Professional services firms: structures and profits

In March 2021, the ATO released draft guidance around its examination of structures and profits for professional services firms. After consultation, this draft guidance was suspended and on 16 December 2021 the ATO released its final guidelines on the “Allocation of professional firm profits – ATO compliance approach”.

What is the guidance exactly?

Under this guidance, what is being examined within professional service firms’ structures is how the profits of the businesses are being taxed. It is intended to ensure the practitioners receive and declare adequate income for services rendered. The guidance includes a risk scale rating which indicates the likelihood of ATO scrutiny for your firm. This is based on your profit allocation.

Who do these guidelines apply to?

These guidelines apply to professionals including lawyers, architects, medical practices and engineers who are operating through trusts, companies and partnerships of discretionary trusts, however it may also extend to other industries where significant income is generated by the skills and expertise of the principle or owner of the business.

If a business has a structure which has been designed to divert income (eg receive very little income for their services) to create a tax benefit, there is an increased risk of an audit which may result in further scrutiny.

Before conducting the guideline risk assessment for your firm, two gateways need to be passed.

These include:

• sound commercial rationale for entering into and operating the arrangement or structure
• There must not be certain ‘high-risk features’

When do the guidelines apply?

Originally the guidance was intended to apply from 1 July 2021, the guidance will now apply from 1 July 2022. From this date it will be classifying structures which require further examination to ensure practices and firms are operating within the required guidelines.

Practitioners with arrangements considered low risk under the previous guidelines may have a higher risk rating under this guideline. Therefore there is a transitional period for those practitioners to continue to apply the previous guidelines until 30 June 2024.

Taxpayers with pre-existing arrangements prior to the issue of the guidance can rely on the previous guidelines for the 2018 to 2022 financial years as long as their arrangement continues to:

• Comply with the previous guidelines
• Is commercially driven
• Does not exhibit any high-risk features as outlined in the

There are a range of risk factors which will need to be assessed under these guidelines. Further detail can be found on the ATO website.

If you have a professional practice, we will review your circumstances and contact you to discuss arrangements under these new guidelines. If you have any questions in the meantime, please feel free to contact us.