Corey Beat CTA on 'Swimming between the flags for professional service entities'

In recent years, the Australian Taxation Office has taken a 'swim between the flags' approach in respect of their guidance and advice to taxpayers. 1 

This approach involves the ATO publishing its views in respect of relative levels of tax compliance risk across a spectrum of behaviours or arrangements, and indicating that the ATO will not allocate active compliance resources to behaviours or arrangements they consider to be low risk. The benefit of this approach is that taxpayers who 'swim between the flags' can supposedly conduct their affairs with additional certainty and potentially receive the benefit of savings in compliance costs. 

But what happens when the ATO picks up its flags and leaves the beach?

Where does this all leave taxpayers in professional practice industries and their advisers? 

Corey Beat CTA

In his paper, 'Swimming between the flags for professional service entities', presented at the Professional Services Day in Perth in March 2018, RSM Bird Cameron's Corey Beat CTA offered an understanding of the current state of play. He also traced the history of taxing professional practice income to explain how we got to this point.

Corey's paper highlights the ATO's Taxpayer Alert TA 2013/3, which indicates it views arrangements where an individual purports to make the trustee of a discretionary trust a partner in a professional services partnership, as high risk. To mitigate concerns within professional practice industries, the ATO subsequently issued the publication Assessing the risk: allocation of profits within professional firms in September 2014, which set out safe harbour approaches for taxpayers to follow to ensure their arrangements were viewed by the ATO as low risk. This publication was accompanied by ATO guidance on the use of Everett assignments by partners in professional service firms, following the Full Federal Court decision in Kelly v Federal Commissioner of Taxation. 2

Late last year, the ATO withdrew both the 'Assessing the risk' guidelines and 'Everett Assignments' web materials on the grounds that the publications were being “misinterpreted in relation to arrangements that go beyond the scope of the guidelines.” Arrangements that have attracted the ATO's attention include the use of self-managed superannuation funds and related party financing activities.

Corey's paper provides some perspective on how we got to this point, providing a background to professional practice structures as well as IT rulings on personal services. It explores issues related to personal services income legislation, TR 2006/2 and service entities, TA 2013/3 and safe harbour guidelines, and the withdrawal of allocation of profit guidelines and Everett assignments.

The paper concludes that the Commissioner’s recent attack on professional practice structures has added an unwelcome degree of complexity when advising professional clients on how to structure their practices, or even when deciding how to structure our own practices.

Any structure that involves the use of discretionary trusts and subsequent splitting of professional
practice income is in the Commissioner’s sights, but taxpayers and their advisers can take some comfort
from the safe harbour tests contained in the professional practice guidelines issued by the ATO. 

Whilst service entities that operate within the Commissioner’s commercial expectations are still an
acceptable way of diverting income away from the professional practice structure, these entities are
unfortunately caught up when considering the overall allocation of profits of the professional firm they

It appears that practitioners and advisers will remain in a state of limbo until such time that the
Commissioner identifies a suitable test case for the Court to determine the validity (or otherwise) of the
Commissioner’s views. With the 'big stick' of the new Part IVA overshadowing TA 2013/3 and the
guidance publication, one wonders how urgently the Commissioner will seek to put a test case before
the Courts.

The full paper is available for purchase on our website and is included with a subscription to the Tax Knowledge eXchange.

1 The term 'swim between the flags' was used by the ATO in Practical Compliance Guideline PCG 2016/1, which outlines the nature and role of practical compliance guidelines provided by the ATO in relation to the administration of the tax laws, but there is anecdotal evidence of senior ATO team members using this phrase prior to the publication of this document.

2 Kelly v Federal Commissioner of Taxation [2013] FCAFC 88


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