Three years after first commencing a review of how professional firms engage in income splitting the ATO has released its highly anticipated partnership profit guidelines.

The new guidelines will be introduced on 1st July 2021. The ATO has published a drat copy of the guidelines under the name Practical Compliance Guideline 2021/22. This document explains how partners in accounting, law, architectural, medical and engineering firms should split their profits.

The new rules replace the old guidelines which assessed how profits should be returned as income for professionals which was withdrawn in 2017. The new guidelines which have been published will be assessed by a public consultation process

According to the ATO one of the major reasons why the guidelines was changed was because they found things were happening that simply didn’t breach the guidelines, but they weren’t things that the ATO wished to see. However, they weren’t as well as they should.

The draft published by the ATO contents that firms and partners must satisfy two requirements to prove that arrangements are commercially driven, and do not carry any high-risk features. They will need to self-assess based on the ATO’s risk assessment methodology made up of three risk zones, namely low risk, moderate risk and high risk.

Partners and firms who fail to met the gateways or fall outside he green risk zone will see the commissioner more likely to give closer scrutiny to the arrangement, including a deeper consideration of whether anti-avoidance provisions apply.

The Institute of Public Accountants contends that the draft guidelines will create an opportunity for partners to self-assess the risk levels of their arrangements. “People can sort of self-assess what level of interests their arrangement will attract from the ATO.”

On the other hand, the IPA believes that density of the proposed guidelines make them a double-edged sword and following them may turn out to be a heavily involved process.

“The previous guidelines were nowhere near as granular. We just had to satisfy one of the guidelines in the previous allocation and document. Now you’ve got to go through gateway one and gateway two, and then self-assess risk. So, it’s a much more involved process” says Tony Greco.

The new guidelines will not just require more work from taxpayers, but also more work the Tax Office as well.  

Part IVA of the guidelines proposes clear risk assessment criteria, but will test if people follow the guidelines, and leaves questions to be asked for those who find themselves in high-risk arrangements.

Since the announcement of the new guidelines, a number of organisations have criticised the ATO’s ongoing consultation process. However, I think what we’ve got to do now is sort of test them in the real world. And this is why it’s in draft format. It obviously has input from practitioners, but at the end of the day, it’s the way they would like to identify risks and what falls within and outside of this compliance framework.”

The guidelines and how they are going to be applied will be reviewed once again by the ATO in 2022.