White Collar Worker and Business Owner? ATO may have your tax in their sights for an audit
The ATO has recently released a new guidance that totally changes the way that professional firms can allocate (or split) their profits among a family group.
Under PCG 2021/4 Professional firms including doctors, dentists, medical specialists, lawyers, architects, engineers, consultants, financial advisers, and accountants, are being ranked for audit risk or higher ATO scrutiny, based on a new “traffic light” system.
This Guideline is concerned with whether there is a risk that income earned by an individual professional practitioner (IPP) is not appropriately taxed to the IPP. The approach assists the ATO to differentiate risk in order to tailor our engagement. It uses two 'gateways' and a risk assessment framework of objective factors to rate IPP arrangements as low (green), moderate (amber) or high (red) risk. Analysis of the facts and circumstances of individual arrangements in the high and moderate risk zones would then be undertaken to determine investment of compliance resources where appropriate.
Read in plain English, if your tax outcome does not fit in to the green zone, “engagement” would be a review or audit from the tax office.
The risk assessment factors are as follows
Risk assessment factor:
Factor 1: Proportion of profit entitlement from the whole of firm group returned in the hands of the IPP
Factor 2: Total effective tax rate for income received from the firm by the IPP and associated entities
Factor 3: Remuneration returned in the hands of the IPP as a percentage of the commercial benchmark for the services provided to the firm
As a result of these ATO rulings:
Your options to allocate your professional firm profits across your family members and entities will be reduced; and
Your family group’s overall tax payable may increase.
Tax laws change all the time, and it’s our role as your accountants and advisors to keep you alert to important changes that affect you.
There are different levels of risk associated with different tax planning strategies that involve allocation of profits of a professional firm.
As mentioned above, the ATO has classified these risks as green zone, amber zone and red zone. The ATO will be investigating all amber zone and red zone risks and will not investigate green zone risks.
We want to help you to understand how these ATO tax law changes affect your forecasted tax payable for 2023 so you can carefully plan for it.
Our assistance will give you peace of mind that the way you allocate your professional firm profits will satisfy the ATO and not draw audit attention to yourself.
OUR PLAN TO HELP YOU
We need to:
Review your current 2023 estimated taxable income for your professional firm and your entire family group, including any companies and trusts you have.
Provide you with a Tax Advice Report that clearly explains the ATO’s new guidelines and a Scenario report which compares your prior year profit allocations with profit allocations just in the “green zone” (meaning that you would avoid an ATO tax audit), highlighting your forecast increased tax payable.
Meet with you to discuss our Tax Advice Report and help you to decide on your 2023 profit allocations.
NEXT STEPS
Please simply email us and let us know that you would like us to prioritise getting started on preparing this Tax Advice Report for you. We’ll immediately send you our Proposal for you to electronically sign and then we’ll get started on our work.
We look forward to hearing from you soon and we look forward to helping you stay within the “green zone” and avoid an ATO tax audit on you and your professional firm.