The Australian Taxation Office recently released its compliance approach for new guidance on the allocation of profits or income of professional firms. This finalised practical guideline applies from 1 July 2022. It sets out the approach followed by the ATO to the allocation of profits or income from professional firms in the assessable income of the individual professional practitioner (IPP).

As per the ATO, the old guidelines were suspended as they were being misinterpreted after being identified by the officials. Also, in situations where Part IVA applies, the professional firm arrangements were precluded for being low risk under the suspended guidelines.

The Australian Tax Office said, to understand the commercial, structural and operational issues that might be affecting professional firms, we engaged with the public and professional bodies along with the external working groups and felt the need of introducing new guidance. The key changes that were made after this consultation include:

• Additional examples featuring a wider variety of arrangements and structures used by IPPs
• Confirming that being high risk doesn’t automatically result in an audit or application of the anti-avoidance provision.

Soon, it came to the notice of the ATO that there was a change in the benchmark percentages used previously in the Risk Assessment Framework. It was done to determine whether an arrangement is low, medium or high risk. For arrangements that were low risk under the suspended guidance but confirmed as moderate or high risk under the new ones will be revised with an application date of 1 July 2022 for a two-year transitional period until 1 July 2024.

As per the new guidance, there are two ‘gateways’ that needs to be passed. As explained by the ATO, a risk assessment framework is used to assess the compliance risks of an IPP arrangement. To apply for these guidelines once a year, all eligible IPPs need to assess their eligibility.

For this, IPPs can use a risk assessment framework to self-assess their level of risk to schedule and understand the level of engagement they can expect from the ATO.

To know more about the new guidance on the allocation of income or profits by professional firms, feel free to talk to one of our tax accountants at KPG Taxation. We will be more than happy to serve you.