Posted by Robert Cooper on Sep 05 2014
The ATO has released a set of guidelines to assess tax compliance risks and allocation of profits, specifically targeting the professional services industry. A new set of risk assessment factors for remuneration of an ‘individual professional practitioner’ (IPP), with compliance activity around these criteria havec ome into effect from this year.
Taxpayers will be rated as low risk, and if they meet one of the following guidelines regarding income from the firm, will not be subject to compliance action on this issue.
1. The IPP receives assessable income( salary, distribution of partnership or trust profit, distributions from associated service entities, dividends from associated entities or any combination of these) from the firm in their own hands as an appropriate return for the services they provide to the firm. In determining an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or if there are no such employees in the firm, comparable firms or relevant industry benchmarks – for example, industry benchmarks for a region provided by a professional association, agency or consultant, and/or
2. 50% or more of the income to which the individual professional 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 individual professional practitioner, or
3. The individual professional practitioner, and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.
If an organisation cannot satisfy any of the above guidelines, the individual professional practitioner’s arrangement will be considered higher risk. In these cases, the lower the effective tax rate, the higher the ATO will rate the compliance risk posed by the arrangements and the greater the likelihood of ATO compliance action being commenced. For example, an arrangement with an effective tax rate of 15% will be rated as higher risk than one with an effective tax rate of 25%.
This all demonstrates a continued effort by the ATO to target organisations who have failed to adhere to their compliance requirements.
CPR Insurance Services cannot provide advice on this matter, but as your trusted adviser, we feel it is important to bring this to your attention to enable you to mitigate the potential loss and for your tax advisor to undertake assessment of your tax compliance.
Further protection can be provided by obtaining a Tax Audit cover that will cover the cost of additional fees required by your Accountant to assist in an audit or investigation actually made against your business. Save yourself from these risks.