The ATO recently released Draft Practical Compliance Guideline PCG 2021/D2 dealing with the allocation of profits of professional firms to individual professional practitioners (IPPs). The guideline contains information about the ATO’s new ‘gateway’ approach to risk that will be used to determine whether:
Under the gateway approach, IPPs can self-assess their risk of a potential ATO audit if:
If these two gateways are passed, the IPP and the ATO can conduct a ‘traffic light’ risk assessment to determine whether the professional firm’s risk zone is red, amber or green. Professional firms are placed into different risk zones depending on the amount of points they score based on:
A professional firm that scores in the amber and red zone may be subject to ATO review. Professional firms in the green zone should be relatively safe from further ATO scrutiny.
Although these guidelines will not be legally binding when finalised, if a taxpayer has relied on these guidelines in good faith to determine they fall in the green zone, the ATO will generally not take action in relation to prior years and will not impose general interest charges.
If the two gateways are not passed, the traffic light risk assessment methodology is not available for IPPs and such high-risk arrangements may be subject to Part IVA.
Once this draft PCG is finalised, it will apply from 1 July 2021. The old guidance materials that were suspended on 14 December 2017 will apply up to 30 June 2021 (or up to 30 June 2023 for arrangements that are low risk under the old guidance but have a higher risk under the new guidance) that were entered into before 14 December 2017.
If your professional firm requires assistance with the taxation of its profits, please speak to your adviser or get in touch with the Crowe Tax Advisory team.