The ATO has released guidelines regarding its administrative treatment of certain tax issues that arise when interests in ‘no goodwill’ professional partnerships, trusts and incorporated practices (practices) are acquired or disposed of.
Broadly, the guidelines apply where:
- the relevant practice qualifies as a “professional practice” - this will be a practice that derives income from “the provision of services involving the exercise of specialised knowledge and skill”, and where the conduct of its members is regulated by legislation or professional standards of conduct and ethical behaviour administered by a professional body / authority such as a medical practice, a law firm or an accounting firm;
- the taxpayer is a practitioner entity that carries on, or participates in the carrying on of, a professional practice as a partner, shareholder, or beneficiary of a trust carrying on that practice (or will satisfy that requirement upon acquiring such an interest);
- the acquisition or disposal of the practice interest occurs on an “arm’s length” basis between unrelated entities during either the admission or exit of a practitioner entity, or through a takeover or merger. The “arm’s length” requirement must be demonstrable from the transaction documents and the practice’s governing documents (such as the partnership deed, trust deed, constitution and shareholders’ agreement); and
- the consideration payable or receivable by the practitioner entity has been determined on the basis that the value of goodwill is nil or nominal.
Where these requirements are satisfied, the ATO will not undertake compliance action in relation to the following four tax issues (only) where the taxpayer has adopted the applicable treatment set out below:
The guidelines do not apply to dealings between related entities, “Everett” type assignments or internal restructures.
The guidelines are retrospective and they are more favourable for taxpayers than the guidance formerly found in the following ATO publications, which are replaced by the guidelines:
1. Taxation Ruling IT 2540 (paragraphs 13 and 14)
2. Tax Determination TD 2011/26 (now withdrawn)
3. Draft Tax Determination TD 2011/D9 (now withdrawn)
4. Draft Tax Determination TD 2011/D10 (now withdrawn)
Also relevant to professional practice are the ATO’s guidelines on Assessing the risk: allocation of profits within professional firms.
If you require advice or further information, please contact: