Professional practices and income splitting - The ATO "draws the line"
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Professional practices
and income splitting –
The ATO “draws the line”
SPRING 2014 On 1 September, the Australian Taxation Office (ATO) released
guidelines concerning income splitting for professional practices
This edition and their owners for 2014/15 and later years, subject to ATO
review in 2016/17.
3 SMSFs and bankruptcy Professional practices potentially impacted include accountants,
solicitors, architects, financial planners, engineers, medical
Privacy and security for smaller practices, etc.
4 organisations in the digital age
Flexibility of practice structure
5 CPN Specialist Query refresher
From the ATO’s perspective, the professional practice can be conducted
from any legal structure, be it a partnership, trust, or company, and
6 Events to watch out for... there is also no restriction on the owner’s structures.
Relevant structures would have to continue to be legally effective and
meet professional body requirements.
Ability to income split – practice owners
Sole practitioners with no employees are not permitted to split income
derived from their own personal exertion.
However, where income is derived from the “business”, rather than an
individual’s personal exertion, the ATO will tolerate income splitting
within certain limits. As a rule of thumb, if a practice is of a size where
there are at least as many employee fee earners as practitioner equity
participants (practitioners who have equity or whose associated
entities have ownership in the practice), income will be taken to be
derived from the “business” and may be split with certain limits.
Practitioners associated with owners of the practice will not be subject
to ATO review or audit, so long as a certain level of income derived from
the practice is included in their personal tax returns, under one of the
three tests. In short, it doesn’t matter how the income from the firm
gets to the practitioner, as long as it gets there. It can be paid by way
of salary, distribution of partnership or trust profit, distributions from
associated service entities, dividends from associated entities or any
combination of these.
In our view, the Commissioner’s approach that a certain amount of
business income relates to personal exertion and needs to be assessed
to the practitioner personally, is incorrect at law and is not supported
by any legal precedent. However, by complying with the guidelines,
a practitioner avoids an ATO review, or the Commissioner testing his
approach in Court.
>> continued page 2
Critical Point Network 1
Professional practices and income splitting – The ATO “draws the line”
>> continued from page 1
The three tests Whilst the three tests are not law, they will be used by the ATO as a
To satisfy the guidelines and avoid an ATO review on this issue, the tax audit case selection tool. Should a practitioner wish, he or she
income returned by the practitioner (associated with the professional could legitimately operate outside the guidelines, but they would then
practice owner), must be at least: potentially face the risk of an ATO review or challenge.
• The level of remuneration paid to the highest band of professional Where none of the guidelines outlined above can be satisfied, the
employees providing equivalent services to the firm. That is, you practitioner will be at higher risk of an ATO review. The further
take an average of that band on a full-time equivalent basis, or away the practitioner is from the three tests, the greater the chance
if there are no such employees in the firm, comparable firms or of review.
relevant industry benchmarks – for example, industry benchmarks Conclusion
for a region provided by a professional association, agency or
For almost 15 years, Pitcher Partners has been actively involved
consultant; and/or
in consultation with, and at times at odds with, the ATO over its
• 50% or more of the practice income (including that from entities treatment of professional practices. These guidelines are, in our view, a
associated with the practice such as service trusts) to which the step in the right direction.
practitioner and his or her associated entities are collectively entitled
(whether directly or indirectly through interposed entities); and/or Whilst these guidelines still discriminate between professionals
and other businesses, they should allow practices more certainty in
• The practitioner and his or her associated entities both have an
their decisions around structuring, restructuring and remuneration
effective tax rate of 30% or higher on the income received from
of owners.
the firm (including income from associated entities such as the
service trust).
Only one of the above three tests needs to be satisfied.
Mark Northeast
These tests are applied at the “equity” practitioner level (not to the Executive Director – Tax Consulting
practice), so the test that one practitioner may satisfy can differ from Telephone (03) 8610 5204
his/her fellow practitioner/partners. In addition, these tests apply on a
year by year basis, so a different test can be chosen each year.
2 Critical Point Network
SMSFs and bankruptcy All of the monetary penalties in Section 126K are “strict liability”
provisions. This means the regulator only has to prove the offence
occurred for the penalty to be imposed. There is no need to prove the
bankrupt’s intention or purpose in failing the provision, only that the
Often the impact of a person’s bankruptcy on their failure happened.
superannuation entitlements is overlooked with potentially
For the purposes of ceasing to be a trustee and reporting to the
severe ramifications. Bankruptcy law allows a trustee Regulator, the operative date is the Date of Bankruptcy. This is
in bankruptcy to access some or all of the bankrupt’s when AFSA receives and accepts the creditor’s petition for voluntary
superannuation entitlements. However, we will focus on bankruptcy and the date of the Court making a Sequestration Order for
law that adversely impacts the bankrupt as a self-managed involuntary bankruptcy.
superannuation fund (SMSF) trustee and in the SMSF itself. Section 206B of the Corporations Act disqualifies an undischarged
bankrupt from managing a corporation. Section 206A(1) says a
bankrupt commits an offence if they participate in decisions about
SMSF where a member becomes bankrupt management of the whole or a substantial part of the business of the
The impact of bankruptcy and the resulting problems are most marked company. This is also a strict liability provision, usually punishable by
where a debtor is a member of a SMSF at the time of bankruptcy. a period of disqualification from acting as a director (usually 5+ yrs).
This is because bankruptcy impacts on a debtor member’s ability to However, there is also the possibility of a jail term.
remain as a trustee of the SMSF on an ongoing basis. This problem
When a SMSF member becomes bankrupt, it is important for the
doesn’t arise where a bankrupt is a member of a large APRA regulated
trustee to review the provisions of the fund’s trust deed. It may be
superannuation fund.
the deed has specific requirements around what happens when a
The Superannuation Industry (Supervision) Act and Regulations (SIS) member becomes bankrupt. It may be, for example, that the trust deed
impacts the SMSF of a bankrupt member in a number of ways. automatically resigns a person from being trustee, as and when they
become bankrupt. There may also be specific requirements around
Section 120 provides that an undischarged bankrupt is a “disqualified dealing with the bankrupt’s entitlement in the SMSF.
person”. Section 126K says a disqualified person may not be, among
other things, a trustee of a regulated superannuation fund. All of the requirements discussed above have to do with a bankrupt
SMSF member being, or ceasing to be, a fund trustee. There is no
Section 17A is the definition of a SMSF. Here, the general rule for a specific prohibition on a bankrupt being a member of a SMSF, or indeed
SMSF is that all fund members be trustees, or directors of a trustee of any superannuation fund. The definition of SMSF, however, requires
company, and that all trustees or directors be fund members. that all members be trustees and all trustees be members. So, in the
The problem for a SMSF member who becomes bankrupt is they long term the bankrupt cannot continue to be a member of a SMSF.
immediately become a disqualified person and are not allowed
to be a trustee of their SMSF. However, for their fund to remain a If the bankrupt ceases to be a trustee, Section 17A(4) allows the fund
SMSF, all fund members must be trustees and all trustees must be six months within which it can adjust its membership in order to
fund members. remain a SMSF. At least this allows the SMSF trustee and members
some time to decide on which course of action they wish to take to
Section 17A(3) provides that where a person is under a legal disability, deal with the bankrupt member. The six month period will begin on
it is possible for the fund to continue to meet the definition of SMSF the Date of Bankruptcy.
if a person holding an Enduring Power of Attorney from that member
becomes trustee of a SMSF in place of that person. Is it therefore Options for when a SMSF member becomes bankrupt:
possible for the bankrupt member to simply be replaced as a trustee by
Option 1 Option 2
someone holding an Enduring Power of Attorney from the bankrupt?
Bankrupt rolls over their Appoint an approved trustee and
Section 17A(10) specifically says a person holding a Power of Attorney entitlement into a larger APRA apply to have their SMSF become
cannot become a trustee in place of the member if the member’s legal regulated fund a small APRA fund
disability is that they are bankrupt. This means the bankrupt has only
Less attractive option for SMSFs Often an expensive exercise and
one choice – to stop being a trustee/director of the SMSF.
who hold one or a small number sometimes approved trustees
SIS imposes obligations and possible penalties on a bankrupt SMSF of specific assets that other accept appointment as fund
member and on the trustee of the SMSF under Section 126K: fund members want to retain trustee where the fund assets
but may need to sell to pay out don’t fit the approved trustee’s
Requirement Penalties the bankrupt list of ‘acceptable assets’
A trustee who becomes (1) up to two years’ jail for the
If the bankrupt does not cease to be a member within the required
disqualified must bankrupt member
six months, the fund fails to be a SMSF. Section 106A requires that the
immediately resign
(2) monetary penalty on fund trustee notifies the Regulator (ATO) if at any time the fund stops
the bankrupt member of up being a SMSF. The trustee is required to notify the ATO within 21 days
to $10,200 of the trustee becoming aware that the fund had ceased to be a SMSF.
There is a $17,000 penalty on the trustee if convicted of failing to meet
The bankrupt must inform the (7) $8,500 penalty
this requirement.
regulator (ATO) immediately
in writing upon becoming a
disqualified person* David Foulds Andrew Yeo
Director – Estate Planning Partner – Business Recovery
* Where immediately in writing means within 28 days using the ATO Form Number 3036 and Superannuation and Insolvency Services
Telephone (03) 8610 5353 Telephone (03) 8610 5190
3
Spear-phishing attacks
by business size
Privacy and security for
smaller organisations in
90% 2012 2013
Of all data out there has been
Large
created in the last two years.
the digital age 39%
business
2,501+
50% employees
The introduction of the Australian Privacy Principles (APPs) in
March this year apply to companies with a turnover of more Medium
than $3 million and a breach can lead to fines of up to business
1 trillion 31%
251 – 2,500
$1.7 million, or $340,000 for individuals or sole traders.
19%
employees
In 2015, 1 trillion devices will
But with the explosion of social media, cloud computing and online be connected to the Internet. Small
businesses, we’re creating more data than ever and every day reports business
come in of data breaches as a result of external attacks and internal 1 – 250
breaches. As a result, the government needed to change legislation. 31% employees 30%
A survey conducted by internet security company Symantec in 2013
found that the three main causes of data breaches globally are:
Malicious attacks or The human factor
cyber-crimes (e.g. negligence,
(e.g. hacking, phishing)
37% 35% disgruntled employees,
or accidental breaches)
29%
System glitches
(e.g. software bugs)
Despite massive investment, even the most well-resourced A survey conducted by security company McAfee last year across 200
organisations are not immune from security breaches. Last year, an small Australian businesses revealed 46% of the businesses surveyed
internal software issue caused technology giant Adobe to expose suffered an internal data or security breach.
40 million customers’ details. However, breaches are not limited to
Many business owners assume that as they’re smaller, the information in
the largest companies. Smaller companies are equally at risk in the
their IT systems isn’t of interest to cyber criminals and their business will
marketplace.
never be targeted. However, statistics demonstrate this is not the case.
Smaller organisations are very much at risk
The statistics also show the number of employees (both past and
Rather than focussing efforts trying to hack the largest organisations, present) that steal from their employer is typically higher in smaller
cyber criminals are opting to infiltrate smaller firms with less robust companies than large organisations. Many small businesses simply
security. Today, most companies offer some form of eCommerce don’t have the same policies and procedures in place and invest less in
platform or conduct transactions virtually. Customers entrust us to training their staff to combat the growing security threats.
keep their information on file and we respond by storing it on-premise
and in hosted databases. Access to these databases and systems often >> continued page 5
requires little more than a simple password.
Critical Point Network 4
>> continued from page 4
So what should you do? Familiarise yourself with the new APPs at www.oaic.gov.au and then
Start by conducting a self-assessment of your business. review the policies and procedures you have in place, see how they
align and address any gaps. We can also be contacted for further advice
• What condition is your IT infrastructure in today? including how to introduce a culture of privacy and security in your
• Is your antivirus software up to date? business or undertake a Privacy Impact Assessment to reassess where
• Are the latest software patches applied? your company stands.
• What are your backup procedures and how secure are they (are tapes
taken offsite, and if so, what happens to them)?
• When was the last time your disaster recovery plan was reviewed
or tested? Andrew Killen
Senior Consultant – Pitcher Partners Consulting
It’s not just about firewalls, passwords and virus scanning. There is a
Telephone 0449 098 345
need for a broader holistic approach to security including governance,
workplace policies and training.
CPN Specialist
Query refresher
We are here to assist you when you
require specialist advice to help meet
your clients’ expectations in areas that
are outside of your immediate field of
expertise or experience.
Please email your completed CPN Specialist
Query service form to
cpn@pitcher.com.au and we will ensure the
appropriate specialist contacts you as soon as
possible. This form is downloadable from the
Pitcher Partners website.
If the enquiry can be answered in less than 10
minutes the service is complimentary.
Alternatively, if it will take a little longer to
resolve (being under 1 hour) then we have
a flat fee of $300 (excl GST) which we will
ask you to approve before we proceed with
providing you with the advice.
Finally, if the matter is more substantial we
will prepare a quote which we will seek your
approval for.
Our aim is to make this query process as
simple and effective as possible for you.
If you have any questions around the query
process please contact me directly:
linda.wah@pitcher.com.au or on
03 8610 5477.
Linda Wah
Critical Point Network Manager
Telephone (03) 8610 5477
5 Critical Point NetworkEvents to watch out for…
Professional Advisors’ Conference – 17 October 2014
CPN Contacts
The Professional Advisors’ Conference provides accounting and legal
practitioners with expert advice and assistance on a range of topical and
MELBOURNE SYDNEY
relevant issues to improve the services you provide your clients and the Gess Rambaldi, Andrew Yeo or Scott Treatt
knowledge you need to run a thriving practice. David Vasudevan Level 22, MLC Centre,
Level 19, 15 William Street 19 Martin Place
Details of the upcoming conference are as follows:
Melbourne VIC 3000 Sydney NSW 2000
Date Friday, 17 October 2014 Telephone +61 3 8612 9261 Telephone +61 2 9228 2284
Venue The Langham, 1 Southgate Avenue, Southbank Facsimile +61 3 8610 5999 Facsimile +61 2 9223 1762
Time 8.30am – 4.00pm partners@pitcher.com.au partners@pitcher-nsw.com.au
Drinks reception to follow at 4.00pm – 5.00pm
RSVP Please confirm registration by Monday, 13 October 2014 PERTH ADELAIDE
Cost CPN Members $380* and Non Members $480* Daniel Bredenkamp Michael Basedow
Early Bird CPN Members $330^ and Non Members $430^ Level 1, 914 Hay Street 160 Greenhill Road
Perth WA 6000 Parkside SA 5063
* Ticket price includes food and refreshments throughout the day Telephone +61 8 9322 2022 Telephone +61 8 8179 2800
^ ‘Early Bird’ registrations close 29 September, and you can receive a Facsimile +61 8 9322 1262 Facsimile +61 8 8179 2885
15% discount for three or more guests (please note that discount partners@pitcher-wa.com.au partners@pitcher-sa.com.au
offers will not be combined)
NEWCASTLE
We are pleased to announce former CEO of the
Greg Farrow
Australian Football League, Andrew Demetriou The Glass House, Suite 4, Level 1
as our keynote speaker. Andrew will share with 101 Hannell Street
us some lessons learned from running Australia’s Wickham NSW 2293
largest sporting organisation, including his Telephone +61 2 4911 2000
thoughts on leadership, management and the Facsimile +61 2 4911 2099
importance of promoting inclusion and tolerance. Don’t miss it! newcastle@pitcher.com.au
Contact cpn@pitcher.com.au for further details.
www.pitcher.com.au
Final Breakfast Briefings for 2014 Pitcher Partners is an association of independent firms. Liability limited by a
scheme approved under Professional Standards Legislation.
Critical Point Network is a business of Pitcher Partners Advisors Proprietary
Session 1 Limited ABN 27975255196. Critical Point Network is a registered trademark.
Date Tuesday, 18 November 2014
The material contained in this publication is general commentary only for
Time 7.15am for 7.30am start – 9.00am conclusion distribution to clients of Pitcher Partners. None of the material is, or should
Venue Pitcher Partners, Level 19, 15 William Street, Melbourne be regarded as advice. Accordingly, no person should rely on any of the
Cost Members $40 and Non Members $60 contents of this publication without first obtaining specific advice from one
of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents
Session 2 accept no responsibility to any person who acts or relies in any way on any
of the material without first obtaining such specific advice.
Date Thursday, 20 November 2014 © Pitcher Partners 2014 PrintPost Approved PP381827/0043
Time 7.15am for 7.30am start – 9.00am conclusion
CPN is printed on paper Certified Carbon Neutral. With 55% recycled fibre it is FSC Mixed
Venue Pitcher Partners South East Office, Source Certified, sourced from sustainable plantation wood, Elemental Chlorine Free and
80 Monash Drive, Dandenong South manufactured by an ISO 14001 certified mill.
Cost Members $40 and Non Members $60
Invitations will be sent out mid-October.
CPN Fishing Charters
Where
St Kilda Marina, Marine Parade, Melbourne
Dates
Friday, 24 October 2014 (6.00pm – 9.00pm)
Saturday, 25 October 2014 (10.30am – 1.30pm)
Friday, 21 November 2014 (6.00pm – 9.00pm)
Saturday, 22 November 2014 (10.30am – 1.30pm)
Extreme Fishing – Saturday, 29 November 2014 (4.00am – 7.00am)
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