Practitioners, firms must continue preparations for PCG2021/4

RSM partner Peter Revelas (pictured) told Accounting Times that although legislation on discretionary trusts has not been finalised, he predicts that trusts will continue to be used for asset protection.

This signals the importance that firms and individual professional practitioners (IPPs) continue preparations to comply with practical compliance guideline PCG2021/4.

The practical compliance guideline assists IPPs in understanding how the ATO assesses the risk associated with their profit allocation arrangements.

“I suspect that it will be an extremely complex process to run through trusts … it will also force people to re-evaluate how they are using their trust generally so you know whether or not there is a need for a trust moving forward … if the need for a trust changes and they fall away then … it sort of makes these rules maybe a little bit redundant,” Revelas said.

“However, trust still will play a part … maybe not for income splitting as much as it was in the past, but for asset protection.

“We'll have to wait and see what happens when that legislation is released.

“Firms can't wipe their hands of [responsibility to comply with the guidance], they do have a responsibility to ensure that the IPPs are actually making those declarations and are compliant … they as a collective have responsibility to each other,” Revelas said.

To rely on the framework, arrangements must pass two gateway tests: the Commercial Rationale Gateway and High-Risk Features Gateway.

RSM warned of the reputational risks that firms face if their IPPs fail to comply with PCG 2021/4, including increased scrutiny from the ATO, potential tax audits and penalties, and a review of all parties to the arrangement.

“Non-compliance by one partner actually puts the entire firm at risk … the ATO will start to attach a risk profile to that particular firm … firms have an obligation to ensure automating an obligation, but they're placing some responsibility on the firm to ensure that their IPPs comply,” Revelas said.

“There is the potential that the firm could be subject to a widespread audit of all of their IPPs, of course, that then feeds into the rhetoric around firm profits being funnelled through to people who are not necessarily working in the firm, directing profits to where they are not necessarily being taxed, where they should be taxed at an appropriate level.

“Firms have an obligation to ensure that the appropriate amount of information is being supplied to their IPPs, at the same time, [in most cases] the IPPs need to be looking at that information and assessing it appropriately before the 30th of June.”

Steps that need to be taken

Revelas said that IPPs must ensure they collate all information on their sources of income as part of a tax-planning exercise.

“Firms of smaller sizes may be impacted [by the need for compliance] more than others, given the fact that they are not likely to be or to have in-house finance, or in-house counsel that will help them work through these [ruled], so they do rely on met once a year meeting with their accountant.”

He noted that accountants in these small firms may not be prepared and recommended that these practitioners seek counsel to clarify the guidance.

Revelas said some firms request that their IPPS present their calculations and keep them on file to confirm compliance, while others centralise the preparation of each IPP's tax returns to ensure compliance.

For other firms, they actively do the work on behalf of their IPPs, and others do a full review of their IPPs to ensure compliance.

“I would suggest that every firm that has IPPs establish a policy that would govern how and what each IPP's responsibilities are in order to reduce the risk that the entire firm could be facing.

“That would include things like making certain disclosures to the firm, which would then serve as a disclosure to their fellow partners that they have complied with PCG2021/4."