A persistent pebble in the shoe of the ATO is how its general anti-avoidance legislation can apply to professional firms that allocate profits to individual professional practitioners with proprietorship in the firm.
Guidelines on the issues at play were suspended half a decade ago after the ATO became aware that these were being misinterpreted in high risk ways in relation to arrangements outside the scope of those guidelines. Some practitioners will know these as Everett assignments (where a partner assigns part of their interest in a partnership to another person, such as a spouse).
Professional firms can be structured in a range of ways, depending on the choices made by the owners, but the ATO has warned that in some cases the way a business is structured “can be used in ways that give rise to different tax consequences and resulting tax compliance risks”.
Its concerns about tax compliance in these instances are based on where arrangements are set up so that a practice’s income is treated as being derived from the business itself, even though the source of that income is actually the provision of professional services by individuals.
During the period of review, the ATO noted the following concerns:
- a lack of any meaningful commercial purpose regarding arrangements including
- a disposal of an equity interest through multiple assignments
- the creation of new discretionary entitlements such as dividend access shares
- utilising amortisation leading to differences between tax and accounting income
- a disregard for CGT consequences and inappropriate use of CGT concessions
- assignments where profit sharing is not directly proportionate to the equity interest held
- the creation of artificial debt deductions
- undertaking an assignment to dispose of an equity interest to a self-managed super fund
- assignments where the arrangement is not on all fours with the principles of Everett and Galland.
Certainty for year end 30 June 2020
Consultation since then has been ongoing with a view to creating new guidance materials. However some pressure has been forthcoming for some certainty for professionals involved. The ATO has now announced that those who have entered into arrangements can continue to rely on the suspended guidelines for the year ending 30 June 2020 as long as their arrangement:
- complies with the suspended guidelines
- is commercially driven, and
- does not exhibit any of the high risk factors outlined above.
Where these conditions are satisfied, they will be considered lower risk for the year ended 30 June 2020.
Where individual professional practitioners are contemplating new arrangements, or have concerns or uncertainty regarding potential high risk factors within their current arrangements, they are encouraged to engage with the ATO as soon as possible.