What Businesses Need to Know
Key Changes in the June 2024 ATO Guidelines
1. Risk Assessment Zones
The ATO continues to categorise firms into three risk zones:
- Green (Low Risk): Firms in this zone are less likely to attract ATO scrutiny.
- Amber (Moderate Risk): Firms here may raise questions, potentially leading to ATO reviews.
- Red (High Risk): Firms in this zone are highly likely to be audited.
The 2024 update places a stronger emphasis on ensuring businesses demonstrate a clear commercial rationale behind their profit allocation strategies.
2. Gateway Tests
Businesses must pass two key gateway tests:
- Gateway 1: Commercial Basis – Profit allocation must be supported by genuine commercial reasons, such as business growth or structural efficiency. This needs to be well-documented and cannot be solely for tax reduction purposes.
- Gateway 2: No High-Risk Features – Firms must avoid complex or artificial arrangements designed to reduce tax, such as income splitting to family members or trusts with little business involvement.
Failing either gateway places the firm in the amber or red risk zones.
3. Changes to Transitional Provisions
The transitional provisions have been extended until June 30, 2024. This allows firms that were previously low-risk under the old guidelines to continue using their existing structures until this date. However, firms must ensure compliance with both the old and new rules by July 1, 2024.
How These Changes Could Affect Your Business
If your firm has been relying on profit distribution strategies, such as income splitting—where profits are allocated to lower-taxed individuals or entities—you will need to reassess these arrangements. The ATO now requires firms to declare a fair portion of profits at a minimum effective tax rate of 30%.
Failing to prove that your profit allocation serves a commercial purpose or using high-risk strategies could push your firm into the amber or red zones, leading to increased audits and possible penalties.
How Business Adviser Can Help
At Business Adviser, a division of DAB Financial, we specialise in helping businesses navigate complex tax compliance issues. Here’s how we can assist you with these new guidelines:
- Risk Assessment: We’ll review your current profit allocation structure to determine your risk level and help you remain in the low-risk green zone.
- Profit Restructuring: For firms in the amber or red zones, we provide expert advice on restructuring your profit allocations to ensure compliance while optimising your tax obligations.
- Ongoing Compliance Support: As the ATO guidelines evolve, we provide continuous support to ensure your business stays compliant and avoids costly audits.
Conclusion
The ATO’s updated guidelines on the allocation of professional firm profits have introduced stricter compliance requirements. Professional firms must now ensure that their profit allocations are commercially justified and avoid high-risk features. By assessing and adjusting your firm’s profit-sharing structures, you can avoid audits and penalties.
Business Adviser is here to guide you through these changes, ensuring your business stays compliant.
