communicate these changes to your clients in our latest downloadable guide - HOW TO: 4 steps to deal with the professional firm profits changes in your firm