The MB+M tax team discuss profit guidance for professional service firms

In recent times, the ATO has been focussing attention on how professional service firms, such as medical specialists, are structured and ultimately how the profits from these firms are being taxed.

The ATO have now finalised their position on the allocation of profits for these professional firms. The ATO’s guidance looks to change the way that professional firms can split their profits among a family group. The guidance takes a strong stance on any structure that aims to divert income away from a principal practitioner, leaving the principal practitioner with low income to be personally taxed for the work they do. Consequently, many professionals may end up paying more tax from the 2023 financial year onwards or risk being audited.

Professional firms include doctors, dentists, medical specialists, lawyers, architects, engineers, financial advisors, and consultants.

As a result of the ATO rulings:

• Your options to allocate your professional firm profits across your family members and entities will be reduced; and
• Your family group’s overall tax payable will likely increase

The ATO’s guidance provides a framework for professional firms to assess their level of risk associated with how they distribute profits through to individual practitioners and their family groups.

Identify your risk

As a professional service firm, you need to assess your structure to understand your risk rating. From this risk rating, you can either make changes to reduce your risk level or ensure sufficient documentation is recorded to justify your position.

It is important to understand that each principal practitioner in the firm needs to have their risk levels assessed separately.

The ATO has classified these risks as green zone, amber zone and red zone. The ATO will focus its attention and compliance activity on all amber zone and red zone risks. Those identifying as green zone are at very low risk of an ATO investigation.

To stay within what the ATO calls the “Green Zone”, the ATO expects a professional and their family group to pay tax at a combined average rate of 35% or higher.

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Source

• ATO: Assessing the risk – allocation of profits within professional firms

Published 29 August 2023.
The information provided in this article is general in nature only and does not constitute financial advice.