The ATO has recently released its guidelines regarding the allocation of profits by professional services firms, including lawyers, doctors and architects. It provides three criteria by which the ATO will judge remuneration of an ‘individual professional practitioner’ (IPP), which includes individual partners or owners of a practice. Compliance activity around these criteria will come into effect this 2014/2015 financial year.

Taxpayers who meet one of the following guidelines regarding income from the firm, will be rated as low risk and won’t be subject to compliance action. Income refers to any salary, distribution of partnership or trust profit, distributions from associated service entities, dividends from associated entities or any combination of these.

1. The IPP receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm, which may be determined using the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm.

2. 50 percent or more of the income to which the IPP and their associated entities are collectively entitled from the firm and associated firm entities is assessable in the hands of the IPP.

3. The IPP and their associated entities both have an effective tax rate of 30 percent or more on the income received from the firm.

As these tests apply to individual practitioners, it’s possible that some partners or owners of a firm may be classified as high risk and subject to an ATO audit, while others may not. These guidelines demonstrate the continued efforts by the ATO to target organisations that fail to adhere to compliance requirements. Other professions that may be targeted include accounting, architecture, engineering, financial services, legal and medical firms.

For more information on these guidelines and an assessment to determine your level of risk, contact the team at Sullivan Dewing.