In late June 2015 the ATO released a document setting out its final guidelines on how the business income of principals in professional firms should be taxed. The guidelines restrict the ability of practitioners in professional firms (lawyers, architects,
doctors, engineers, etc) to split income. Income splitting by professionals in practice has obviously been effective in reducing the average rate of tax, and the ATO is looking to make professionals pay personal tax on a higher proportion of their business income. While the ATO is roaming in search of a test case, it has provided the following three tests to allow professionals to reduce their risk of audit.
- Equivalent remuneration test – the personal business income of the professional is in line with senior professional employees of the firm, or a market equivalent;
- 50% test – at least 50% of the business income is taxed to the professional personally;
- 30% tax rate – the professional and his/her entities have an effective tax rate of at least 30%;
This form of compliance by fear is likely to be successful, as professionals fall into line to avoid an ATO audit, which for most is about as appealing as a visit to the dentist for a root canal.
Contact us, to speak with one of our auditors for more information.