ATO Targets Professional Practices

The ATO has announced that it will be undertaking a more thorough review of the taxation affairs of professional practices.

The new guidelines apply to all professional practices, not just medical and dental practices, from 1 July 2014 on, so the first year is the year ending 30 June 2015.

In particular, the ATO is concerned that professional practitioners are inappropriately splitting their share of income generated by their professional practice with associates and other entities (e.g., companies and trusts) to reduce the overall tax burden on this income.  It appears that the ATO has now decided to adopt a ‘hard line’ on the issue of whether income from a professional practice should be taxed to the professional practitioner or whether it can be distributed to family members and entities that are controlled by the professional practitioner.     

As part of the ATO’s review of professionals, the ATO has recently released a document titled ‘Assessing the risk: allocation of profits within professional firms’. This document has been designed to provide ‘individual professional practitioners’ with guidance on whether their tax affairs are regarded as ‘high’ or ‘low’ risk from an ATO audit perspective.  An individual professional practitioner broadly relates to a professional who runs a practice (eg. doctor ) and who has an ownership interest (whether directly or indirectly) in that practice.

In other words, the ATO’s audit document is designed to provide guidance on the audit risk status of taxpayers operating professional practices who hold an ownership interest in that practice (e.g., as a partner, principal or director).  

To that end, the ATO’s audit document assesses the audit risk status of a professional practitioner by applying three different tests that examine how much professional practice income has been included in the professional practitioner’s assessable income.  A professional practitioner will be regarded as ‘low’ risk where they pass any of the three tests highlighted in the ATO’s audit document.

The ATO proposes to apply these three tests as part of its audit selection process to professional practitioners from the 2014-15 income year onwards.  The three tests are as follows:

1. Satisfying the ‘equivalent remuneration test’

Under this test, a professional practitioner must ensure that their assessable income from the professional practice includes an amount that is at least equal to the highest band of professional employees providing equivalent services to the firm.

A professional practice is entitled to use comparable firms or relevant benchmarks where the firm has no such employees.  

2. Satisfying the ‘50% remuneration test’

Under this test, 50% or more of the income the professional practitioner is entitled to receive from the practice (whether directly or through their associated entities) is included in the assessable income of the professional practitioner.

3. Satisfying the ‘30% effective tax rate test’

Under this test, the effective tax rate of the professional practitioner individually and the professional practitioner together with their associated entities collectively must be at least 30% in relation to the income received from the practice.  

Should you be concerend?

Absoloutely not. The ATO have given clear guidlines and clients will receive a 'professional risk assessment' of their personal situation to ensure they are operating within the guidelines.