On 25 June 2018, the Commissioner updated his website page on his suspended ‘guidelines’ for income allocation for professional firms (which is really about how much income principals in professional firms can ‘split’ with family members, without attracting audit attention from the Commissioner). He suspended his previous guidelines on 14 December 2017, citing various alleged abuses. Assuming the firm does not adopt silly structures or make silly mistakes in setting up the structure, the Commissioner really only has Part IVA of the ITAA36 (s177A and following) to apply, and on my previous analysis, the likelihood of it applying, is low.
The ATO foreshadowed the terms of his updated guidance (on 15 June 2018) to the ‘Professional Firms Working Group. Those foreshadowed terms were not to the content on the relevant ATO site, since 14 December 2017, when he suspended the original guidelines.
The foreshadowed guidance, was set out below.
Certainty for year ending 30 June 2018
We have prepared the following statement which we are distributing to affected stakeholders through various channels over the following days.
ATO Position on year end 30 June 2018 – providing certainty
On 14 December 2017 we suspended Assessing the risk: allocation of profits within professional firms’ guidelines.
In reviewing the guidelines we have observed a variety of arrangements exhibiting high risk factors not specifically addressed in the suspended guidelines, including but not limited to:
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- Lack of any meaningful commercial purpose regarding arrangements including, but not limited to
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- 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.
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- 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 adopted by the High Court in Everett and Galland.
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Those taxpayers who had entered into arrangements prior to 14 December 2017 which comply with the guidelines and do not exhibit any of the high risk factors outlined above can continue to rely on the guidelines for the year ended 30 June 2018. Where an individual principal practitioner‘s arrangement was already in place without high risk factors, and they meet one of the three benchmarks previously published, the arrangement will be considered lower risk for the year ended 30 June 2018.
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 contact the ATO here.
[In truth, this is really just a ‘lift’ from the ATO’s webpage explaining why it suspended its ‘guidelines’ and what was happening since.]
[Whilst the profession has been pressing for replacement guidance before 30 June 2018 (prior to the ‘new partner’ season), in my opinion, this is an overstated imperative. First, most of the new partners/equity holders, will be at arm’s length to the partnership they are joining, and won’t have deemed value problems. Second, most firms of any size won’t have an outlandish or over aggressive structure. Third, the established income splitting measure of a ‘service trust’ is well tested in the law and the Commissioner has not withdrawn his guidance on that. Fourth, the ‘Everett assignment, which has enjoyed a resurgence, since the ‘small business CGT concessions’ became law, are effectively ineffective, again, since the date of the 8 May 2018 Federal Budget, for all but sub $2m turnover firm, if legislated. [See related TT Article: Budget Announcement]. Fifth, the law ought to be ‘discoverable’ by professionals, in the tax field, and exposure assessed, just as for any client (without unlegislated non-binding guidance). And, sixth, it remains possible to ask the Commissioner for a binding private ruling, for advice about the tax outcome, of a particular arrangement, if privately assessed risk seems unacceptable, and this advice can be relied on or appealed.]
FJM 2.7.18
[LTN 122, 28/6/18; TT Related Article: Recent flurry of activity; Tax Month – June 2018]
Study questions (answers available)
- Does the ATO seek to give professionals any certainty prior to the 30 June 2018, in time for the crop of new ‘partners’/equity holders announced?
- Does it really give any new certainty?
- Are there a lot of professionals that really need this kind of guidance, for ‘certainty’ prior to 30 June 2018?
- Is there any firm undertaking to give ‘replacement guidance’ by 9 July 2018?
