Jun 15, 2022
Individual Professional Practitioners (IPPs)
The ATO has released a Practical Compliance Guideline in relation to the taxation of profits by individual professional practitioners (IPPs). The professionals covered include for example those practising as Accountants, Architects, Consultants, Engineers, Lawyers, Medical Practitioners, as well as many others.
To be considered as an “IPP” you will need to be a ‘partner level’ individual who holds equity in the practice (either personally or via a related party such as a Family Trust or spouse). The actual title of the person, such as partner, principal, or director, is not the relevant factor.
The ATO’s concern is that IPPs are working in professional firms but not returning taxable income appropriate with the value of the services that they provide. Instead, profit distributions are being made to an associated person or entity and a tax benefit obtained.
A proposed risk-based compliance approach has been established by the ATO which requires two qualifying ‘gateways’ to be passed before applying the risk assessment framework.
Gateway 1 considers whether the implemented arrangement and the way in which it operates are commercially driven.
There must be a genuine commercial rationale for the arrangement for all parties involved and the arrangement must achieve that end.
The arrangement must also be appropriately documented and there must be evidence that the stated commercial purpose was achieved as a result of the arrangement.
There must also be a genuine commercial basis for the way in which profits are distributed within the group, especially in the form of remuneration paid.
Gateway 2 This Gateway require that the IPP’s arrangements do not contain any high-risk features. High-risk feature may include:
- arrangements covered by a Taxpayer Alert;
- financial arrangements relating to non-arm’s length transactions;
- exploitation of the difference between accounting standards and tax law;
- multiple classes of shares and units held by non-equity holders.
In most situations, the passing of these gateways for our clients will be satisfied.
Where the taxpayer satisfies Gateways 1 and 2, they may self-assess their risk level against each of the risk assessment factors.
The overall score will determine which risk zone – Green (Low Risk), Amber (moderate) or Red (high risk) – the IPP’s arrangement falls into, this can be shown as follows:
Aggregate score against first two factors
Aggregate of all three factors
|Green||Low risk||Less than or equal to 7||Less than or equal to 10|
|Amber||Moderate Risk||8||11 and 12|
|Red||High Risk||9 or higher||13 or higher|
Are you concerned with the level of risk zone your allocation of profits might put you in? Contact us at Messenger Zerner and we will discuss this in further detail with you.