The Tax Office's new income splitting rules for professional partnerships might result in partners with identical arrangements assessed at different risk levels.
The update, designed to provide certainty for this year's tax returns, says that taxpayers who have entered into certain income splitting arrangements before December 14 will be considered low risk by the ATO.
The interim guidance comes after tax officials withdrew the old rules for allocating profits last December. The ATO was concerned about the way some firms used service trusts, a technique used by partnerships to split profits with lower taxed structures such as super funds.
The ATO expressed concern about service trusts with "high risk" tax avoidance behaviour such as arrangements that lack "any meaningful commercial purpose", "use inappropriate capital gains tax concessions", create "artificial debt deductions" and assign profit in a way "not directly proportionate to the equity interest held".
"They're saying that they have preferred methods about the way practitioners are allocating their income. They want the practitioners to be taxed at an appropriate amount," said Todd Want, tax director at mid-tier accounting firm William Buck.
"They've seen certain behaviours they haven't been thrilled with, like pushing the income off to super funds or restructuring income in a certain way to avoid tax liabilities."
Tax officials have confirmed that an arrangement will be considered low risk if it was in place before December 14, doesn't have high risk factors and met one of three earlier published benchmarks: the partner is receiving market-level remuneration, or the partner's tax rate is at least 30 per cent, or at least half the income is going to the partner.
"From a practitioner point of view, while the benchmarks have no legal basis, they provide a level of certainty for the vast majority of practitioners who simply want to do the right thing," Mr Want said.
The Tax Office advised partners who have entered into arrangements since December 14 and have potentially high-risk elements to contact the agency as soon as possible.
"There's also a bit of uncertainty about how new arrangements fit within the guidelines," Mr Want said.
"The disappointing part at the moment, if you were a new partner that came on board after December 14, you're not covered by the grandfathering rules. You might not be considered low risk."
The advice to partners would be to ensure they meet one of the three benchmarks, said Peter Bembrick, a partner in tax services at mid-tier firm HLB Mann Judd.
"In our firm, we are looking at those guidelines and saying, are we comfortable we meet them?" he said.
"And certainly the advice to anybody is to look at the guidelines. Do you meet them? If you met one of the three guidelines, you'd be low risk."
But he said that a partner who entered into an arrangement after December 14 "wouldn't have the same level of protection".
"But really, if someone is coming in as a new partner in a firm, they're probably not going to have an awful lot of scope to split income. A more experienced, lateral hire, might have more of an issue.
"Generally, the more complex the arrangement, the higher the risk."
This article was published and provided by the Australian Financial Review.