Tax changes on professional firm profit allocation

The ATO has released new guidance that totally changes how professional firms allocate (or split) their profits among a family group.

Professional firms such as accounting, law, medical, engineering, architecture, management consulting, and financial service practices will be impacted by these new tax changes.

It aims to address arrangements that alienate, or inappropriately redirect, the income of an individual professional practitioner (IPP) to an associated entity (such as a spouse or family trust) to reduce the IPP’s tax liability.

Professional firm owners and operators need to review their profit allocation arrangement using the Practical Compliance Guideline PCG 2021/4 which outlines the ATO compliance approach to the allocation of profits or income from professional firms, in the assessable income of IPP.

PCG 2021/4 Allocation of professional firm profits — ATO compliance approach, which came into effect on 1 July 2022, “helps IPPs to assess and manage risks associated with their profit allocation arrangements”. This Guideline will also suggest the level of engagement they can expect from the ATO.

The ATO has a dedicated team responsible for the oversight and management of profit allocation arrangement risks. They will soon begin contacting IPPs who may be in a higher-risk category.

There are different levels of risk associated with different tax planning strategies that involve the allocation of profits of a professional firm.

The ATO has classified these risks as green zone, amber zone and red zone. They will be investigating all amber zone and red zone risks. Green zone risks will not be investigated.

As a result of these ATO rulings:

  • Your options to allocate your professional firm profits across your family members and entities will be reduced; and
  • Your family group’s overall tax payable will probably increase.

Tax laws change all the time, and it’s our role as your accountants and advisers to keep you alert to important changes. More importantly, we want to help you understand how these new tax laws affect you and give strategic advice so you can carefully plan for any expected tax payment in the future.

It’s important that we review and forecast your tax payable before helping you decide on your profit allocations for 2023.

For further information and expert assistance with your tax, contact our KMT accountants today!

Reference: ATO website

Check out KMT Free Resources to download tax guides and deductible checklist.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from a qualified accountant at KMT Partners.