How retained earnings are used in the TaxPlan Professional Firm Profit Report
Considerations from the Tax Institute which supports the ChangeGPS implementation:
- PCG 2021/4 has the title “ALLOCATION of Professional Firm Profits”. The entire guideline from start to finish is all about the allocation of professional firm related amounts – whether they be wages, FBT items, super contributions, trust distributions or dividends – to the professional. There is NOT ONE MENTION OF RETAINED PROFITS in a professional firm that trades as a company being included in the IPP’s assessment.
- Para 34: 34. “This Guideline only applies where an IPP has received an amount of income from a practice which generates its income from a business carried on in a business structure that is not subject to the PSI regime.” The key word here is RECEIVED. Again, its RECEIVED income that this entire guideline focuses on. Profits retained in a trading company are NOT RECEIVED by the IPP.
- Risk Assessment Factor Number 1 is “Proportion of profit entitlement from the whole of firm group returned in the hands of the IPP”. Retained profits in a professional firm company are NOT “returned in the hands of the IPP”.
- Risk Assessment Factor Number 2 is “Total effective tax rate for income received from the firm by the IPP and associated entities”. Again, this focusses on income RECEIVED by the IPP, NOT on retained income in the professional firm company
The Tax Institute has published their interpretation on page 627 of its May 2022 “Taxation in Australia” journal, and it 100% aligns with the ChangeGPS approach.
