PCG 2021/4 outlines the ATO’s compliance approach to the allocation of profits or income from professional firms in the assessable income of an individual professional practitioner. PCG 2021/4 applies from 1 July 2022.

The ATO said the guidance aims to address arrangements that alienate, or inappropriately redirect, the income of a professional practitioner to an associated entity such as a spouse or family trust with the effect of reducing the practitioner’s tax liability.

“Professional firm owners and operators need to review their profit allocation arrangement against two 'gateways' in PCG 2021/4,” the ATO explained.

“If their arrangement passes both gateways, PCG 2021/4 will help them to self-asses their level of risk by using a risk assessment framework, understand the level of engagement they can expect from us, and decide whether to seek professional advice or contact us.”

The ATO noted that there is a two-year transitional period until 1 July 2024 that may apply to arrangements that were low risk under the suspended guidelines but are now considered moderate or high risk under PCG 2021/4.

Pitcher Partners executive director Ashley Davidson previously warned a wide range of structures and arrangements that have been set up for retention of talent or other legitimate commercial reasons may be considered risky under the clarified guidelines.

“If you are a white-collar worker, the owner of a professional business or associated with one, and you derive income from a business that is not counted as personal services income, you may find you fall under the general scope of the guideline.” 

Mr Davidson said the first step for professionals was to understand the risk profile of current arrangements and assess whether the ATO would consider it to be a commercially driven arrangement. It should also be examined for any features the ATO might consider to be “high risk”. 

These two tests, known as gateways, must be passed before a professional can apply the PCG to their situation.  

“The new PCG doesn’t apply to existing arrangements until 1 July 2024, but after that date, you will need to pass both gateways before you can apply the new guidelines to your personal arrangements,” Mr Davidson explained. 

“If a professional’s circumstances fail to pass either of these gateways, the ATO suggests it might view the arrangement as an attempt to redirect income away from the individual.”