Key points
- The ATO’s Practical Compliance Guidelines 2021/4 will apply to all principals of certain professional firms starting in FY25.
- The Guidelines set out the risk of ATO audit or review activity in relation to the allocation of professional firm profits.
- Recent ATO communications highlight compliance issues in the legal profession.
The Australian Tax Office’s guidelines relating to the allocation of profits of professional firms, PCG 2021/4 (Guidelines), have been in place since 2022, with a two-year transition period for those with pre-existing arrangements that were considered to be low risk under the prior guidelines. With the transition period coming to an end last year, the financial year ending 30 June 2025 is the first year that the new Guidelines will be applicable to all professionals. The Guidelines apply to the principals of certain professional firms that provide services in recognised professions such as accounting, architecture, engineering, financial services, medicine and management consulting.
The Guidelines set out the risk of ATO audit or review activity in relation to the allocation of professional firm profits. The Guidelines target arrangements involving Individual Professional Practitioners (IPP) where entitlements to a share of the profits of their firm may ultimately be assessed to entities associated with the IPP (rather than the IPP themselves). The ATO considers such profits as comprising a mixture of income from the IPP’s personal exertion, as well as income generated from a business structure and its assets. You can read more about the guidelines in an article previously published by Pitcher Partners.
Compliance risks
Recent ATO communications have underscored the importance of the Guidelines, particularly in light of some compliance challenges observed across the legal profession. While the ATO has recognised that most lawyers do the right thing, they note there are a significant number who have not lodged tax returns or have incorrectly reported distributions from partnerships and associated service trusts.
ATO compliance actions
ATO compliance actions undertaken against the lawyers have included:
- reviews and audits
- default assessments
- garnishees
- payment arrangements
- prosecutions
Since the inception of the Guidelines, Pitcher Partners identified the challenges in effectively applying the risk assessment framework due to limited detail. This has resulted in a lack of clear and practical guidance to support IPPs to self-assess their arrangements. Or in some instances to know whether the Guidelines even apply to them.
To support practitioners Pitcher Partners has developed a professional firms risk assessment toolkit to help you self-assess your risk.
What should you do?
With the full rollout of the Guidelines applying in FY25 clients, both individual professionals and professional firms, should contact their Pitcher Partners representative to consider their arrangements and how the Guidelines affect them.
