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Varying PAYG Installments

You can vary your PAYG installments so the amount you prepay is closer to your expected tax for the year.

If you pay PAYG instalments using the instalment amount (option 1 on your activity statement), you may want to vary if there has been a significant change in your instalment income this year.

If you calculate your PAYG instalments using the instalment rate (option 2 on your activity statement):

  • you do not need to vary simply because your income has changed – the payment you calculate will go up and down in line with your income;
  • you would usually only vary if the taxable proportion of your income has changed – for example, if your income has fallen significantly but your deductions for running costs have stayed the same.

You make your variation when you lodge your activity statement or instalment notice. You must lodge:

  • on or before the day your PAYG instalment is due; and
  • before you lodge your tax return for the year.

Your varied amount or rate will apply for the remaining instalments for the income year, or until you make another variation.

Underestimating installment amount or rate

When you vary your PAYG instalments, it is important to not underestimate your instalment amount or rate. If you underestimate, you could be left with a substantial tax bill when you lodge your tax return at the end of the year.

Also, when your tax return is lodged, the ATO compares your actual instalments to the total tax payable on your instalment income for the income year.

If your varied instalments are less than 85% of your total tax payable, you may have to pay interest (the general interest charge) on the difference, in addition to paying the shortfall. Depending on the circumstances there may also be penalties.

If you are not sure, it is best to not vary your instalments. Any overpaid instalments will be refunded to you after you lodge your tax return.

Varying your installments due to flood and other disasters

You may need to vary your PAYG instalments due to the impact of the 2022 floods or other disasters.

The ATO has said that it will not apply penalties or charge interest on variations if you have taken reasonable care to estimate your end of year tax liability. This means making a reasonable and genuine attempt to determine your liability. When considering if a genuine attempt has been made, the ATO considers what a reasonable person would have done in your circumstances.

Want to find out more?

Talk to us about whether you should vary your PAYG instalments. We can also talk to the ATO on your behalf if you are unable to pay an instalment amount.

Crypto Reforms: Change in Consultation Approach

According to the latest ASIC report into retail investors, the uptake in cryptocurrency has skyrocketed among Australian retail investors. It found that 44% of those surveyed reported holding cryptocurrency, making it the second most common product type held after Australian shares. At the same time, a quarter of the surveyed investors who held cryptocurrency also indicated that cryptocurrency was the only investment they held.

With this increase in the uptake of cryptocurrency and other related blockchain technology, coupled with the lack of regulation which has allowed scams to proliferate, it will perhaps come as no surprise that the ACCC has estimated that more than $100m had been reported lost to cryptocurrency investment scams just in the first half of 2022.

In a bid to stamp out these scams, the previous government had commissioned the Board of Taxation to conduct a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia. This review was to focus on the scope of digital transactions and assets without increasing the overall tax burden. Specifically, it was asked to consider:

  • the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
  • the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
  • the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
  • the taxation of digital assets and transactions in comparative jurisdictions and consideration of how international experience may inform the taxation of digital assets and transactions in Australia; and
  • whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.

Various public consultation dates in September 2022, both in person and virtual, have also been announced by the Board of Taxation in relation to the review, with submissions closing on 30 September 2022. The Board is due to report back to the government by the end of 2022.

However, the Albanese Government has recently criticised the previous government for “prematurely jump[ing] straight to options without first understanding what was being regulated”. According to the Assistant Treasurer and Minister for Financial Services, this government is seeking to take a “more serious approach to work out what is in the ecosystem and what risks needs to be looked at first”.

As a part of this new approach, Treasury will prioritise “token mapping” work as the first step in a reform agenda. This aims to identify how cryptocurrency assets and related services should be regulated. The next steps in this process will be to identify notable gaps in the regulatory framework, progress a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of cryptocurrency assets and provide additional consumer safeguards.

Treasury will be commencing consultation with stakeholders on a framework for industry and regulators soon by the release of a public consultation paper on “token mapping”. While the Board of Taxation review was not addressed by the government, it is assumed the review as previously announced will continue.  

Want to participate in the consultation?

If you have had experiences with cryptocurrency, either positive or negative, and would like to contribute to these consultations, we can assist in writing your submission or just keeping you informed about when consultations will start.

Period of Review Changes Coming for SMEs

At the start of the COVID-19 pandemic in 2020, the previous government passed a measure to increase the small business threshold from $10m to $50m for the purposes of most of the small business exemptions. This was part of a Bill to implement various Budget measures for economic recovery.

Among other things, this legislation meant that the Commissioner was only able to amend an income tax assessment of “medium businesses” (those with a turnover between $10m and less than $50m) for a limited period of 2 years. The Commissioner was still able to amend an assessment at any time if fraud or evasion was expected or to give effect to an objection made by the taxpayer or a decision on review or appeal.

While the current government is not seeking to disturb a majority of the measures contained in the legislation, it has recently introduced a proposal to exclude certain small and medium entities (SMEs) from the shorter 2-year amendment period and revert those entities back to the standard 4-year period.

Draft Regulations have been released to exclude certain entities with particularly complex tax affairs or significant international tax dealings from the shorter period of review, which according to the government is in line with the original intentions of the 2020-21 Budget announcement.

Entities which would be subject to a longer period of review should the Draft Regulation be registered include:

  • those with related-party dealings in relation to assets or non-cash benefits with a market value of at least $50,000.
  • entities that derive an assessable income of at least $200,000 from any source that is not an Australian source. To prevent structuring arrangements being undertaken to avoid this, the $200,000 threshold is assessed as a combined threshold including the assessable income from the relevant assessed entity and any entity affiliated with or connected with the entity.
  • foreign controlled Australian entities (including Australian companies, trusts and partnerships) and non-resident entities at any time during the income year.
  • any entities that engage in schemes captured by either the Diverted Profits Tax (DPT) or Multinational Anti-avoidance Law (MAAL).
  • certain entities with at least 10 other entities connected with or affiliated with the entity at any time during the assessment year.
  • entities that may be entitled to the R&D tax offset or certain related deductions, recoupments and adjustments, and
  • entities that claim the following CGT relief:
    • restructure rollover relief
    • demerger relief
    • rollovers relating to CGT asset transfers between 2 companies or the creation of a CGT asset between companies within the same wholly owned group, where one company is a non-resident, and
    • entities subject to Div. 855 (where a foreign resident can disregard a capital gain or loss in certain circumstances).

The Draft Regulations also seek to remove the current requirement that a 4-year period of review only applies where at least one of the related parties already has a 4-year period of review in relation to related party dealings. This means that even if all related parties have a 2-year assessment period, if all other conditions are satisfied, a 4-year period of review may apply to a relevant assessed entity. The above amendments will apply to assessments made after the Regulations commence for income years starting on or after 1 July 2021.

What does this mean for your business?

With these potential changes on the horizon, will your business be affected? We can help you get ready or make a submission on your behalf in relation to these changes. Contact us today for expert help and advice.

ATO Has Resumed Collecting Aged Debts

The ATO has recently announced that it will resume collecting aged debts by offsetting tax refunds or credits. Aged debts are a collective term the ATO uses to refer to its uneconomical non-pursued debts that it has placed on hold and has not undertaken any recent action to collect. These debts do not typically show up on the online accounts of the taxpayers as an outstanding balance as the ATO has made them “inactive”.

Usually when a debt is put on hold, the ATO notifies the taxpayers via a letter that the debt collection has been paused and that any credits that taxpayers are entitled to will be offset against the debt. In addition, the ATO will also note that it reserves the right to re-raise the debt in the future, depending on the circumstances of the taxpayer. Letters were sent out in May 2022 to remind taxpayers that they have aged debts and June 2022 saw the recommencement of debt collection.

While most taxpayers should have received their aged debts letter by now, some may not have received anything, due to a change of address or the patchiness of the postal service. The first clue for those taxpayers that they may have an aged debt may be when they notice that their refund is less than expected or a credit on one account is less than it should be. To avoid surprises, taxpayers who are unsure whether they have aged debt can check their online services for a transaction with the description “non-pursuit” on their statement of account.

It is important to remember that those with multiple accounts need to check all relevant accounts for that description to ensure they do not have an aged debt.

Taxpayers with aged debts who are unable or choose not to pay all or part of the debt may find that they end up paying more, as general interest charge may be automatically applied even though the debt is “on hold”. Where the ATO offsets aged debts either from ATO accounts or credits from other government agencies, taxpayers will be notified that the debt has been re-raised and offset. If it is offset against an ATO account, taxpayers will be able to find a transaction on online services with the description “offset”.

By law, the ATO is required to offset credits against any tax debts owed except in some very limited circumstances, such as having a fully compliant payment plan for outstanding debts, the tax debt is a future debt or is related to a director penalty liability, a deferral has been granted for recovery action, or the available credit is a Family Tax Benefit amount.

Taxpayers that do not meet the above criteria and are unable to pay the debt may be able to apply for a review or a debt waiver depending on their circumstances. For example, a permanent release of a debt may be available to on the basis of serious hardship (i.e. where the payment of a tax liability would result in a person being left without the means to afford basics such as food, clothing, medical supplies, accommodation or reasonable education).  

Not sure if you have an aged debt with the ATO?

If you are unsure whether you have an aged debt with the ATO, we can help you find out. If you require assistance with debt repayment or applying for a waiver, we can assist you by working with the ATO to find the best solutions for you. Contact us today for assistance and prevent interest charges building up.

Tax Time Focus on Rental Properties

Just as with previous income years, tax time 2022 is no different. The ATO has again cited rental property income and deductions as one of the 4 key focus areas, along with record-keeping, work-related expenses, and capital gains from crypto assets/properties/shares. The focus is no surprise considering that a recent ATO Random Enquiry Program found that 9 out of 10 tax returns that reported rental income and deductions contain at least one error.

“We are concerned about mistakes, and in particular, leaving out income or deliberate over-claiming of rental property deductions this year.” – Assistant Commissioner, Tim Loh.

The ATO warns taxpayers that it receives rental income data from a wide range of sources including share economy platforms, rental bond authorities of various States, property management software providers, and State and Territory revenue and land title authorities. This information will then be matched to the information provided by taxpayers on their tax returns meaning that there is no hiding income from the all seeing eye of the ATO.

One of the income categories for rental properties that may be important for this year and that many landlords may not know to include is insurance payouts. With the la nina weather event causing flooding along large parts of the country, if you obtained insurance payments in relation to loss of rental income or repairs, that would need to be included.

For those renting out their investment property, their home, or part of their home on a short-term basis on digital sharing platforms such as Airbnb, that income will need to be included, and any expenses will need to be apportioned according to the space rented out. There may also be CGT consequences upon selling the property so taxpayers will need to be careful.

Joint owners of properties will need to ensure that their income and deductions are in line with the rental property’s ownership interest, which generally depends on legal documents at the time of purchase.

As for expenses, the ATO notes that while some expenses such as rental management fees, council rates, repairs, interest on loans, and insurance premiums can be deducted in the year its incurred. Other expenses, such as borrowing costs, capital works, and some depreciating assets can only be claimed over a number of years. Capital works include replacing a roof or a new kitchen or bathroom. Depreciating assets such as dishwashers or ovens over $300 will need to be claimed over their effective life.

In addition, taxpayers should also be aware that if they redraw on a rental property loan for private expenses or to purchase a private asset, the amount of interest relating to the loan for the private expense or asset cannot be claimed as a deduction. There may also be other instances where a deduction in relation to a rental property will be denied such as when a property is advertised significantly above reasonable market rate, or where unreasonable restrictions are imposed on potential tenants.

Taxpayers that have sold a property during the 2021-22 income year will need to be cautious as capital gains is also one of ATO’s focus areas for this year. Those that have rented out a part of their property may only be entitled to a partial main residence exemption depending on the amount of space rented out.

Need help?

If you want to take all the hassle out of tax time, we have the expertise to help you sort out your tax return including rental property income and expenses. If you’ve sold a property or another CGT asset during the year, we can help you work out whether you’ve made a gain or loss. Contact us today.

Top tips for managing payroll as an employer

We’ve just entered a new financial year, so chances are you might be forward planning for 2022/23, and have identified that there’s capacity to grow your team.

One of the most common challenges small-business owners face with expanding your team is navigating employer obligations when it comes to payroll. Here are some tips to help managing payroll as a small-business owner/employer.

Explore your employment types and your options

Before hiring, it is important to consider what your business needs to succeed, and what it can afford. Look at historical data, as well as your budget and forecast to determine what is feasible. If you are about to enter a busy period and predict it will quieten down and return to normal again, a casual or contract role might suit you better. On the other hand, if your data shows you that the work and sales are consistent and you are struggling to find time in the day to do it all, then a full-time role may be good for you.

Knowing your employment types and the obligations associated with them, such as award rates (which vary by sector, experience and whether the employee is taking an apprenticeship or other scheme), sick leave and holiday pay, is essential before you start the hiring process.

Look to cloud-based tools to streamline your payroll

Apart from ensuring you’re paying award rates at a minimum and submitting employees’ payments on time, there are a number of elements to consider when it comes to your tax obligations with the ATO. For example, PAYG withholding is where your employer automatically withholds a portion of your gross wage or salary for tax purposes. PAYG withholding must be done for all employees. Furthermore, it needs to be reported to the ATO with every pay cycle, and year end data has to be submitted with each financial year (the cut-off date being 14th July), so that employees can lodge their personal tax returns.

The government introduced single touch payroll (STP) in 2019, which is where payment details are lodged via digital means. It is advantageous to employers as it frees up a lot of the manual data entry that was once required.

Most affordable accounting and bookkeeping service providers (e.g. QuickBooks, Xero, and MYOB) provide payroll functionalities, and are also integrated with STP. Your cloud-based payroll platform can be connected to the ATO portal, which means you can generate and send reports while preparing employees’ payments, saving you a lot of time in the process.

Take time to understand and comply with superannuation requirements

Superannuation is compulsory and paid in addition to employees’ wages and salaries. The super guarantee (minimum amount you need to pay) increased from 10% to 10.5% on 1 July 2022. If you haven’t already done so, your payroll software must be updated in order to account for the change.

Cloud-based providers are useful here as you can configure your payroll and STP so that superannuation is automatically included. Make sure you provide new employees with a superannuation standard choice form, where they provide their chosen fund’s details.

You also need to select a default super fund for the business, where you pay employees if they don’t have a preferred fund, or a stapled super fund.

Super needs to be paid quarterly – by 28 October (Q1), 28 January (Q2), 28 April (Q3) and 28 July (Q4) each year. If not, you will need to pay a super guarantee charge.

Need help with managing your payroll?

Hiring and then managing payroll and its associated legalities can be a little daunting, however, a tech-based solution is ideal for small-business owners navigating this process. It’s both user-friendly and affordable, meaning you can get more hours in your day for other business processes. If you require assistance with payroll management and compliance to legalities, contact us today.

The importance of record keeping

You are legally required to keep records of all transactions relating to your tax and superannuation affairs as you start, run, sell, change or close your business, specifically:

  • any documents related to your business’s income and expenses;
  • any documents containing details of any election, choice, estimate, determination or calculation you make for your business’s tax and super affairs, including how any estimate, determination or calculation was made.

You should make sure that you understand what records are needed for your business and make accurate and complete record-keeping practices a part of your daily business activities. Talk to your tax advisor about what records your business needs to keep and for how long.

What is a record?

A record explains the tax and super-related transactions conducted by your business.

The record needs to contain enough information for the ATO to determine the essential features or purpose of the transactions.

The minimum information that needs to be on the record is generally:

  • the date, amount, and character (for example, sale, purchase, wages, rental) and the relevant GST information for the transaction;
  • the purpose of the transaction; and
  • any relevant relationships between the parties to the transaction.

Five rules for record keeping

The ATO has 5 record-keeping rules, which are based on law and the ATO’s views.

  1. You need to keep all records related to starting, running, changing, and selling or closing your business that are relevant to your tax and super affairs – if your expenses relate to business use and personal use, make sure you have clear documents to show the business portion.
  2. The relevant information in your records must not be changed (for example, by using electronic sales suppression tools) and must be stored in a way that protects the information from being changed or the record from being damaged – you need to be able to reconstruct your original data if your record-keeping system changes over time.
  3. You need to keep most records for 5 years – generally, the 5-year retention period for each record starts from when you prepared or obtained the record, or completed the transactions or acts those records relate to, whichever is later. However, in some situations, the start of the 5-year retention period is different. For example, for super contributions for employees, the 5 years starts from the date of the contribution. You need to keep all information about any routine procedures you have for destroying digital records.
  4. You need to be able to show the ATO your records if they ask for them. The ATO will also need to be able to check that your record-keeping system meets the record-keeping requirements – if you store your data and records digitally using an encryption system, you will need to provide encryption keys and information about how to access the data when asked. You also need to ensure the ATO can extract and convert your data into a standard data format (e.g. Excel or CSV).
  5. Your records must be in English or able to be easily converted to English.

Need help with record keeping?

Keeping correct records is very important. Failing to do so could have financial consequences. We can help you with your records. Contact us today for more information.

How small businesses can embrace digital transformation

Surviving and thriving in today’s competitive, fast-paced world is tough for small businesses. However, many are finding that digital transformation and recent Government financial support have the potential to level the playing field between large and small businesses.

The hurdles can be much easier to overcome in small businesses without pre-existing infrastructures, corporate hierarchies and legacy IT systems. New technologies are affordable and scalable, removing the need to finance a big upfront investment.

In a broad sense, digital transformation is the concept of transforming manual processes into digital or automated ones. Often it starts with modernising data and information management, which is the best way to promote productivity.

Transforming document-centric business workflows is a key component of any digital transformation strategy. Understanding which operations and processes can be improved and would deliver more value if they were transformed digitally is essential.

Typically, these are the processes that generate large volumes of documents in both paper and digital form, which offer numerous opportunities for streamlining. As more business is conducted digitally, the continued use of paper creates a hybrid physical-digital landscape which can be time consuming and difficult to manage.

With widespread use of information technology tools and the increase of data production, not only does digitally transforming reduce costs and the environmental impacts of paper, but it also encourages flexibility in working when documents can be accessed from anywhere, saving time and costs.

To transition to a paperless or a paper-reduced working environment, four key steps can put your small business on the right path.

Organise your documentation

Make a list of the different types of records in the company from accounting, tax, personnel and customer then develop a records retention schedule that defines how long categories of records should be retained and when they should be destroyed.

Understanding where the paper is coming from can help to stop it from being created. Stopping the creation of paper must be done in a prioritised manner, based on regulatory, customer and cost impacts. As such it is recommended to start with vendor sources, then employee and finally customer sources.

Digitalise

Physical documents that take up valuable office space can be stored digitally at a fraction of the space and cost. Digital files can be categorised and prioritised based on department or project, helping to make them more accessible by staff, available to employees working remotely and improving the ability to find and analyse valuable insights that can be converted into new leads and growths.

Destroy what you don’t need unless there is a compelling reason to keep paper copies for legal or compliance reasons. Eliminating document s after they are no longer needed makes economic sense. Once you’ve determined which documents can go, it is important to destroy them securely.

Consider offsite storage

Digitalisation is not always a perfect solution and some businesses require secure storage of physical documents. Depending on how much paper you manage, storing onsite can be convenient and inexpensive at first, but using an offsite storage provider can keep your sensitive documents safe from loss or damage.

As the digital world around us continues to evolve and pervade every part of our personal and work lives, digitisation of records is the fastest way to ensure efficient and effective processes. For a small business looking to automate any business process, the removal of paper is a key component to its growth and success. Digitalisation helps to alleviate administrative tasks for automation which frees up employees to be more productive and innovative in their respective roles, providing greater opportunities to build and ensure competitive advantage.

What changes are coming to superannuation for 2022-23?

In line with existing legislation, a number of superannuation changes are coming into effect that will apply to both employees and employers.

Two specific changes that will affect employees most are:

  • The rate of super guarantee contributions from employers will increase to 10.5%.
  • The $450 eligibility threshold for super will be removed.

What does this mean for your future retirement savings?

Super guarantee lifts to 10.5%

From the new financial year, the super guarantee (SG) rate will increase from 10% to 10.5% for employees.

For employees on award wages or enterprise agreements, superannuation is paid on top of their wage. If an employee who is paid $90,000 plus super received $9,000 into their super contributions, under the new rate rise they will be paid $9,450.

However, for employees on contracts who receive super as part of their salary, the 0.5% will be take from their salary. This means their annual wage will decrease.

The Australian Retirement Trust Education Manager, Josh van Gestel, explains the importance of considering how your employer will fund this new rate increase:

“Some employers may pay this additional amount on top of the other salary increases or bonuses they may provide to you, while some other employers may instead pay you for this increase in SG by reducing your current salary or any future salary increases or bonuses they would have otherwise paid to you.”

“If you’re also making personal pre-tax contributions to your super, including salary sacrifice contributions or amounts you claim as a tax deduction, just make sure the increase in what your employer pays doesn’t tip you over the annual concession limit of $27,500 that applies to how much you can contribute each year.”

This isn’t the last expected SG rate rise we will see as the Federal Government has mandated a 0.5% rate increase every financial year until it reaches 12% in 2025.

More employees eligible for super as the $450 threshold is ditched

The $450 threshold for super is also going to be scrapped.

For the first time from 1 July, it is estimated more than 300,000 Australians (mostly young) will be eligible to receive SG payments. this means many low-income workers with part-time or casual jobs will now be entitled to the same benefits as their higher-earning counterparts.

Under the new changes, anyone earning less than $450 per month before tax will receive the new 10.5% contribution regardless of how little they earn. The one exception is if the employee is under the age of 18 – they must work for at least 30 hours per week to be eligible for super payments.

How to get started if you’ve never received super before

Those who are new to superannuation are recommended to do some research and find a super fund that best suits their needs now and in the long run. After all, you want to ensure that the fund you entrust with your savings ticks all the relevant boxes.

There are three key things to weigh up when selecting the right fund for you:

  1. Take a look at the tangible numbers such as fees and costs – make sure to compare fees and costs, remembering that these are deducted from your account balance and can deplete your savings over time. There is also the matter of insurance, make sure you are getting the cover you need at a reasonable cost that you can justify.
  2. Consider the services and benefits on offer – you want to make the most of your membership. See what you can access and the functionality you get, what rewards and discounts a membership can let you access, and the support you can receive.
  3. Think about what type of fund you’re after – consider if the fund you’re with or looking to join is a profit-for-members fund, a retail fund that may be offered through a bank or other financial institutions, or if you consider doing it all yourself through a self-managed super fund.

Work test requirements for older Australians scrapped

Older Australians aged between 67-74 will be able to top up their super without having to undergo a work test, provided their super balance is less than $1.7 million in July 2022.

This change allows older super members to continue to build their retirement balances.

Cut off age for non-concessional contributions rises

Older super members who wish to make non-concessional contributions into their super account has increased from 67 to 75 years of age.

This means that people aged up to 74 can make a considerable contribution into their account – $110,000 per year or $330,000 over three years. One important thing to remember is that this only qualifies for those members who have less than $1.48 million in their super.

Buying your first home with super

If you’re thinking about using your super savings to buy your first home, there are important changes that have occurred from 1 July 2022.

An individual can make personal contributions of up to $15,000 a year into their super, and up to an overall maximum of $50,000 that they can later withdraw to put towards the purchase of their first home. This is an increase from an overall maximum of $30,000 which applied prior to 30 June 2022.

By saving through super, you can actually save on tax which you can put towards your dream home.

New financial year resolutions to make

As we head into the new financial year, it’s time to do a quick check on your super to see how it’s tracking and whether any relevant changes need to be made.

Mr. van Gestel recommends doing the following tasks:

  • Engage with your fund – get your online access sorted.
  • Consider whether you should bring your super funds together (if you have more than one).
  • Check your investments – your super is an investment so make sure it’s performing as it should be.
  • Consider adding personal contributions if you can.
  • Make sure your insurance and beneficiary nominations are correct.
  • Reach out to your super fund if you ever need assistance or guidance.\

For more information on super funds and self-managed super funds, contact us today.

Professional Firm Profit Allocations: ATO View

If you run a professional services firm there are many tax issues to consider in the allocation of profits. The ATO is particularly concerned about individual professionals with an ownership interest who redirect their income to an associated entity, such as a trust, with the effect of significantly reducing their tax liability – raising the prospect that anti-avoidance provisions could apply. From 1 July 2022, new guidelines explaining the ATO’s compliance approach to profit allocations will commence. These guidelines assist taxpayers to identify their particular risk level and understand whether their profit allocation arrangement may attract attention from the ATO.

The new guidelines (PCG 2021/4) are significantly different to previous ATO guidance. Importantly, the ATO acknowledges that some arrangements that were previously considered “low risk” may now have a higher risk rating.

Before speaking to your advisor, it may help you to understand the new two-step process for identifying your risk.

Step 1: Pass the “gateways”

For the guidelines to apply to your profit allocation arrangement, you must satisfy two “gateway” tests.

Firstly, does the arrangement have a sound and genuine commercial rationale? The ATO suggests that a change in tax performance, absent any other non-tax related practical changes, strongly indicates a lack of commercial rationale.

Secondly, are you satisfied that the arrangement has no “high risk” features? This includes anything flagged in a Taxpayer Alert, as well as the following:

  • Financing arrangements related to non-arm’s length transactions. For example, where an associated entity borrows to acquire the individual’s ownership interest and claims deductions for interest expenses.
  • Exploiting artificial differences between taxable income and accounting income.
  • Where a non-equity partner assigns their fixed-draw income to their associated entity.
  • Multiple classes of shares and units held by non-equity holders.

If you don’t meet these two tests, the guidelines don’t apply and you should seek professional advice.

Step 2: Identify your risk

If you pass the gateways, the next step is to consider three risk assessment factors (or two, if the third is impractical) and use the tables in the ATO’s guidelines to identify your “score” for each factor. The total of your scores – adjusted for whether you apply two or three factors – will determine which risk “zone” the arrangement falls into: low, moderate or high risk.

The three factors are:

  1. Proportion of the income entitlement assessed in the hands of the individual professional (as opposed to their associated entities) – the greater this proportion, the lower your risk score.
  2. Total effective tax rate for income received from the firm by the individual and associated entities – the higher the effective tax rate, the lower the risk score.
  3. Remuneration assessed in the hands of the individual as a percentage of a commercial “benchmark” for the services provided to the firm (optional) – higher percentages yield a lower risk score.

Your advisor can help you perform these calculations.

If your arrangement is in the “low risk” zone, you can have confidence that the ATO will generally not dedicate compliance resources to testing your arrangement. If it rates as “moderate” or higher, the ATO is likely to analyse your situation further. Arrangements that were previously “low risk” but now have a higher rating may qualify for a transitional period until 30 June 2024 in which to apply the ATO’s previous guidance.

Now is the time to take action

The ATO says taxpayers should self-assess their risk annually, document the assessment and be able to provide supporting evidence in the event the ATO fact-checks the assessment. Contact our office for expert assistance in assessing and managing your risk.

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