ATO Scrutiny of Professional Services: Understanding PCG 2021/4

The ATO has been concerned about arrangements involving individual professional practitioners who redirect their income from an activity or business that includes their professional services to an associated entity where it has the effect of significantly reducing your tax liability.

On 17 December 2021, the ATO published the Practice Compliance Guideline PCG 2021/4 for the allocation of profits by professional firms, which outlines the risk profiles to practitioners of professional services organisations. The ruling captures all professional services organisations which include (but not limited to) legal firms, medical practices, financial services organisations, accounting firms, architects, engineers and other consultants.

However, PCG 2021/4 notes that professional practitioners that are classified as low risk based on the Suspended Guidelines will continue to be classified as low risk until 1 July 2024. To prepare for application, it is important to consider the impact of the PCG on your business structures, remuneration and compliance obligations.

Arrangements that will attract ATO’s attention will include those that lack commercial rationale or have high-risk features.

Before applying the Risk Assessment from PCG 2021/4, the arrangement must pass 2 Gateways:

1. Commercial Rationale Gateway (must assess if the arrangement is commercial):

Indicators for arrangements that show lack of commercial rationale can include:

• More complex than necessary to achieve the relevant commercial objective
• Structures that serve no real purposes other than to gain tax advantage
• Have a tax result that appears to be a odds with its economic or commercial result
• Result in little or no risk in circumstances where significant risks would normally be expected
• Operate in non-arm’s length or non-commercial terms
• Present a gap between the substance of what is being achieved and the legal form it takes
  
  

2. No High Risk Features Gateway (assess that the arrangement does not have high risk feature):

Indicators for arrangements with high-risk features can include:

• Are materially different in principle from Everett Assignments
• Multiple classes of shares and units held by non-equity holders
• Non-arm’s length financial transactions
• Exploit the difference between accounting standards and tax law
• Involve multiple assignments or disposals of an equity interest
• Misuse the superannuation system, including assignments or disposals of an interest to an associated self-managed super funds (SMSFs)
• Distribution of income to entities, other than the individual professional practitioner with losses.  

PCG 2021/4 assesses risk based on scorecard calculations

Assuming the structure satisfies tests of commerciality and no high risk features, PCG 2021/4 sets out the compliance approach to reviewing a taxpayers affairs with a traffic light risk rating system that assesses the ATO’s review on whether the taxpayer is at risk of breaching the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936.

What does your Risk Zone mean?

Green Risk = low risk and only subject to ATO review in exceptional circumstances

Amber (Medium Risk) or Red Ratings (High Risk)= likely to be subject to review

For More information

If you believe that the ATO PCG 2021/4 applies to you, reach out for our support around assessing areas of exposure and implications for existing arrangements. Get in contact with your Archer Gowland Redshaw adviser on (07) 3002 2699 | info@agredshaw.com.au