Accounting & Tax, EOFY

Profits of Professional Services Businesses

personal services businesses

There is a new ruling from the ATO on arrangement that affect how professional service companies distribute their profits to principals. We give you the low down on these changes.

Draft guidance (PCG 2021/D2) released by the ATO and set to apply from 1 July 2021 takes a strong stance on how the profits of professional services firms are structured and how profits flow through to the professionals involved. The ATO is specifically concerned with structures designed to divert income so the professional ends up receiving very little income directly for their work, reducing their taxable income.

Where these structures appear to be in place to divert income to create a tax benefit for the professional, Part IVA may apply. Part IVA is an integrity rule which allows the Commissioner to remove any tax benefit received by a taxpayer where they entered into an arrangement in a contrived manner in order to obtain a tax benefit. Part IVA may apply to schemes designed to ensure that the professional is not appropriately rewarded for the services they provide to the business, or that they receive a reward which is substantially less than the value of those services.

The draft guidance sets out a series of tests to identify a practitioner’s risk level, looking at the structure of the business and how profits are distributed, and whether the structure has any high risk features.

Some arrangements that were previously considered low risk may now fall into a higher risk zone.

For professional services firms, it will be important to assess the risk level and this needs to be done for each principal practitioner separately.

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