ATO updates its audit risk ‘guidelines’ on allocation of profits within professional firms

The ATO published the ‘Assessing the Risk: Allocation of profits within professional firms’ guidelines and ‘Everett Assignment’ web material in 2015, and said, at that time, they would be reviewed in 2017.

In reviewing the guidelines the ATO become aware of situations that had misinterpreted the guidelines or gone beyond the scope of the guidelines. They also discovered risky or wrong restructuring steps, taken towards the arrangements, meant to comply with the guidelines on profit allocation (viz: ‘income splitting’).

In light of those concerns, the ATO suspended the application of the guidelines and Everett Assignment web material as of 14 December 2017.

• Individual professional practitioners contemplating entering into new arrangements from 14 December 2017 are encouraged to engage with the ATO.
• Those who have entered into arrangements before 14 December, which comply with the guidelines, and do not exhibit high risk factors, can rely on those guidelines.

Arrangements that caused the ATO concern – too much ‘income splitting’ or bad ‘restructuring’

We have concerns with the following arrangements, which were noted during our review:

• Lack of any meaningful commercial purpose regarding arrangements including, but not limited to
  • disposal of an equity interest through multiple assignments (multiple Everett assignments of partnerships interests – which is code for saying that the High Court only approved a single assignment, and adding a second or third may be in effective under Anti-Avoidance provision, if it lacks sufficient non-tax reasons).
  • the creation of new discretionary entitlements such as Dividend Access Shares (which sounds like the practice has been carried on through a company, successfully, for tax purposes, but they’ve pushed the envelope too far by allowing income to go to places without having to hold the equity – but why that goes further than Galland’s case, where the assignment of the partnership interest, went to a discretionary trust, I don’t know).
  • utilising amortisation leading to differences between tax and accounting income.
• Disregard for CGT consequences (which is a reference to people just getting the restructuring wrong – not, necessarily, overdoing the income splitting, when they get there).
• Inappropriate use of CGT concessions (it is not clear to me whether ‘inappropriate’ means no more than partners of big firms claiming the ‘small business’ CGT relief – which Treasury also called ‘inappropriate’ in the budget papers, when announcing the measures to change the existing law. In my view there is nothing ‘inappropriate’ about claiming concessions, when the existing law says you can. Parliament can then change the law, if they don’t like the result. But it would be more honest, to just say that they want to narrow the relief – without labelling it an ‘integrity’ measure.)
• Assignments where profit sharing is not directly proportionate to the equity interest held (but, on the face of things, partnership law allows partnerships, where the income entitlements that did not match equity interests, and an assignment of such interests would be no different, in principle, to Everett’s case. Still, one would have to see what else accompanied this, to judge whether that crossed the line, and could be struck down by the Anti-Avoidance provisions.)
• The creation of artificial debt deductions. (In my view, there is nothing ‘artificial’ about the assignee borrowing, to pay the full market value of the interest assigned to them. This might be ‘debt creation’ but it happens all the time, when buying assets. Whether this crosses some line, if the deducible borrowings replace non-deductible borrowings, changes things a bit, but, in my view, not enough to be struck down under ‘anti-avoidance’ provisions.)
• Undertaking an assignment to dispose of an equity interest to a self-managed super fund. (This looks a ‘bit much’ on the face of things. But I would have thought that this offended many of the superannuation provisions, such as ‘non-arm’s length income provisions, that tax such income at the maximum marginal rate, inside the fund – see s295-550 of the ITAA97.)
• Assignments where the arrangement is not on all fours with the principles of Everett’s case and Galland’s case.

The ATO encourages submissions, for revised guidelines, as soon as possible, as they are working towards providing certainty prior to 30 June 2018.

27.5.18

[ATO website – General Guidelines, Everett Guidelines; FJM; LTN 84, 4.5.19; Tax Month May 2018]

Study questions (answers available)

1. Were the ATO’s Guidelines made in 2015, said to be reviewed in 2 years and then reviewed in 2017 (as they said)?
2. Did the ATO ‘suspend’ these guidelines on 14 December 2017?
3. Are pre-14 December 2017 arrangements grandfathered, in a way that can be relied on?
4. Did the ATO think that multiple Everett Assignments were concerning?
5. Was the ATO happy with ‘dividend access shares’?
6. Did the ATO encounter restructures that ignored current CGT requirements?
7. Was the ATO happy with the creation of ‘debt deductions’?
8. Was the ATO happy with an Everett assignment to an SMSF?