Accountant’s Foundation: Professional Firm Profit (PFP)

What is PCG 2021/4? 

 PCG 2021/4 is a practical compliance guideline regarding the allocation of profits from professional firms, released by the ATO and in effect from 1st July 2022. 

PCG 2021/4 is focused on arrangements where taxpayers redirect their income, which includes professional services, from a business or activity to an associated entity so that the outcome is that they significantly reduce their tax liability. 

Who Does this Impact? 

PCG 2021/4 relates to IPP (Individual Professional Practitioner) defined as a member of a recognised profession, including: 

• those who are required to be accredited and adhere to ethical guidelines in order to enter and maintain Practice 
• Those accepted by the public as possessing special knowledge and skills 
• Those who uphold a high standard of behaviour with respect to the services provided to the public 

The guideline applies if  

• The IPP provides professional services to clients or is actively involved in the management of the firm 
• Is not subject to the PSI rules 
• If the company has a legally effective structure, for example, partnerships, trusts and companies (but not sole traders) 
• The IPP is an equity holder 
• The arrangement is commercially driven (ie it satisfies Gateway 1), and 
• The firm and IPP do not demonstrate any high-risk features (ie Gateway 2 is satisfied). 

 You can only assess one professional at a time – two in a relationship will need to be assessed separately to include their share of profits from the overall professional firm. 

 Why is PCG 2021/4 Important? 

The ATO has shared the PCG 2021/4 guideline as their compliance approach, which includes a scoring table, splitting risk factors into red, amber and green zones. Clients who choose not to be guided by it and whose score is in the amber and red zone can expect to be reviewed and audited by the ATO. 

 How to Stay in the Green Zone? 

The guidelines provide a table that sets out the score for each of the following risk assessment factors. 

• How much of the profit goes to the professional as a percentage of the entire profit from the firm group?   
• Secondly, what is the effective tax rate?  
• The ATO has also included an option factor of how much remuneration has returned in the hands of the professional, though they note that this is difficult to determine accurately. 

 A score of seven or under using the first two factors or of 10 and under using all three factors will allow your clients to remain in the green zone. 

Key Tips for Dealing with PFP 

Keep Contemporaneous Records 

Be sure that you are keeping records at the time of decisions that detail the arrangement that you have applied. 

Annually Assess Your Clients' Eligibility to Apply the Guidelines

The ATO expects that every year, the guideline will be reviewed to review eligibility as the business arrangement changes and that this assessment will be documented. 

Develop a Firm-Wide System for PFP Advice  

When you have a system implemented across the entire Practice, it ensures that all accountants are providing the same advice and will de-risk your firm.  

 ChangeGPS contains the Professional Firm Profit – Tax Advice System – everything you need to train your team and the steps to implement this advice. 

Educate Your Clients on the Changes 

Make sure that your clients are aware of these guidelines and their need for annual review. 

ChangeGPS contains the VPP Client email – Tax Advice – Professional Firm Profit Allocation to help you educate your clients. 

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