The Australian Taxation Office (ATO) has been advised to rethink the "unintended or unacceptable outcomes" of its newly reported draught Practical Compliance Regulation 2021/D2, according to a joint proposal by Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants, The Tax Institute, and the Law Council of Australia.

The new proposals, which will take effect on July 1, clarify the possibility of the ATO conducting a risk management process analysis of an individual professional practitioner's (IPP) and their business.

To use the risk evaluation process, citizens must first satisfy the following gateways, demonstrating that the solutions are economically supported and do not include any of the PCG's high-risk features.

Even if an IPP tries to alienate can apply sums of profits made through their hard work, the ATO states the anti-avoidance clauses of Part IVA.

The joint bodies have therefore taken a good look at the ATO's interpretation of "alienation of profits," claiming that there is no basic policy of taxation law that considers the benefit or income received by a partnership, business, or trustee of trust from the personal exertion or skilled workers of individuals to be that individual’s personal profits or salary.

"It makes no difference how engaged such a person is in the actions through which the organization derives earnings,"

"In the absence of relevant statutory provisions, a business ‘owner' can choose to obtain hardly anything, tiny bit, a huge amount, or somewhere in between and be taxed accordingly."

Professional companies, such as accounting, architectural, engineering, financial services, legal, and medical sectors, also have been targeted by the ATO.

"It cannot be objectively concluded that the income generated by an account or legal firm is so distinct from the income derived by, say, a plumbing or management consultancy firm that the ATO can assign enforcement resources appropriately."

Whereas the joint bodies recognize such a need to target unnatural and contrived schemes, they consider the draught PCG does not address the core of the Part IVA danger.

This is a risk assessment for Part IVA, but the PCG does not mention or discuss Part IVA risk," said Elinor Kasapidis, CPA Australia's senior manager of tax policy. "The way it handles everything through entry points and then the risk assessment process will ultimately capture several normal, typical arrangements that exist in skilled firms,"

"We will predict a lot of IPPs and their companies, who might have been characterized by low risk in a Part IVA evaluation, to now be categorized as medium to high risk of audit simply because of the way they have developed the risk assessment process and trying to score."

Professional bodies are expected to submit additional submissions with appropriate concepts to back up their case now that the ATO has extended the referral timeline from March 26 to April 16.

"How much we believe the ATO requires to do is take a hard look at how they're trying to solve the problem and figure out how to better align their risk assessment framework with Part IVA, as well as ensuring that such a PCG absolutely assists both the ATO and IPPs in identifying truly high-risk agreements,"

We've proposed to collaborate with the ATO to truly identify some of the problems and practical consequences of what they're considering, which puts companies that were previously doubtful to be audited under Part IVA at a medium to high risk of audit, but we'd like to work with them to figure out a better way to deal with the situation."

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