A joint submission by Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants, The Tax Institute, and the Law Council of Australia has now urged the ATO to reconsider the “unintended or unreasonable outcomes” of its recently released draft Practical Compliance Guideline 2021/D2.
The new guidelines, which are set to apply from 1 July this year, explain the likelihood of the ATO reviewing the affairs of an individual professional practitioner (IPP) and their firm based on a risk assessment framework.
To apply the risk assessment framework, taxpayers must first satisfy two gateways to prove that arrangements are commercially driven, and do not present any high-risk features detailed in the PCG.
The ATO notes that where an IPP attempts to alienate amounts of income flowing from their personal exertion, it may consider the application of the anti-avoidance provisions under Part IVA.
The joint bodies have taken aim at the ATO’s view of the “alienation of income”, noting that there is no general principle of taxation law that regard the income or profit beneficially derived by a partnership, company or trustee of a trust through the personal exertion or skilled labour of an individual, as the profit or income of that individual.
“It does not matter how involved such an individual may be in the activities from which the income is derived by the entity,” said the joint submission.
“Absent specific statutory provisions, an ‘owner’ of a business can decide whether to receive nothing, a little, a lot or something in between and be taxed accordingly.”
The ATO’s targeting of professional firms — such as those in accounting, architectural, engineering, financial services, legal and medical firms — has also been put in the spotlight.
“It cannot be rationally argued that the income derived by an accounting or law firm is so different to the income derived by, say, a plumbing or management consulting business to permit the ATO to apply compliance resources differently,” said the joint submission.
While acknowledging the need to target artificial and contrived schemes, the joint bodies believe the draft PCG does not go to the heart of Part IVA risk.
“This is an assessment of Part IVA risk and yet the way the PCG is constructed doesn’t talk to Part IVA risk or address it,” said Elinor Kasapidis, CPA Australia senior manager of tax policy. “The way it approaches it through the gateways and then the risk assessment framework will essentially capture many standard, common arrangements that occur in professional firms.
“The way they have built the risk assessment framework and the scoring means we would expect a lot of IPPs and their firms, who through a Part IVA assessment would be low risk, [to] now be classified as at moderate to high risk of audit.”
With the ATO now extending the consultation deadline from 26 March to 16 April, the professional bodies are set to provide further submissions with specific examples to back their case.
“What we think the ATO needs to do is to really look at how they are approaching the problem and find a way to better align their risk assessment framework with Part IVA, and to also ensure that this PCG really helps both the ATO and IPPs to identify truly high-risk arrangements,” Ms Kasapidis said.
“We have offered for the ATO to further engage with us to better understand some of the challenges and the practical implications of what they are proposing, which makes firms who are highly unlikely to be a risk of Part IVA to be now at a moderate to high risk of audit, and we would like to work with the ATO to find a better way of dealing with the issue.”
This is all a long way from the rule of law. Part IVA was meant to be an objective test not a big stick to allow the FCT to tell people how to run their affairs.