Allocation of profits within professional firms – a flurry of recent developments

There has been a lot of activity around the allocation of profits within professional firms, in the last 6 months (December 2017 to May 2018). The key events and (where applicable) related Tax Technical articles, are set out below.

1. On 14 December 2017, the Commissioner of Taxation ‘suspended’ (not cancelled) his 2015 guidance on what allocations of profits, within professional firms, would attract their audit attention [see TT article about this suspension]. This included assignments of interests in a professional partnership, one of which the High Court held was effective, to split what would otherwise have been the professional’s income – Everett’s case [1980] HCA 6 (Everett Assignments). The Commissioner cited problems arising in the process of restructuring to achieve income splitting. He also concerned that profits were directed to a Self Managed Superannuation Fund.
2. After this suspension, the Commissioner then started consulting with professionals and interested parties – which continues. This remains a hot issue amongst professionals, particularly, as 30 June 2018 approaches. This is because there will inevitably be promotions, to ‘partner’, that commence the next day. Without some guidance, from the Commissioner, they will have to run ‘naked’ in deciding what they can do, and will do, (relying ‘only’ on the general law and tax statutes, as they stand today, which are not always the same, as applied in the decided cases).
3. On 4 May 2018, the Commissioner updated the pages on his website that advised about the suspension of his guidelines. [See related TT article]
4. On 9 May 2018, the Government delivered its 2018-19 Budget, which included an announcement that will close down ‘Everett’ assignments, by a change that will, amongst other things, remove the capital gains tax (CGT) exemption that would otherwise hamstring the assignment (or, at least, this measure will remove it for partners of ‘large’ firms that would fail the $2m turnover or $6m net asset test). [See related TT article.]
5. On 11 May 2018, there was another meeting of the ‘Professional Firms’ Working Group’ (part of the consultation mentioned above). This was in the wake of the budget and focussed on getting out some fresh guidance before 30 June 2018 (hopefully comfortably before). We have reproduced a summary of the proceedings of this working group [see related TT article].

I have also published an historical overview of developments in this area, since 1964, where the High Court considered doctors practicing through a company was still tax avoidance, and assessed the doctors on what they would have earned, had they not incorporated. [See TT article]

21.5.18

FJM

Study Questions

1. Was it this calendar year that the ATO suspended its ‘guidance’ the level of audit attention various types of allocations of profits, in professional firms, will attract?
2. Did the 2018 Budget announce a measure to limit small business CGT relief to small partnerships?
3. Are practitioners trying to get fresh guidance out, by 30 June 2018, because it is the conventional balance date for financial statements?