Interview with Whenua Oner and Shane Hayes of Family Aged Care Advocates People often make aged care decisions in a crisis and end up being short-changed by the “system”. Often navigating the aged care system can feel like you’re lost in a maze which can be stressful and overwhelming but it doesn’t have to be that way, which is why Whenua and Shane explain how they guide families through the aged care journey. To find out more about Family Aged Care Advocates and the valuable work they do, please visit familyagedcareadvocates.com.au and, in particular, their Aged Care Insights on their blog. Let's Talk That’s all we focus on: You, your family, your wealth, your business and the legacy you (and we) leave. That’s it. Join Collins Hume on this amazing journey. Copyright 2022. Collins Hume Accountants & Business Advisors | Ballina & Byron Bay

Broaching the taboo topic of ageing In life, many of us are totally at ease and comfortable talking to our family and friends about many topics. However, for whatever reason, there are certain subjects that we’re either reluctant or feel uneasy to discuss openly – typically they are love and relationships, politics, religion and money ... call them the “taboo topics”. Add another taboo topic to the list. That is the topic of ageing. As we age and reach our elderly years, asking for some help to do things to make life easier can be really hard to bring up in conversation. When families get together, there are things we just notice but we’re reluctant to say anything. We notice that Dad might be starting to forget things or Mum is having difficulty getting out of her chair and seems a bit uneasy on her feet. Any attempt to say something is usually met either in silence or the words “I’m okay, just getting older” are uttered. And for many families that’s where things are left. Then there’s a crisis ... Families are then drawn together when there’s been a crisis such as a fall or a hospital admission. Then discussions and decisions are usually being made under high stress and emotion in hospital hallways and carparks. This is not an optimal starting point. Making decisions and what’s the trade-off ... Like other life decisions, when it comes to ageing decisions, some are relatively simple to make with minimal consequences, whilst others can be very difficult. When making decisions, there are usually “trade-offs” to be considered. The impact of these trade-offs usually increases as the importance of the decision increases. Therefore, to make the best possible decision, it’s important to consider as many options as humanly possible. So what needs to be thought about ... When it comes to ageing and getting some help there are usually many options to consider and everyone is different. For instance, when getting some help in the home, exactly what help is required and possible now and into the future, who will provide the help and at what cost? If moving into an aged care facility, what care will be required, where will the new home be, what to do with the family home, and how to pay for this are all decisions that need to be made and there are usually many options to consider. So how do families identify these options and make appropriate decisions? Where do you start? What questions do you ask and who to? Are the answers you get back in your best interest ... or someone else’s? What needs to be done and when? What happens if there’s a problem? How Family Aged Care Advocates fit in ... That’s where Family Aged Care Advocates step in. We provide guidance and support to help families identify the relevant options to help you make informed decisions to get the best care outcomes for the people you love and care for most. We’re independent aged care specialists only interested in the right outcomes for your family ... that’s all that matters and there’s no trade-off with that. Families can schedule a call with Whenua or Shane at Family Aged Care Advocates by booking a time via their website: https://www.familyagedcareadvocates.com.au/ or by arranging an introduction via Collins Hume. This article is of a general nature only. No specific person’s personal objectives, needs or financial situations were taken into consideration when creating the content for this article. Family Aged Care Advocates Pty Ltd (ABN 77 642 454 484) are aged care specialists. You should seek qualified financial planning, taxation and legal advice before making any decisions that are unique to your circumstances. This article was prepared in good faith and we accept no liability for any errors or omissions.

Applying for a Director ID From 5 April 2022 new directors must apply for their director ID before they’re appointed. The Australian Business Registry Services (ABRS) is reaching out to directors who haven't applied on time to encourage them to do so, but you shouldn’t wait to be contacted. The application is free, and the ATO encourages directors to apply early and avoid any risk of non-compliance. Remember, you must apply for your own director ID so you can verify your identity. No one can apply on your behalf. Source: ATO

Are Your Contractors Really Employees? Two landmark cases before the High Court highlight the problem of identifying whether a worker is an independent contractor or employee for tax and superannuation purposes. Many business owners assume that if they hire independent contractors they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations. However, each set of rules operates a bit differently and in some cases genuine contractors can be treated as if they were employees. Also, correctly classifying the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong. Two cases handed down by the High Court late last month clarify the way the courts determine whether a worker is an employee or an independent contractor. The High Court confirmed that it is necessary to look at the totality of the relationship and use a ‘multifactorial approach’ in determining whether a worker is an employee. That is, if it walks like a duck and quacks like a duck, it’s probably a duck, even if on paper, you call it a chicken. In CFMMEU v Personnel Contracting and ZG Operations Australia v Jamse, the court placed a significant amount of weight on the terms of the written contract that the parties had entered into. The court took the approach that if the written agreement was not a sham and not in dispute, then the terms of the agreement could be relied on to determine the relationship. However, this does not mean that simply calling a worker an independent contractor in an agreement classifies them as a contractor. In this case, a labour hire contractor was determined to be an employee despite the contract stating he was an independent contractor. In this case, Personnel Contracting offered the labourer a role with the labour hire company. The labourer, a backpacker with some but limited experience on construction sites, signed an Administrative Services Agreement (ASA) which described him as a “self-employed contractor.” The labourer was offered work the next day on a construction site run by a client of Personnel Contracting, performing labouring tasks at the direction of a supervisor employed by the client. The labourer worked on the site for several months before leaving the state. Some months later, he returned and started work at another site of the Personnel Contracting’s same client. The question before the court was whether the labourer was an employee. Overturning a previous decision by the Full Federal Court, the High Court held that despite the contract stating the labourer was an independent contractor, under the terms of the contract, the labourer was required to work as directed by the company and its client. In return, he was entitled to be paid for the work he performed. In effect, the contract with the client was a “contract of service rather than a contract for services”, as such the labourer was an employee. The second case, ZG Operations Australia v Jamse produced a different result. In this case, two truck drivers were employed by ZG Operations for nearly 40 years. In the mid-1980’s, the company insisted that it would no longer employ the drivers, and would continue to use their services only if they purchased their trucks and entered into contracts to carry goods for the company. The respondents agreed to the new arrangement and Mr Jamsek and Mr Whitby each set up a partnership with their wife. Each partnership executed a written contract with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for its delivery services, and was paid by the company for those services. The income from the work was declared as partnership income for tax purposes and split between each individual and their wife. Overturning a previous decision in the Full Federal Court, the High Court held that the drivers were not employees of the company. Consistent with the decision in the Personnel Contracting case, a majority of the court held that where parties have comprehensively committed the terms of their relationship to a written contract (and this is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute), the characterisation of the relationship must be determined with reference to the rights and obligations of the parties under that contract. After 1985 or 1986, the contracting parties were the partnerships and the company. The contracts between the partnerships and the company involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. This relationship was not an employment relationship. In this case the fact that the workers owned and maintained significant assets that were used in carrying out the work carried a significant amount of weight. For employers struggling to work out if they have correctly classified their contractors as employees, it will be important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement. Merely labelling a worker as an independent contractor is not enough if the rights and obligations under the agreement are not consistent with the label. The High Court stated, “To say that the legal character of a relationship between persons is to be determined by the rights and obligations which are established by the parties' written contract is distinctly not to say that the “label” which the parties may have chosen to describe their relationship is determinative of, or even relevant to, that characterisation.” A genuine independent contractor who is providing personal services will typically be: Autonomous rather than subservient in their decision-making; Financially self-reliant rather than economically dependent upon the business of another; and, Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided. Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time. Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes. How to contact us We’re available to assist you with the employee classification. Contact Collins Hume Accountants & Business Advisers in Ballina on Byron Bay on 02 6686 3000. The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Temporary full expensing enables your business to fully expense the cost of the following in the first year of use: new depreciable assets improvements to existing eligible assets, and second-hand assets Introduced in the 2020-21 Budget and now extended until 30 June 2023, this measure enables an asset’s cost to be fully deductible upfront rather than being claimed over the asset’s life, regardless of the cost of the asset. Legislation passed by Parliament last month extends the rules to cover assets that are first used or installed ready for use by 30 June 2023. Some expenses are excluded including improvements to land or buildings that are not treated as plant or as separate depreciating assets in their own right. Expenditure on these improvements would still normally be claimed at 2.5% or 4% per year. For companies it is important to note that the loss carry back rules have not as yet been extended to 30 June 2023 – we’re still waiting for the relevant legislation to be passed. If a company claims large deductions for depreciating assets in a particular income year and this puts the company into a loss position then the tax loss can generally only be carried forward to future years. However, the loss carry back rules allow some companies to apply current year losses against taxable profits in prior years and claim a refund of the tax that has been paid. At this stage the loss carry back rules are due to expire at the end of the 2022 income year, but we are hopeful that the rules will be extended to cover the 2023 income year as well. How to contact us Start your year-end tax planning now. Contact Collins Hume Accountants & Business Advisers in Ballina on Byron Bay on 02 6686 3000. The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Don't Rock the Boat Budget 2022-23 The 2022-23 Federal Budget is a safe, ballot box friendly Budget as expected with a focus on cost of living, homeownership, and health. Key initiatives include: A 6 month, 50% reduction in fuel excise with effect from midnight Budget night A $420 cost of living tax offset for low and middle income earners from 1 July 2022 A one-off $250 economic support payment to some social security payment recipients For small business, a $120 tax deduction for every $100 spent on training employees and digital adoption But, it is also a Budget that drives digitisation Not just to support innovation but to streamline compliance, create transparency and more readily identify anomalies. Single touch payroll was the first step, the PAYG instalment system, trust compliance, and payments to contractors are next. We'll keep you up to date as the detail of these measures comes to hand. For now, you can get across all the announced measures in our Budget Summary: How to contact us Start your year-end tax planning now. Contact Collins Hume Accountants & Business Advisers in Ballina on Byron Bay on 02 6686 3000. The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

The ATO’s Attack on Trusts and Trust Distributions Late last month, the Australian Taxation Office (ATO) released a package of new guidance material that directly targets how trusts distribute income. Many family groups will pay higher taxes (now and potentially retrospectively) as a result of the ATO’s more aggressive approach. Family trust beneficiaries at risk The tax legislation contains an integrity rule, section 100A, which is aimed at situations where income of a trust is appointed in favour of a beneficiary but the economic benefit of the distribution is provided to another individual or entity. If trust distributions are caught by section 100A, then this generally results in the trustee being taxed at penalty rates rather than the beneficiary being taxed at their own marginal tax rates. The latest guidance suggests that the ATO will be looking to apply section 100A to some arrangements that are commonly used for tax planning purposes by family groups. The result is a much smaller boundary on what is acceptable to the ATO which means that some family trusts are at risk of higher tax liabilities and penalties. ATO redrawing the boundaries of what is acceptable Section 100A has been around since 1979 but to date, has rarely been invoked by the ATO except where there is obvious and deliberate trust stripping at play. However, the ATO’s latest guidance suggests that the ATO is now willing to use section 100A to attack a wider range of scenarios. There are some important exceptions to section 100A, including where income is appointed to minor beneficiaries and where the arrangement is part of an ordinary family or commercial dealing. Much of the ATO’s recent guidance focuses on whether arrangements form part of an ordinary family or commercial dealing. The ATO notes that this exclusion won’t necessarily apply simply because arrangements are commonplace or they involve members of a family group. For example, the ATO suggests that section 100A could apply to some situations where a child gifts money that is attributable to a family trust distribution to their parents. The ATO’s guidance sets out four ‘risk zones’ – referred to as the white, green, blue and red zones. The risk zone for a particular arrangement will determine the ATO’s response: White zone This is aimed at pre-1 July 2014 arrangements. The ATO will not look into these arrangements unless it is part of an ongoing investigation, for arrangements that continue after this date, or where the trust and beneficiaries failed to lodge tax returns by 1 July 2017. Green zone Green zone arrangements are low risk arrangements and are unlikely to be reviewed by the ATO, assuming the arrangement is properly documented. For example, the ATO suggests that when a trust appoints income to an individual but the funds are paid into a joint bank account that the individual holds with their spouse then this would ordinarily be a low-risk scenario. Or, where parents pay for the deposit on an adult child’s mortgage using their trust distribution and this is a one-off arrangement. Blue zone Arrangements in the blue zone might be reviewed by the ATO. The blue zone is basically the default zone and covers arrangements that don’t fall within one of the other risk zones. The blue zone is likely to include scenarios where funds are retained by the trustee, but the arrangement doesn’t fall within the scope of the specific scenarios covered in the green zone. Section 100A does not automatically apply to blue zone arrangements, it just means that the ATO will need to be satisfied that the arrangement is not subject to section 100A. Red zone Red zone arrangements will be reviewed in detail. These are arrangements the ATO suspects are designed to deliberately reduce tax, or where an individual or entity other than the beneficiary is benefiting. High on the ATO’s list for the red zone are arrangements where an adult child’s entitlement to trust income is paid to a parent or other caregiver to reimburse them for expenses incurred before the adult child turned 18. For example, school fees at a private school. Or, where a loan (debit balance account) is provided by the trust to the adult child for expenses they incurred before they were 18 and the entitlement is used to pay off the loan. These arrangements will be looked at closely and if the ATO determines that section 100A applies, tax will be applied at the top marginal rate to the relevant amount and this could apply across a number of income years. The ATO indicated that circular arrangements could also fall within the scope of section 100A. For example, this can occur when a trust owns shares in a company, the company is a beneficiary of that trust and where income is circulated between the entities on a repeating basis. For example, section 100A could be triggered if: The trustee resolves to appoint income to the company at the end of year 1. The company includes its share of the trust's net income in its assessable income for year 1 and pays tax at the corporate rate. The company pays a fully franked dividend to the trustee in year 2, sourced from the trust income, and the dividend forms part of the trust income and net income in year 2. The trustee makes the company presently entitled to some or all of the trust income at the end of year 2 (which might include the franked distribution). These steps are repeated in subsequent years. Distributions from a trust to an entity with losses could also fall within the red zone unless it is clear that the economic benefit associated with the income is provided to the beneficiary with the losses. If the economic benefit associated with the income that has been appointed to the entity with losses is utilised by the trust or another entity then section 100A could apply. Who is likely to be impacted? The ATO’s updated guidance focuses primarily on distributions made to adult children, corporate beneficiaries, and entities with losses. Depending on how arrangements are structured, there is potentially a significant level of risk. However, it is important to remember that section 100A is not confined to these situations. Distributions to beneficiaries who are under a legal disability (e.g., children under 18) are excluded from these rules. For those with discretionary trusts it is important to ensure that all trust distribution arrangements are reviewed in light of the ATO’s latest guidance to determine the level of risk associated with the arrangements. It is also vital to ensure that appropriate documentation is in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of beneficiaries. Companies entitled to trust income As part of the broader package of updated guidance targeting trusts and trust distributions, the ATO has also released a draft determination dealing specifically with unpaid distributions owed by trusts to corporate beneficiaries. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of another integrity provision in the tax law, Division 7A. Division 7A captures situations where shareholders or their related parties access company profits in the form of loans, payments or forgiven debts. If certain steps are not taken, such as placing the loan under a complying loan agreement, these amounts can be treated as deemed unfranked dividends for tax purposes and taxable at the taxpayer’s marginal tax rate. The latest ATO guidance looks at when an unpaid entitlement to trust income will start being treated as a loan. The treatment of unpaid entitlements to trust income as loans for Division 7A purposes is not new. What is new is the ATO’s approach in determining the timing of when these amounts start being treated as loans. Under the new guidance, if a trustee resolves to appoint income to a corporate beneficiary, then the time the unpaid entitlement starts being treated as a loan will depend on how the entitlement is expressed by the trustee (e.g., in trust distribution resolutions etc): If the company is entitled to a fixed dollar amount of trust income the unpaid entitlement will generally be treated as a loan for Division 7A purposes in the year the present entitlement arises; or If the company is entitled to a percentage of trust income, or some other part of trust income identified in a calculable manner, the unpaid entitlement will generally be treated as a loan from the time the trust income (or the amount the company is entitled to) is calculated, which will often be after the end of the year in which the entitlement arose. This is relevant in determining when a complying loan agreement needs to be put in place to prevent the full unpaid amount being treated as a deemed dividend for tax purposes when the trust needs to start making principal and interest repayments to the company. The ATO’s views on “sub-trust arrangements” has also been updated. Basically, the ATO is suggesting that sub-trust arrangements will no longer be effective in preventing an unpaid trust distribution from being treated as a loan for Division 7A purposes if the funds are used by the trust, shareholder of the company or any of their related parties. The new guidance represents a significant departure from the ATO’s previous position in some ways. The upshot is that in some circumstances, the management of unpaid entitlements will need to change. But, unlike the guidance on section 100A, these changes will only apply to trust entitlements arising on or after 1 July 2022. How to contact us We’re available to assist you with detailed advice on trusts and trust distributions. Contact Collins Hume Accountants & Business Advisers in Ballina on Byron Bay on 02 6686 3000. The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Collins Hume's NRL Footy Tipping Competition kicks off for 2022 Footy season is knocking on our door and Collins Hume would like to invite you to participate in our annual NRL Tipping Comp. It’s a tough time for many of us right now and perhaps a bit of distraction can help us all. Rules and prizes for 2022 will be kept the same as 2021. Huge thanks to all our local businesses that helped by contributing towards this year's prizes! Prize Information First prize $300 worth of gift vouchers sourced by Collins Hume from local businesses Second prize $100 worth of gift vouchers sourced by Collins Hume from local businesses Third prize $50 worth of gift vouchers sourced by Collins Hume from local businesses Knockout Comp Winner $100 worth of gift vouchers sourced by Collins Hume from local businesses 5 quick steps to join Go to https://www.iTipFooty.com.au Click the 'REGISTER' button if you don't already have an account with iTipFooty.com.au Once you have successfully registered login and, click the JOIN COMP button Enter Comp # 103098 and Comp Password CH1234 Click join comp... DONE! Check in for results each week. Prizewinners will be announced at the end of the season. Good luck!

Big 4 banks pledge support for NSW and QLD customers impacted by February's flooding. Please contact your bank directly to discuss any financial support. ANZ ANZ announced a financial relief package for customers affected by significant flooding across south-east Queensland and parts of northern New South Wales with severe weather systems continuing to threaten more damage. ANZ customers affected by flooding are encouraged to contact ANZ’s dedicated financial hardship team on 1800 149 549 or at anz.com.au/support/natural-disaster-support/. Read more » Commonwealth Bank Commonwealth Bank is providing its Emergency Assistance to customers and businesses in flood-affected areas in South-East Queensland and New South Wales. To access this support please phone CBA on 1800 314 695 or visit a branch where it is safe to do so. Further information about Emergency Assistance is available online at  commbank.com.au/emergencyassistance. Read more » National Australia Bank NAB will provide $1,000 grants and additional financial relief to customers and colleagues affected by floods in the Northern Rivers region in NSW, to assist them in the immediate aftermath of the natural disaster. The grants will give NAB customers and colleagues who have experienced significant damage to their homes ready access to funds to meet their immediate needs. Business and agriculture customers who have suffered damage or losses because of the floods are also eligible. NAB customers who have suffered damage to their home and need assistance can call NAB Assist on 1300 308 132. All enquiries will be assessed on a case-by-case basis by the NAB Assist team to determine eligibility. Read more » Westpac Westpac has launched a $2 million fund to help small businesses impacted by the floods in Queensland and New South Wales access financial help. Small business customers who meet the eligibility criteria can apply for $3,000 in cash grants per customer group to help with urgent expenses or repairs by contacting their banker or calling Westpac's customer support teams. Read more »

Australian Government Disaster Recovery Payment (AGDRP) of $1,000 per eligible adult and $400 per eligible child is now available for people impacted by a flooding event. Residents in 26 flood-affected local government areas across New South Wales and Queensland can start applying for Commonwealth financial support through Services Australia from 9am today. Eligible residents can claim support via myGov or by calling Services Australia on 180 22 66 Claims for AGDRP and DRA for NSW local government areas will be open at 2pm (AEDT) from 1 March 2022 Affected Queensland local government areas can claim AGDRP from 9am (AEST) and can claim DRA from 1pm (AEST) from 1 March 2022 The DRFA assistance provides grants of up to $180 per person, to a maximum of $900 for a family of five or more. Financial support has now been activated for Northern New South Wales local government areas of Ballina, Bellingen, Byron, Clarence Valley, Coffs Harbour, Kyogle, Lismore, Richmond Valley and Tweed. Queensland residents in Brisbane, Fraser Coast, Gold Coast, Ipswich, Lockyer Valley, Logan, Moreton Bay, Noosa, Redland, Scenic Rim, Somerset, South Burnett, Southern Downs, Sunshine Coast and Toowoomba local government areas are also included. These communities are in addition to the local government areas of Gympie and North Burnett, who became eligible to apply on 28 February 2022. Payments are available in Gympie and North Burnett local government areas and the Queensland Government is responsible for activating these payments. The AGDRP is a one-off, non-means tested payment and is available to eligible people in those affected local government areas who have suffered a significant loss, including a severely damaged or destroyed home or serious injury. Disaster Recovery Allowance The Disaster Recovery Allowance (DRA) will also be provided into the 26 affected local government areas. The DRA assists employees, small business persons and farmers who experience a loss of income as a direct result of a major disaster. This allowance provides for a maximum of 13 weeks payment from the date you have or will have a loss of income as a direct result of a disaster. The DRA payment is set at the maximum equivalent rate of Jobseeker Payment or Youth Allowance, depending on your personal circumstances, and is taxable. Australian Defence Force personnel continue to support the emergency response efforts and will do more once the water recedes and the recovery effort starts. This includes the arrival of the ADF in Lismore to assist NSW. For more information on support available, visit servicesaustralia.gov.au/disaster Source: pm.gov.au

South East Queensland Floods February 2022 Help for people directly affected by a natural disaster event, such as flooding, in disaster declared areas. The Australian Government Disaster Recovery Payment (AGDRP) is a one-off, non-means-tested payment of $1,000 per eligible adult and $400 per child adversely affected by a major disaster either in Australia or overseas. The AGDRP may be activated when the impact of a disaster on individuals and families requires an additional Australian Government response to support short-term recovery needs. Current status The Australian Government has announced support for people seriously affected by floods in South East Queensland. Claims opened at 1 pm AEST Monday 28 February 2022. The Australian Government has announced support for people seriously affected by floods in NSW. More information will become available. The Australian Government has announced the Disaster Recovery Allowance for people who’ve lost income due to the South East QLD Floods. More information will become available. How to claim There are 3 steps to claim the Australian Government Disaster Recovery Payment. Read all the details at Steps to claim Australian Government Disaster Recovery Payment. Also watch the government websites for any updates as new LGAs are added.

Professional Services Firm Profits Guidance Finalised The Australian Taxation Office’s finalised position on the allocation of profits from professional firms starts on 1 July 2022. The ATO’s guidance uses a series of factors to determine the level of risk associated with profits generated by a professional services firm and how they flow through to individual practitioners and their related parties. The ATO may look to apply the general anti-avoidance rules in Part IVA to practitioners who don’t fall within the low-risk category. With the new guidelines taking effect on 1 July 2022, professional firms will need to assess their structures now to understand their risk rating, and if necessary, either make changes to reduce their risks level or ensure appropriate documentation is in place to justify their position. The problem The finalised guidance has had a long gestation period. The ATO has been concerned for some time about how many professional services firms are structured – specifically, professional practices such as lawyers, accountants, architects, medical practices, engineers, architects, etc operating through trusts, companies and partnerships of discretionary trusts and how the profits from these practices are being taxed. The ATO guidance takes a strong stance on structures designed to divert income in a way that results in principal practitioners receiving relatively small amounts of income personally for their work and reducing their taxable income. Where these structures appear to be in place to divert income to create a tax benefit for the professional, Part IVA may apply. Part IVA is an integrity rule which allows the Commissioner to remove any tax benefit received by a taxpayer where they entered into an arrangement in a contrived manner in order to obtain a tax benefit. Significant penalties can also apply when Part IVA is triggered. Determining the risk rating The guidance sets out a series of tests that are used to calculate a risk score. This risk score is then used to classify the practitioner as falling within a Green, Amber or Red risk zone, which determines if the ATO should take a closer look at you and your firm. Those in the green zone are at low risk of the ATO directing its compliance efforts to you. Those in the red zone, however, can expect the ATO to conduct further analysis as a matter of priority which could lead to an ATO audit. Before calculating the risk score it is necessary to consider two gateway tests: Gateway 1 considers whether there is commercial rationale for the business structure and the way in which profits are distributed, especially in the form of remuneration paid. Red flags would include arrangements that are more complex than necessary to achieve the relevant commercial objective, and where the tax result is at odds with the commercial venture, for example, where a tax loss is claimed for a profitable commercial venture. Gateway 2 requires an assessment of whether there are any high-risk features. The ATO sets out some examples of arrangements that would be considered high-risk, including the use of financing arrangements relating to transactions between related parties. If the gateway tests are passed, then you can self-assess your risk level against the ATO’s risk assessment factors. There are three factors to be considered: The professional’s share of profit from the firm (and service entities etc) compared with the share of firm profit derived by the professional and their related parties; The total effective tax rate for income received from the firm by the professional and their related parties; and The professional’s remuneration as a percentage of the commercial benchmark for the services provided to the firm. The resulting ‘score’ from these factors determines your risk zone. Some arrangements that were considered low risk in prior years under the ATO’s previous guidance may now fall into a higher risk zone. In these cases, the ATO is allowing a transitional period for those practitioners to continue to apply the previous guidelines until 30 June 2024. For professional services firms, it will be important to assess the risk level and this needs to be done for each principal practitioner separately. Those in the amber or red zone who want to be classified as low risk need to start thinking about what needs to change to move into the lower risk zone. Where other compliance issues are present — such as failure to recognise capital gains, misuse of the superannuation systems, failure to lodge returns or late lodgement, etc — a green zone risk assessment will not apply. Collins Hume will contact any of our clients who might be impacted by the incoming guidance. If you are concerned about your position, please contact us in Ballina or Byron Bay on 02 6686 3000.