The ATO have now progressed their review of professional practices to the point where they have released some guidelines as to the level of risk arising depending upon the way that partnerships and each partner deal with profits.
I wrote about this in the July issue. Readers will recall that the ATO’s concerns cover:
- Situations where an individual employee sets up an entity to hold an interest in the employer business and that individual’s remuneration from the business drops from then on despite that person taking on more responsibility;
- Individual partners or owners selling their equity to a controlled entity and the business profits from then on flowing through to be taxed in the hands of other taxpayers;
- Ongoing business owning entities not paying any remuneration to related individuals who work in the relevant business.
The professions of concern to the ATO include lawyers, accountants, medicos, engineers and architects.
The guidelines set out risk factors that will be applied by the ATO to assess “…the risk of Part IVA applying to the allocation of profits…”. The tests set out in the guide allow taxpayers to self-assess as to whether they are at low or high risk according to the ATO’s new viewpoint. It does this via three 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% 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% or more.
Answer ‘Yes’ to one or more of these and you are low risk; answer ‘no’ to all and you are high risk.
The ATO hope that the publishing of these guidelines will give taxpayers a framework to self-assess their own risk, and that this will bring about a change in taxpayer behaviour. Many taxpayers are averse to risk, and so these guidelines are likely to have such an effect.
However, there has been some vigorous debate about whether Part IVA can be applied to this area, and the ATO is keen to find a test case or two to clarify whether it is on the right path or not.
A more detailed analysis of the guidelines can be found here.
All that can be said for certain is that this issue is still live, and that it will be some time before professionals can be certain about what activities the law will support.
© This article was submitted by Graeme Prowse. Graeme is a Director of Webb Martin Consulting Pty Ltd, an affiliation of TaxBanter. Graeme has over 20 years’ experience in dealing with income tax issues for businesses of all types and sizes. Graeme may be contacted at GraemeP@webbmartinconsulting.com.au
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