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ATO practical compliance guidelines discriminatory and unfounded

ATO practical compliance guidelines discriminatory and unfounded

I am a partner at Pitcher Partners and as a Partner, I am a business owner.

Like most of the business owners who are my clients, I bring years of education, experience, relationships, leadership and effort to work everyday to try to run a profitable business. These factors are not distinguishable by industry. The owners of the property developer, fashion retailer, software engineer, shoe care manufacturer, office furniture wholesaler, grass seed farmer, PR agency and law firm clients I have represented over the years all have this in common.

However, despite the fact that in all these examples the owners of equity in the business have been contributing their IP towards the profitability of the enterprises, the ATO has for many years, and through various means, sought to carve out the professional services industry and expect proprietors of those businesses to treat the profits in a particular way.

The latest iteration is the Practical Compliance Guide 2021 / D2, Allocation of Professional Firm Profits – ATO compliance approach.

This is not new legislation passed through Houses of Parliament, it is not an interpretation of law determined under the stress test of a Court decision, nor is it a Public Ruling binding on the Commissioner based on the interpretation of application of a section of the Income Tax Assessment Act.

It is “administrative guidance” as to the ATO’s proposed compliance approach in respect of the application of the general anti-avoidance provisions, Part IVA.

However, while the ATO might describe it as “administrative guidance” I would suggest the threat contained therein of, and I quote, “Reviews are likely to be commenced as a matter of priority. Cases may proceed directly to audit. We are likely to use formal powers for information gathering”, in circumstances that were previously considered acceptable and fully compliant with the law, is far from “guidance”.

I think the threat of audit with no legislative basis is closer to bullying. Although this may be the ultimate bluff, the ATO knows the advisor community has no choice but to explain the ATO position to their clients and that it is unlikely many clients will choose to defy the position.

This creeping attack on the service industry has been happening for a while. We all hoped the Personal Service Income legislation released in 2000 which established the “personal service business” concept should have provided sufficient comfort to those in the service industry.

However, despite this, there has been ongoing “guidance” the most significant of which were the changes to service trust treatment in 2007 and the original allocation of income guidance in 2015. At the time I was surprised that the ATO would single out a class of business, but in time accepted the guidance because it provided what I felt was a “reasonable” position for most practitioners.

These guidelines will impact legally established, and in some cases quite historical, structures. Therefore, unless there is material movement in ATO thinking as a result of industry responses to the draft, all professional services practitioners are going to need to beware of the workings of the guidelines.

Related webinar

ATO singles out professional practices: Practical compliance guidelines (PCG 2021/D2)

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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