The ATO have once again issued guidance on their approach to assessing income of the individual professional practitioner (IPP)Draft Practical Compliance Guideline PCG 2021/D2. This revised guidance come after the original Guidance was suspended in December 2017. We previously reported on the original guidelines Assessing the Riskand their subsequent suspension Service Firm Guidelines Suspended.
The release of the new draft Practical Compliance Guidance PCG 2021/D2 comes subsequent to consultation with the professional groups and the affected stakeholders. This draft guidance aims to provide consistency across the industry.
So what’s new in this Draft Guidance?
This is once again a risk-based compliance approach and now requires two qualifying ‘gateways’ to be passed before applying the risk assessment guidelines.
The gateways require those with non-commercial arrangements and arrangements with high risk features to engage with the ATO before they apply the guidance.
Then when the IPP passes the two gateways, they can then self-assess against the risk assessment framework and determine the type of compliance attention that will be given to their arrangement.
This new draft PCG combines the three previously separate risk assessment measures into one single methodology. This gives an overall risk rating of with low, medium or high risk, including:
- the percentage of profit entitlement from the whole of the firm group that is returned in the hands of the IPP
- the total effective tax rate for income received from the firm by the IPP and associated entities
- the remuneration returned in the hands of the IPP as a percentage of the commercial benchmark for the services provided to the firm.
So on application of the three risk assessment measures, an IPP will be rated as ‘low risk’ where all the following apply:
- greater than 50% of their profit entitlement from the whole of firm group is returned in their personal income tax return
- the effective tax rate paid by the IPP and their associates on their profit entitlement from the firm is greater than 30%
- the IPP returns an amount of income in their personal income tax return which reflects at least an appropriate return for their services to the firm.
Where the ATO finds the arrangement to have high risk features or lacking apparent commercial rationale then they will treat the risk through application of integrity provisions as well as Part IVA.
So where to from here?
We will as always be keeping a close eye on this space and working with our clients to determine their level of exposer and what steps they can take to ensure they remain low risk.
Where you have circumstances and in a position to
- not pass the gateways provided in the new draft PCG
- identify as medium or high risk on self-assessment of the risk framework.
Then we will carefully examine your circumstances to determine if they are outside the intent of the new draft guideline. We will carefully examine arrangements that go beyond the intent of the draft guideline.
For further information and assistance contact Waterford Accountants on email – email@example.com