Income Splitting – New Rules from July 2021

Do you use income splitting to reduce tax? The ATO is changing rules around income splitting and is checking taxpayers who may have high-risk agreements. Book a time with us to review existing arrangements prior to new rules starting in July 2021.

Are you interested in learning more about income splitting and how to minimise tax by apportioning income or profit between associated entities?

Professional services firms frequently use income splitting – for example, medical, legal, financial or IT services firms. It’s a good way of reducing tax within the allowable provisions – so long as it is not stepping over the boundary into tax avoidance.

New ATO guidance on this topic means individual professional practitioners (IPP) will need to prove that arrangements are commercially motivated before self-assessing the risk level of current income splitting arrangements.

The new guidelines will apply from 1 July 2021 and are more involved than the guidelines currently used to satisfy the ATO's requirements.

The ATO will be on the lookout for arrangements that result in payments to an individual that seem to be artificially low due to income splitting in order to avoid tax.

In assessing the risk of tax avoidance, the ATO takes into account several factors:

• The proportion of profit entitlement from the whole of the firm that is returned to the IPP.
• The total effective tax rate for income received from the firm by the IPP and associated entities.
• The remuneration returned to the IPP as a percentage of the commercial benchmark for the services provided to the firm.

Talk to us about income splitting arrangements and how they can benefit you within the rules.
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We’ll work through the new guidelines with you to assess the commercial rationale of arrangements and any high-risk features that may trigger an ATO audit. If you’re thinking of restructuring operations, now is the time to review existing arrangements.