ATO investigating SMSFs that invest in professional practices
The ATO is reviewing its guidelines on the structures of professional firms and has raised concerns about certain arrangements involving the use of SMSFs, an industry lawyer warns.
Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler explained that in 2015 the ATO released guidelines on the allocation of profits by professional firms as it was concerned about the way some professional practices were structuring the revenue flow from their practice.
“The ATO introduced some guidelines to say that if you stay within our guidelines as a professional practice then you should generally be safe from Part IVA,” said Mr Butler.
These guidelines, he explained, were quite complex when you look into them in detail and comprised three major threshold tests.
One of the tests was that the assessable income from the professional practice had to be an amount that was at least equal to the amount of remuneration paid to one of their arm’s length professional employees.
“So if they were a practitioner in a small practice, and the practice had a senior professional employee, the ATO would expect you to get remuneration of at least the senior employee.”
Another one of the tests was that 50 per cent or more of the income that a practitioner collects had to be assessable to that professional practitioner.
The other test was that the professional practitioners must pay 30 per cent effective tax on the income received by them or their related entities from the practice.
The ATO has announced they will be reviewing these guidelines, as it has become aware that some of the guidelines are being misinterpreted in relation to arrangements that go beyond the scope of the guidelines.
“We have observed a variety of arrangements exhibiting high risk factors not specifically addressed within the guidelines, including the use of related party financing and self-managed super funds,” the ATO said in a public statement.
While the ATO hasn’t provided a lot of information at this stage on the high risk factors involving SMSFs, one of the arrangements that might be attracting the ATO’s attention, Mr Butler said, could be where a professional’s SMSF invests in the company that conducts the practice, such as a financial planning practice or accounting firm, and the practice company pays the professional practitioner less than an arm’s length remuneration package resulting in a higher dividend on the equity their SMSF holds in the business.
If the practitioner receives a greater return on equity in their SMSF from the fund’s investment in the company, and less than an arm’s length remuneration package, they’ll end up with a better tax result, he explained.
“So obviously if you're siphoning money over to your SMSF, you could be paying nil or 15 per cent, and you'd be paying less than the 30 per cent, so it appears this would fall outside of the ATO's guidelines,” he said.
“This is a warning by the ATO that after reviewing what they’ve seen out of the market place, they’re looking at this more strictly. Professionals who have their SMSFs invested in their practice entity should be mindful as in addition to being at risk of a non-arm’s length income assessment with a 45% tax rate, could also be hit up with part IVA given they do not fall with the ATO’s professional practice guidelines.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.