Allocation of Professional Firm Profits: PCG 2021/4

The allocation of professional firm profits is assessed under PCG 2021/4 by checking two gateways, then scoring each practitioner’s arrangement. The score guides the Australian Taxation Office’s (ATO) compliance attention. It does not decide whether the tax treatment is lawful.

What PCG 2021/4 Asks of a Professional Firm

PCG 2021/4 assesses the risk that an individual professional practitioner is not taxed on an appropriate share of the profit their firm earns. The concern arises when personal effort produces income that is redirected to associates while the practitioner receives artificially low compensation.

The guideline covers accounting, legal, medical, architectural and management consulting practices, as well as engineering and financial services firms. The individual professional practitioner (IPP) provides services to clients or manages the firm. The IPP, or their associated entities, must hold a legal or beneficial equity interest.

A practice can operate through a partnership, company or trust. A related service trust can also supply staff, premises or administration. Using a company or trust does not itself establish avoidance. Assess the actual ownership rights, commercial arrangements and income allocations across the group.

The firm must operate through a legally effective entity arrangement, and its income must fall outside the personal services income rules. Establish those conditions before applying the gateways. Contractor personal services income requires its own assessment.

PCG 2021/4 is an administrative risk framework. The legal outcome depends on the actual rights, transactions and applicable tax law, including the general anti-avoidance provisions in Part IVA. A green score gives no legal safe harbour. A red score does not automatically establish that Part IVA applies.

The ATO’s PCG 2021/4 also sets out commencement and transitional conditions. The earlier suspended guidelines have only a historical role under those conditions. Their transitional period has ended, so use PCG 2021/4 for an ongoing allocation.

The Two Gateways

Both gateways must be satisfied before you can use the PCG 2021/4 scoring framework. Complete them separately for each IPP’s arrangement.

Gateway 1: Commercial Rationale

The arrangement and the way profits are distributed must have a genuine commercial basis. The arrangement must achieve its stated purpose for the parties involved. Saying that a trust provides asset protection is insufficient if it produces no actual improvement in asset protection.

Keep the constituent documents, ownership records and agreements beside the commercial explanation. Match those documents to management decisions, cash movements and the parties’ actual rights. Record what the arrangement achieves, why each entity is involved and how the allocation rewards the practitioner’s work.

For a service trust, retain the service agreement, evidence of services supplied and the basis for its charges. The practice’s entity chart can show how ownership and payment recipients fit together. The chart supports the analysis, but the underlying documents establish the rights.

A step that only produces a tax advantage can undermine this gateway. Other warning signs are circular funds, unnecessary complexity and a mismatch between legal form and economic substance. The ATO also considers who controls and enjoys the income distributed to associates.

Gateway 2: High-Risk Features

The arrangement must be free of the high-risk features described in paragraphs 47 to 59 of the guideline. Arrangements covered by a Taxpayer Alert also require attention. The ATO’s examples include the following features.

• An associated trust borrows to buy part of the practitioner’s interest, while the practitioner uses the sale proceeds to repay private mortgage debt.
• An artificial difference between accounting and taxable income sends taxable income to one entity while another enjoys the cash.
• A person with salary-like remuneration assigns partnership income despite lacking genuine equity rights or participation in management.
• Discretionary share or unit classes direct profits to associates of a non-equity professional according to that professional’s personal performance.

Ordinary work-in-progress and employee leave provisions do not ordinarily cause concern under the accounting-versus-tax feature. Read the complete arrangement against the guideline, rather than treating every accounting difference as a failure.

If either gateway fails, stop scoring. You cannot claim a green result by adding favourable numbers to an ineligible arrangement. The guideline directs affected practitioners to engage with the ATO. Failure invites closer examination of the facts, but does not settle the legal tax outcome.

Passing both gateways begins the annual risk assessment. Revisit eligibility when ownership, financing or the way income is enjoyed changes, even if the previous year’s score was green.

The Risk Assessment Factors and the Score

The score combines the IPP’s personal share of group profit with the effective tax rate on that income. An optional third factor compares the IPP’s remuneration with a commercial benchmark.

Factor 1 includes the profit entitlement from the whole firm group. Include the service entity and other associated businesses, not just the operating practice. Factor 2 uses tax attributable to firm income across the IPP and their associates, divided by their total firm income.

For each recipient, paragraph 85 uses the larger of two tax calculations. One calculates tax on firm-related income and deductions alone. The other subtracts tax without those amounts from tax with them. Apply that comparison before adding recipients’ tax amounts. Exclude income-based levies, including the Medicare levy.

The risk assessment scoring table at paragraph 76 assigns these points. Boundary words matter, especially at exactly 50%, 60% or 30%.

Points	Factor 1: IPP’s personal profit share	Factor 2: Effective tax rate	Factor 3: Remuneration as a share of benchmark
1	Above 90%	Above 40%	Above 200%
2	Above 75%, up to 90%	Above 35%, up to 40%	Above 150%, up to 200%
3	Above 60%, up to 75%	30% to 35% inclusive	Above 100%, up to 150%
4	50% to 60% inclusive	Above 25%, below 30%	Above 90%, up to 100%
5	Above 25%, below 50%	Above 20%, up to 25%	Above 70%, up to 90%
6	25% or less	20% or less	70% or less

The risk-zone table at paragraph 78 gives separate totals for two-factor and three-factor assessments.

Zone	Risk level	Factors 1 and 2	All three factors
Green	Low	7 or less	10 or less
Amber	Moderate	8	11 or 12
Red	High	9 or more	13 or more

Factor 3 is optional. The guideline permits the first two factors where it is impractical to determine an accurate commercial remuneration benchmark. If you use factor 3, support the benchmark with comparable duties, responsibility and personal risk. Include cash, superannuation and non-cash remuneration. Review the benchmark annually.

An employee doing similar work can supply a starting comparison. Adjust for the principal’s management, client development and liability exposure. A generic industry salary without those adjustments does not establish the value of the role. Client fees under the practice’s pricing approach are also different from a remuneration benchmark.

Illustrative Two-Principal Calculation

This fictional example uses the 2026-27 resident income tax scale in Schedule 7 of the Income Tax Rates Act. Every amount and allocation below is illustrative. Assume the legal eligibility conditions and both gateways are satisfied. An actual file must substantiate those assumptions.

Each principal’s group entitlement is $500,000: $400,000 from the practice and $100,000 from a related service trust. Assume the trust’s distributable income equals its tax net income. Each principal and spouse is an adult resident with no other income, deductions or offsets. There are no superannuation contributions or fringe benefits in this simplified calculation.

Illustrative item	Principal A’s group	Principal B’s group
Whole group entitlement	$500,000	$500,000
Amount returned by principal	$300,000	$100,000
Amount returned by spouse	$200,000	$400,000
Factor 1 percentage and points	60%, 4 points	20%, 6 points
Principal’s income tax, excluding levies	$100,870	$20,520
Spouse’s income tax, excluding levies	$55,870	$145,870
Total tax attributable to firm income	$156,740	$166,390
Factor 2 percentage and points	31.348%, 3 points	33.278%, 3 points
Two-factor total and zone	7, green	9, red

For Principal A, the effective tax rate is $156,740 divided by $500,000, multiplied by 100. Factor 1 scores 4 because exactly 60% sits in that band. Factor 2 adds 3, producing a total of 7.

The example uses two factors because an accurate commercial benchmark is assumed impractical to determine. Principal B’s higher group tax rate still produces a red score because so little income is returned personally. Assess each principal separately. Averaging the two scores would conceal Principal B’s result.

Under paragraph 110, the ATO conducts further analysis of red arrangements as a priority. It can proceed to audit if the facts remain high risk. Amber arrangements are likely to receive further analysis. Green arrangements generally receive limited attention, subject to the guideline’s exceptions and adequate evidence.

Before an allocation produces a red result, review its commercial basis and obtain advice on lawful alternatives. A different distribution must remain effective under the governing documents. Shifting a number on the worksheet cannot repair defective ownership rights or a failed gateway.

What the Practice Documents, for Itself and for a Client

Keep an annual file that lets another adviser reproduce the eligibility assessment and score. Retain the following papers together.

• The whole-group profit allocation working, reconciled to each recipient’s return and the service entity’s accounts.
• Evidence for both gateways, including agreements, ownership rights and the achieved commercial purpose.
• The effective tax calculation for every recipient, with the paragraph 85 comparison and treatment of benefits.
• The commercial benchmark and adjustments, or the reason an accurate benchmark is impractical.
• A file note recording the factors used, points, risk zone and changes from the previous year.

For your own practice, assess the proposed allocation while there is still time to make valid decisions. Update the calculation when final accounts are available, then reconcile it before lodging the relevant returns. Keep any trust distribution resolution consistent with the deed and the recorded entitlement.

For a professional firm client, agree whether your engagement covers the allocation review and obtain the whole-group information. Give the principal the result and explain any proposed change before the client implements it. Finalise the working against the actual allocation and returns. A last-year worksheet needs fresh evidence when circumstances change.

APES 220 Taxation Services applies to covered professional-body members providing this advice. Paragraph 11.1 of the standard requires working papers documenting the work and the basis and method of calculations, determinations or estimates. The advice file must show more than a zone label.

APES 220 also requires appropriate communication about tax consequences and risks. Its tax-planning provisions direct public practitioners to Section 380 of APES 110. Record the reasoning behind the advice and the information given to the client. Members must also properly discharge their own tax obligations and those of associated entities for which they are responsible.

Obtain independent advice when personal interests could impair the review, the gateways are uncertain or a prior arrangement needs unwinding. A transfer, cancelled entitlement or revised financing arrangement can create separate tax consequences. For a proposed transition, assemble the existing arrangement, proposed allocation and execution steps before approaching the ATO through the contact details in PCG 2021/4.