The Australian Tax Office (ATO) issued its latest guidelines dated 25 June 2018 to professional services firms regarding its assessment of risk in respect to allocation of profits within such firms.

These guidelines follow the ATO’s previous release dated 14 December 2017 on this matter.  These guidelines must also be read in conjunction with other applicable ATO rulings or guidelines, including those in respect to service entity arrangements.

Professional services firms who have put in place or are contemplating putting in place profit sharing arrangements or Everett Assignments (assignments of partnership interests discussed in the High Court decision in FCT v Everett (1980) 80 ATC 4279) from 14 December 2017 should be aware of these guidelines and may consider seeking an ATO private ruling before a restructure is undertaken or substantial income has been allocated.

In the latest guidelines, the ATO will treat the 2018 income year as “low risk” for professional services firms with profit sharing arrangements already in place before 14 December 2017; who meet any one of the ATO’s pre 14 December 2017 safe harbour benchmarks (30% effective tax rate, 50% individual share of income or benchmark comparable senior employee remuneration); and if the profit allocation arrangements do not exhibit certain high risk factors.

The ATO’s high risk factors which may attract the application of the Part IVA general anti-avoidance rules include:

  • Lack of any meaningful commercial purpose regarding arrangements including, but not limited to:
    • disposal of an equity interest through multiple assignments
    • the creation of new discretionary entitlements such as Dividend Access Shares
    • utilising amortisation leading to differences between tax and accounting income
  • Disregard for CGT consequences and inappropriate use of CGT concessions
  • Assignments where profit sharing is not directly proportionate to the equity interest held
  • The creation of artificial debt deductions
  • Undertaking an assignment to dispose of an equity interest to a self-managed super fund
  • Assignments where the arrangement is not on all fours with the principles of Everett and Galland

The ATO is currently developing its guidelines on this matter and will apply after 2018.

The ATO’s 2018 guideline on previous safe harbours will not apply to profit sharing arrangements or Everett Assignments put in place from 14 December 2017.

Professional services firms should also be aware that this year’s Federal Budget proposed new rules to deny Small Business CGT concessions to individual partners who enter into Everett assignments of partnership interests.