For some time now the ATO have been reviewing professional practices. Their concerns relate to the following broad areas:
- 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.
These concerns are held by the ATO across a number of professions, including (but not limited to) lawyers, accountants, medicos, engineers and architects.
As part of this the ATO have reviewed and/or audited a number of professional practices (including a number of accounting firms) about their structures, what the key individuals do, and what risks and rewards exist. The aim of these reviews and audits was to understand what is occurring in practices and to form a view on whether any tax was being underpaid.
These reviews resulted in Taxpayer Alert TA 2013/3 issuing last December. It particularly takes issue with professional partnerships where discretionary trusts are involved. Even more so, where an existing individual partner sells out to a related discretionary trust the ATO flags that it may audit the disposal and consider whether the sale is ineffective for income tax purposes (i.e. it may apply Part IVA to continue to assess the individual on the income even though that individual legally no longer owns an interest in the business).
The ATO haven’t stopped at the Alert. They are reviewing rulings IT 2330 (Income splitting) and 2540 (CGT and disposal of partnership assets) and are preparing a publication on professional practices. This publication will set out the ATO’s expectations on a number of issues including:
- What remuneration should be paid to senior employees and non-employees who work in the business because a related party has an ownership interest therein; and
- What the ATO’s expectations are on the taxation of business profits.
The publication is drafted and the various law and accounting bodies currently have an opportunity to comment upon it. Our expectation is that the final publication will be released sooner rather than later. It is possible that the ATO will expect that the publication is taken into account for partnership changes as soon as 1 July this year.
Anyone with upcoming ownership changes in either their own practice or in that of a client should look out for this and consider any risks that arise. Even if no changes are contemplated practices should compare their own activities to the ATO’s expectations to see whether any ongoing matters are giving them tax risk.
This article was submitted by Graeme Prowse. Graeme is a Director of Webb Martin Consulting Pty Ltd with 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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