Two new cases before the Administrative Appeals Tribunal demonstrate how serious the Australian Taxation Office (ATO) is about making sure professional services firms - lawyers, accountants, architects, medical practices, engineers, architects etc., – are appropriately taxed.
In both cases, the ATO pursued the practices using Part IVA. Part IVA is an area of the income tax law that enables the
Tax Commissioner to attack schemes or arrangements undertaken to obtain a tax benefit, enabling him to cancel any benefit derived by the
scheme.
That is, you could have a legally viable structure in place but if the only purpose of that structure is to reduce tax, then the
Commissioner can use Part IVA to remove the tax benefit. And, if Part IVA applies, you may end up with an additional tax liability as
well as an administrative penalty of either 25% or 50% of the tax shortfall amount.
Broadly, the cases involved a solicitor who controlled a number of practice trusts that derived profits through marketing and facilitating
tax planning arrangements.
While the arrangement in each case was complex and involved a large number of steps, the practice trusts ensured their business profits
weren’t subject to tax by essentially making trust distributions on paper through a series of trusts and ultimately to either a company that
had existing tax losses, or a tax-exempt entity.
However, the real funds relating to the trust distribution (less a commission paid for the use of these entities) were ultimately
received by the solicitor or their associated entities in the form of a loan.
Professional practices have been in the ATO spotlight for many years now for the way they distribute profits. Back in 2021, the ATO
finalised its guidance on the allocation of professional firm profits, putting in place a series of risk ratings and gateway tests.
These two cases however demonstrate the ATO’s willingness to pursue the issue in the courts using the Commissioner’s powers in Part IVA.
For professional services firms, it’s important to be aware that there are several ways in which the ATO can potentially challenge
arrangements involving the distribution of profits from a professional practice. For example:
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