The criticism of the ATO’s contentious draft Practical Compliance Guideline 2021/D2 comes as the Tax Office claims that it had been consulting with the legal and accounting professional bodies ever since it withdrew its previous guidance in late 2017.
However, the peak bodies have now disputed this, noting that only selected members were consulted under strict confidentiality agreements, hampering the ability of the bodies to aid in the development of the new guidelines.
“We were not consulted in the development of this draft guidance, contrary to what’s stated on the ATO’s website,” said Elinor Kasapidis, senior manager of tax policy at CPA Australia.
“Had we been approached, we would have told the regulator the proposed changes are unjustified and badly designed.”
The draft PCG, which tries to prevent owners of a professional firm from being taxed on an “artificially low” share of the business’s profits, has found little support since it was publicly released last month, with the joint professional bodies questioning the legal basis of the draft guidelines.
The Institute of Public Accountants believes the ATO is attempting to intimidate firms into conservative tax outcomes, criticising the lack of connection between the guideline’s new risk assessment framework and existing general anti-avoidance provisions.
Likewise, CPA Australia believes the new guidelines could cause individual professional practitioners (IPP) to pay significantly more tax than is legally required simply to avoid the risk of an ATO audit.
“This is an example of regulatory overreach,” Ms Kasapidis said. “There’s no evidence of widespread tax avoidance or tax revenue losses to justify singling out professional firms such as accounting practices for harsh treatment.
“The ATO has designed the new risk assessment framework with little consideration of the structure of modern practices and the way they generate and distribute profits.
“Many of our members will have their risk profile upgraded under the new framework, despite no change to their business model or the identification of issues that would warrant a higher risk profile.”
The professional body has now provided the ATO with five examples of how the new guidelines will cause many standard, arm’s length and commercial arrangements to be classified as moderate to high risk of audit even when it is highly unlikely that the ATO would successfully apply Part IVA at the audit’s conclusion.
It has urged the Tax Office to reconsider the draft PCG and to ensure that the risk assessment framework properly identifies IPPs and arrangements with a high level of Part IVA risk.
“The ATO needs to head back to the drawing board on this one,” Ms Kasapidis said.
“Before serving up another draft of these guidelines, we strongly recommend they engage with the peak professional bodies for insights on how professional firms actually operate.”
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Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.