"It is likely to be pure co-incidence but the ATO's crackdown on professionals' diverting their professional income to lower tax rate associates comes at a time when the Tax Commissioner is a former tax partner of a large accounting firm,” says
Associate Professor Dale Boccabella from the UNSW Business School.
“There is little doubt that tax partners of the major accounting firms are at the forefront of devising strategies for the diversion of income.”
The ATO’s new move is largely directed at medium-sized and large professional services firms. They can apply whenever a trust or company, as well as a partnership, or combination, is used to divert income away from the principal.
“Various planning strategies have been used and can be used by principals in professional services firms to divert income away from themselves,” he says. This can include transferring a partner’s interest in a partnership to a family discretionary trust so that the trust obtains partner’s income.
From there, the trust makes ‘tax efficient’ allocations of the income to family members. “If tax effective, the partner can get away with reporting a trivial income, if any at all. Somehow, the ATO has accepted this for many years.”
Now the ATO would like to see either the principal report a minimum level of the income in her tax return, or the entitlement of the principal and associated parties from the practice bears at least a 30 per cent tax rate.
“In a non-legal sense, these guidelines are saying that some of the diverted income is really due to the personal exertions of the principal, such as the partner, and therefore should be taxed to that principal,” he says.
He adds that one omission from the ATO's guidelines is that they do not apply to tradespeople; they only apply to professional services firms and their principals.
Dale Boccabella can discuss the implications of the challenge by the ATO.
For further comment call Dale Boccabella on 02 9385 3365, 0427 591208 or Email
firstname.lastname@example.org or Kathrin Bain on 02 9385 9541, 0400 794 285 or Email:
Media contact: Julian Lorkin: 02 9385 9887