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Profits of Professional Services Firms: Understanding the ATO’s Compliance Measures

The Australian Taxation Office (ATO) is intensifying its efforts to scrutinise tax-efficient structures and identify potential tax avoidance behaviour within professional services firms. This targeted approach unfairly targets businesses who provide advice over other types of businesses using the same business structures.

Who is the ATO targeting?

The ATO’s inclusive approach employs broad terminology to encompass a wide range of taxpayers. While their focus is primarily on accountants and lawyers, the definition of professional services is much broader. In essence, if you have professional indemnity insurance or have acquired specialised skills through education and operate a business offering services based on those skills, you fall within the realm of a professional services firm. 

Examples are:

  • Accountants and lawyers
  • Doctors, Dentists, Physio, Medical Imaging…
  • Vets, privatised environmental consultants, research labs…
  • Marketing and advertising, IT consulting, software support…
  • Consulting engineers, architects, drafting firms…
  • Teaching and training organisations, business coaching…

What will the ATO look at?

The first test examines whether the business income qualifies as personal services income, resulting in all income being taxable in the hands of the individual who generated it, regardless of how it was distributed through trusts or other means.

The second test revolves around the structures and distributions affecting the distribution and taxation of profits. The ATO requires a legitimate business case to justify the chosen structure. If they determine that the primary purpose of the structure is to evade taxes, they may apply Div 4 anti-avoidance measures to enforce maximum taxation.

Risk profiling and compliance:

The ATO compares the total tax paid to the income of the business and related parties, assigning a score that reflects the overall percentage of tax paid and how business income is distributed. This score determines your risk profile using a traffic light system:

    • Green Zone: The ATO will only review profit allocation in exceptional circumstances, dedicating minimal compliance resources.

    • Amber Zone: Further analysis will be conducted on the arrangement’s facts and circumstances, and the ATO may reach out for clarification.

    • Red Zone: The ATO will prioritise a thorough analysis of the arrangement’s facts and circumstances. If high-risk indicators persist, an audit may be initiated where appropriate.

How can I assess my risk?

At our firm, we can perform these calculations as part of the tax preparation process and provide you with insights into your risk profile. By understanding where you stand on the risk scale, we can assist you in adjusting how you manage business profits in the future, minimising the ATO’s interest in your activities.

Navigating the ATO’s compliance measures:

Understanding and managing your risk profile is essential. Our team is equipped to guide you through the process, ensuring compliance and minimising the likelihood of an audit. By proactively addressing any potential concerns, we help you maintain a strong position with the ATO.

Please note that this information is provided as a general guide, and it’s important to consult with a qualified professional for personalised advice tailored to your specific circumstances.

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