As of Monday, the Australian Taxation Office (ATO) has released much awaited clarity surrounding their view on the tax avoidance risk and subsequent likelihood of tax audit to owners of professional services firms operating through a commercial structure, such as partnership, trust or company.The ATO has provided three risk assessment guidelines to test whether practitioners are at risk of breaching tax avoidance legislation and therefore subject to increased ATO audit risk in the way that practitioners and their family or associates receive and report income from their own exertion. Only one of these guidelines needs to be met to reduce the risk of being investigated:
1. The practitioner receives assessable income in their own hands at least equal to the level of remuneration paid to the highest band of professional employees providing equivalent services in the firm; and/or
2. 50% or more of the income to which the practitioner and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the practitioner: and/or
3. The practitioner and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.
Our view is that the ATO has agreed in principle that using private structures for remuneration can be appropriate. William Buck recommends that all professional services should review their current business and ownership structures and remuneration arrangements in light of these new ATO guidelines as a matter of urgency to determine whether you are exposed to increased risk and/or whether opportunities can be identified to more appropriately structure remuneration arrangements.
If you would like to discuss your professional services business and an effective remuneration strategy to suit your business please contact your local William Buck advisor.