New ATO Ruling Affects “Professionals” and Profit Allocations

The new ATO guidance (PCG 2021/4) changes the way that professional firm profits can be allocated (or split) among a family group from 1 July 2022 onwards. As a result, most professionals may end up paying larger amounts of tax from the 2023 financial year onwards.

A professional firm is one that offers customised, knowledge-based services to clients which include medicine (doctors, dentists, medical specialists, etc), lawyers, architects, engineers, accountants, financial advisors, and consultants.

To stay in what the ATO calls the “Green Zone” and not be audited, the ATO expects a professional and their family group to pay tax at a combined average rate of 35% or higher.

You should plan for higher tax payments from 2023 onwards. The ATO requires you to document annually your assessment of your profit allocations along with PCG 2021/4.

Changes affecting Family Trusts (also known as Discretionary Trusts)

There are 2 key changes will affect people using Family Trusts in this 2023 financial year.

Key ChangeHow This Will Affect You
S100A + Distributions to Family Members
The ATO has released draft Tax Rulings based on S100A of the Tax Act that restrict Trusts making distributions to adult children or family members unless the cash amount of the distribution is paid to the beneficiary.        
More Tax to Pay in 2023
You may be restricted in the amounts your Family Trust can allocated to adult children or parents when compared with prior years. Our Tax Planning meeting with you in May/June 2023 will be crucial to get this right and not expose you to any penalties from the ATO.    
“Owies” Case + Consideration of Beneficiaries
In this recent Court case, the Trustee was removed, and an independent Trustee was appointed when 2 beneficiaries complained they were not considered.
More Work to Administer your Trusts in 2023
Prior to 30 June, accountants will have to assist all Trustees with the following: Reconsider the default beneficiaries in a Trust. Consider the purpose recited in a Trust. Consider the terms of a Trustee exercising their discretion.

Your business cashflow may be affected

With inflation running the highest it has been in decades, interest rates rising, labour costs increasing and power costs escalating, you should closely monitor your profit margins and ensure your prices are set at a level that keeps your business profitable.

Please contact us if you would like to discuss how this will affect you in this 2023 tax year and in future years, including discussions around:

  1. Professional Firm Profit Allocations
  2. Cashflow Analysis
  3. Family Trusts – S100A and Distributions to Family Members
  4. Family Trusts – “Owies” Case and Consideration of Beneficiaries

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