Understanding the Practice Compliance Guidelines for the Allocation of Firm Profits

The PCG 2021/4 will come into effect on July 1, 2022, one year beyond the initial start date proposed in Draft PCG 2021/D2. Professional businesses and its Individual Professional Practitioners (“IPP”) will need to consider how the PCG impacts them in the coming months, as well as what activities would be suitable to enhance their standing.

Individual Professional Practitioner (IPP) offers clients with customised, knowledge-based services. Listed below are a few of the professions that professional services firms:

What does the PCG entail?

Taxpayers with pre-existing arrangements may still rely on the suspended guidelines up until the year ending June 30, 2024, after which the new rules will take effect.

The ability to rely on the suspended guidelines is essential because, unlike the PCG, the suspended guidelines provided a simplified and easier to satisfy ‘safe harbour’ compliance approach if the individual professional practitioner (IPP) was assessed on at least 50% of the income to which the IPP and associates were collectively entitled from the professional services firm, or the IPP and their associates had an effective tax rate of 30% or higher on the income generated from the professional services firm.

This PCG reiterates long-standing ATO concerns that, due to the organisational structure of professional firms, firm arrangements might be applied to redirect income from an IPP to an associated entity, potentially changing the IPP’s tax burden. To address this, the ATO affirmed in the PCG a risk assessment framework to assess IPP compliance. There are two “gateway tests” that must be passed before the risk assessment framework may be used:

After passing the gateway tests, the IPP can determine their risk rating by evaluating it against the following factors:

According to the ATO, IPPs in the amber danger zone will probably trigger additional analysis, and for red zones, reviews will probably start as a matter of priority. However, the PCG is offered for use in self-assessment. It is recommended that IPPs self-assess their risk rating in accordance with the PCG and then communicate with the ATO to discuss their arrangements if they are in the amber or red zones. IPPs are required to assess their agreements annually using the PCG. The simultaneous documentation supporting the risk rating will be taken into consideration as a starting point if the ATO reviews such arrangements.

The PCG requires an IPP that passes the two Gateways to self-assess against two or three risk assessment factors, with the third being optional to determine what risk zone the IPP is in.

What you should do as an IPP?

Professional services clients should conduct a risk assessment using the PCG now that the ATO has released the finalised version of the PCG. While clients using the suspended standards could continue until June 30, 2024, consideration should be made to how these clients would be able to receive a low risk rating after that.

We advise you to conduct a risk assessment applying the PCG for the 2022 fiscal year. If you are in the amber or red zones, you should be informed of the risk ratings assigned by the ATO and what would be necessary to eventually move into the green zone.

Here are some of the issues to take into consideration when you conduct your Risk Assessment:

• If your arrangements fulfill the Gateway standards, and if not what measures could you do to meet these requirements?
• How your IPPs would be rated if the two or three (if necessary) RAFs were applied to each IPP’s current situation.
• What changes, if any, would be necessary to income distribution patterns for an IPP to be certified as low risk under the PCG?

You should also remember that the PCG in no manner substitutes for, alters, or affects how the law is applied according to the ATO.

Star Advisers can assist you regarding these important changes. Email us at info@staradvisers.com.au to find out your audit score.