From 1 July 2024 all transition periods in the ATO’s PCG 2021/4 regarding the allocation of professional firm profits have ended, and the PCG now applies to all entities which distribute professional profits. Although there was significant focus on the PCG when it was first issued, not much has been said of the guideline over the last 12 months since it has come into full effect.
The PCG is focused on whether a practitioner in a business personally pays tax on an amount approximate with what they would be paid as an employee, and distinct from business profits which they are distributed. PCG 2021/4 provides a traffic light system to assess the likelihood of ATO compliance activity, based on the amount returned in the hands of the individual professional practitioner and the total effective tax rate (amongst other matters) of the practitioner’s family group. What PCG 2021/4 does not do is consider actual commensurate remuneration for the work completed.
The PCG scores the risks using the following two tables:
Although the PCG only addresses the risk of audit and not the relevant tax provisions (which would include Part IVA), it is important to bear in mind because these guidelines are often treated like law by auditors. There is also a relatively high risk that if one practitioner is audited in respect of a business, the ATO will look at the other practitioners in that business.
The PCG is relevant to draws from partnerships, assignments of those partnership drawings, the distribution from trusts (including which received partnership draws) and declaration of dividends from companies.
This article is part of our team’s key updates and insights to help ensure your EOFY is in order and that you’re well-prepared for the year ahead.
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- Professional profits: the implications of PCG 2021/4 on the allocation of professional profits, which is relevant to all entities now that the transition period has ended.
- EOFY and checklist: covering the key items including Division 296, changes to deductibility of interest charges, company admin tasks, TPB obligations, and lodgement timelines.