Steve Westaway, professional services partner, Grant Thornton Australia told AccountantsDaily the new guidelines present additional tests that firms must now satisfy in order to prevent the attention of the tax office and a possible audit.
“There was already a guideline that was put out by the ATO, a ruling that basically set out what they class as business income … which basically said that the assessable income they are talking about (in the recently issued guidelines) is business income.”
“What they are now saying is that professional practices need to satisfy a second test that a proportion of that income that represents their personal input, no matter what that is, and the ATO has now defined that as a minimum set of numbers,” he said.
Mr Westaway noted these rules apply only to professional services firms and not any other businesses. He also expressed concerns that the new ATO guidelines may not be in line with actual legislation and supporting case law.
“There is a lot of debate about the ATO's interpretation of the current legal guidelines, as in does the legislation itself and the case law supporting it actually give them that base to operate from,” Mr Westaway said.
“The issue that’s come out from this is that basically if you don’t stay within the safe harbour guidelines you’ve got to be prepared to challenge the tax office on their stance.”
Challenging the tax office can be a costly exercise and one Mr Westaway said he doesn’t expect to see in the near term.
“The general feedback that you get when you talk to people in the profession is the cost of the argument is not worth the effort.”
“The ATO has achieved a very high compliance rate in terms of the service trust ruling released a couple of years ago without the need to actually litigate it and you'll find the same outcome will apply to this. It’s just a matter of the cost and the disruption to the practice when you head into any form of litigation is extremely high.
“That doesn’t make the commissioner right but if they achieve the same outcome either way then they’ve achieved their target,” Mr Westaway said.
For accounting practices, this means is that the ATO has now issued a new risk assessment tool saying that unless a firm fits within one of the three exemptions that the ATO has put in the guidance then the firm is at a higher risk of being selected for compliance review, according to Mr Westaway.
“And that compliance may be at first instance receiving a letter saying we know note your profit share doesn’t match our guidelines, can you please explain and answer the following questionnaire – to congratulations you've got a tax audit,” Mr Westaway said.