Tax Alert:  ATO prompts urgent review of professional practices structures

Professionals entering and exiting professional practices could be subject to tax on amounts that they will never receive under a series of Determinations released by the ATO. This is particularly the case where at least one of the interests in the practice is held by a family trust or company.

The ATO has released a final Determination (TD 2011/26 ) and two draft Determinations (TD 2011/D9 & D10) which call into question the entities that accountants, architects, consultants, engineers, lawyers and other professionals have been using in their business structures. As a result, all Principals need to review their business structures to ensure that they are not adversely affected by the views put forward by the ATO.

The Determinations are targeted at “no goodwill” incorporated professional practices but have broader implications. The ATO will now only accept that Principals coming and going from these practices will be taxed at nominal values for their equity where certain narrow conditions are met. A major condition is that the professional practice cannot be owned, even in part, by family companies or trusts.

If these conditions are not met, incoming Principals will be subject to tax on the market value of their shares. Similarly, on exit, such Principals will be subject to tax on the market value of their shares despite receiving only a nominal payment on exit.

No goodwill practices
A “no goodwill” practice refers to a professional practice where the Principals have agreed that, when buying and selling equity, the value of the equity will not reflect the value of underlying goodwill. A no goodwill practice simplifies the administration of professional practice structures and frees incoming Principals from the burden of having to pay substantial amounts to buy into the practice. This approach and others, where incoming Principals pay discounted amounts for their equity, have been very effective for professional practices for many years.

Partnerships 
Recently, we have seen a trend away from using partnerships as business vehicles as each profession’s rules have gradually relaxed. Many professional practices have moved with the times and are now using alternative structures, such as companies.

The ATO, in contrast, is still applying concepts that it developed in relation to partnerships. Unfortunately the Determinations place constraints on these new structures which will limit their effectiveness despite professional bodies relaxing their rules to facilitate their use.

The ATO's approach risks undermining commercial decisions to implement more efficient and effective ways of operating a business.

Review your professional practice structure
Many professional practices have moved to adopt companies and trusts as business structures on the assumption that they will be treated like any other business. Unfortunately the ATO does not share this view and as a result all professional practices should review their structures where:

• They operate through a company or trust 
• The full value of goodwill is not taken into account when principals enter and exit 
• Goodwill is valued at $0  
• Equity in the practice is owned by family trusts or companies 
• A family trust or company is a partner in the partnership 
• They are considering incorporation

Grant Thornton has been able to assist many professional practices to review their structures. One of our partners would be pleased to assist you in undertaking a review of your practice structure. For more information, please contact:

Adelaide
Steve Westaway
Partner, Privately Held Business
T  +61 8 8372 6666
E  steve.westaway@au.gt.com

Brisbane
Dennis Eagles
Partner, Wealth Advisory Services
T  +61 7 3222 0200
E  dennis.eagles@au.gt.com

Melbourne
Andrew Steer
Partner, Privately Held Business
T  +61 3 8663 6000
E  andrew.steer@au.gt.com

Perth
Kim Hayman
Partner, Privately Held Business
T  +61 8 9480 2000
E  kim.hayman@au.gt.com

Sydney
Peter Berg
Partner, Tax
T  +61 2 8297 2400
E  peter.berg@au.gt.com

Bill Shew
Partner, Privately Held Business
T  +61 2 8297 2400
E  bill.shew@au.gt.com