The new ATO guideline affects more than the traditional professions. Engineers, architects and IT consultants, anyone charging for expertise is included. Photo: wosunan.
A new Australian Tax Office compliance guideline is catching a whole range of professionals off guard, reshaping profit distribution and driving up personal tax bills.
Many firms don’t realise that the ATO now classifies them as “professional services”. And it’s not just doctors, lawyers, and accountants.
A new compliance guideline, PCG 2021/4, is quietly reshaping how professional firms operate, and many are only just now discovering its impact.
The net is wide; it’s not just the traditional professions – engineers, architects, and IT consultants – anyone charging for expertise is included.
If a business earns income from providing professional services and uses structures such as trusts to distribute profits, this new guideline applies.
“PCG 2021/4 is designed to test whether firms comply with the law when distributing profits,” RSM Australia Business Advisory Director Andrew Fernance says.
“Historically, professional firms enjoyed flexibility in using trusts and other structures to reduce tax, but that era is now over.
“The guideline requires that a fair share of profit, at least 50 per cent for a full equity partner, be reported as personal income.”
This change will mean higher personal tax bills and less capital for investments. For example, a partner earning $1 million who previously took $200,000 personally and distributed the rest through a trust must now report at least $500,000 in their own name.
After paying tax on that amount, they may then struggle to maintain any property or investment commitments funded through the trust.
“The ripple effects are significant. Mid-tier partners who once relied on trusts for negative-geared investments now face dilemmas,” Andrew says.
“With no income flowing to the trust, losses can’t be offset elsewhere.
“Some may sell assets or move them into personal names, which solves cash-flow issues but removes asset protection, increasing exposure if professional legal claims arise.
“These changes are forcing many professionals to rethink not only profit distribution but also broader business and investment structures.”
RSM Australia business advisory director Andrew Fernance says the ripple effects are significant. Photo: RSM Australia.
The ATO uses PCG 2021/4 to assess compliance risk, placing firms in green, amber or red zones.
Red signals high risk and likely audit attention, while green means safety but possibly higher tax than necessary. Advisers aim for amber, minimising tax without triggering audits.
“I recently came across a partner in an engineering firm who was in the red zone, reporting only 30 per cent of profit personally.
“They had to restructure to a 50 per cent personal and 50 per cent trust distribution. This reduced audit risk but increased personal tax by $70,000 annually,” Andrew says.
Others may face even stricter limits. For example, senior associates on partial equity arrangements can no longer use Everett assignments to divert income to trusts, meaning all profits will be taxed personally.
“The guideline is here to stay, at least for now. The best approach is to accept the new reality and work with trusted advisers to ensure compliance,” Andrew says.
“For many, this will mean simpler structures and fewer opportunities for income splitting. While some firms are abandoning trusts altogether, taking distributions directly in personal names.
“While this reduces flexibility, it avoids audit risk and aligns with ATO expectations.
“The immediate effect is higher personal tax, but ignoring the guideline could lead to even greater costs if the ATO challenges allocations.”
Andrew says that despite the challenges, there are still opportunities. By using the ATO’s risk assessment framework and collaborating with accountants, professional services firms can still manage tax effectively within the rules.
“The key is understanding the consequences and adapting business structures accordingly. Those who act now will avoid surprises and position themselves for stability in a changing compliance landscape.”
