The newly expanded guidelines build on the original professional practices guidelines released last year in 2014. Ultimately, the new guidelines appear to call for professional practitioners to modify their business structure in order to avoid greater audit attention from the ATO.
Original ATO professional practices guidelines
The ATOs original guidelines were released last year and included three benchmark tests:
- Is the individual controller remunerated (either via salary or profit) more than the business' highest-paid band of employees providing equivalent services (or if there are none then in line with comparable industry benchmarks);
- Does 50 per cent or more of the owner's profit go to the individual; or
- Is every taxpayer related to the individual and in receipt of income from the business taxed at an average tax rate of 30 per cent or more.
At this time, the ATO indicated that it would apply these guidelines to the 2015 income tax returns of professional practitioner as a way to assess the revenue risks posed by the behaviour of such individuals. Now these guidelines have been built into the ATO's risk assessment software tools. So as a professional practitioner lodges their tax return, they will be assessed against these guidelines. Those found wanting may be subject to further review along with their business partners and associated professional practices themselves.
Under the newly expanded guidelines, the ATO now suggests that Part IVA can apply to:
- Service trust arrangements (even those which comply with the safe harbour rules); and
- Everett assignments from 1 July 2016
Legal framework of ATO professional practices guidelines
The legal robustness of the new ATO guidelines is subject to debate. While the ATO acknowledges the legal framework within which its new guidelines operate, the guidelines themselves are not couched in legislation. This opens for the door for a more interpretive rather than ‘black and white’ application of the guidelines.
The ATO acknowledges that:
- A legal and validly constructed business structure is just that
- The guidelines do not apply where the PSI rules already provide a framework to determine whether income is from either a business or from personal exertion
- It still accepts the service entity guidelines and safe harbour rules
There are already some examples of the potential juxtaposition between the ATO’s guidelines and the relevant legal framework. While the ATO acknowledges that it still accepts the service entity guidelines and safe harbour rules, it then appears to boycott this by bringing service entity income in as part of the overall income that is tested under the new guidelines.
In a nutshell, the ATO is putting professional practitioners on notice that a valid business structure that does not generate PSI for the relevant individual will be reviewed. From here, the ATO may look to apportion profit generated by that business to that individual. This it will do without regard to the entity with the legal entitlement to the profit.
Essentially this could be said to apply an outcome akin to PSI to a business that would successfully pass all the PSI tests.
Here is where the newly expanded ATO guidelines come in. These seem to suggest you must simply modify your business structure to tax sufficient business profit in the hands of the ‘at risk’ individuals. In doing so, you are significantly less likely to attract an ATO audit.
Many businesses are already moving to ensure that they satisfy one or more of the newly expanded guidelines. Naturally the potential stress and time-consumption of undergoing an audit is sufficient to change taxpayer behavior to align with ATO objectives, whether or not those taxpayers consider the ATO analysis to be correct. If you feel that you may need to adjust your business structure in light of the new expanded ATO guidelines, why not speak to Ganrid & Associates for some specialist advice and support.