ATO urges professional firms to clean up distribution statements
Grant Thornton partner Paul Banister says the Tax Office’s most recent update suggests it is not getting the information it needs to apply its risk compliance framework for professional firms.
Professional firms have been singled out in the Tax Office’s latest private wealth adviser program update, flagging the need for accurate and timely reporting.
Paul Banister, partner of business tax and advisory at Grant Thornton, said the update was a clear demonstration that the ATO is “not getting the information that they are seeking from returns being lodged by professional firms.”
“Professional firms are under a greater degree of scrutiny these days, he said, and the ATO expects diligence in the preparation of statements of distribution.
The timing of the update might imply that professional firms did not give sufficient financial information in their 2023 tax returns for the ATO to apply its risk assessment framework announced in its Practical Compliance Guideline (PCG) 2021/4.
PCG 2021/4 was developed by the ATO over several years in response to concerns that individual practitioners were relying on the structure of professional firms to alter their tax liabilities.
“Because of the complexity of a whole array of structures that professional firms conduct their business in, it’s always very difficult to pin down a common rule for all,” said Banister.
“If you read that document, it does get quite complex. The ATO does need some good data to be able to make that risk assessment. If they’re not getting that data, that would be problematic.”
Apart from a general reminder for professional firms to lodge their statements of distribution accurately and on time, the ATO’s latest update listed specific errors in reporting incomes from professional firms.
Since professional firms operate under a range of structures and entity types, taxpayers must be clear on which entity type is making a distribution, it said.
It also called out incorrect reporting of partnership incomes, including an observed trend in falsely listing it as trust income, primary production income, or “other income.”
Distributions must also be reported on the right label. If the distributing entity is a partnership, it must be reported at 130 for individuals, 6D for companies, and 8R for trusts, the ATO said.
If the distributing entity is a trust, it must be reported at 13U for individuals, 6E for companies, and 8R for trusts.
“Let’s say the entity sharing an income is a trust or even a superannuation fund. It might just be named as a company, so the distribution statement might be prepared on the basis that it is a company, but it is a different type of entity that is receiving the income,” said Banister.
“That’s going to cause problems in terms of getting the right information and making sure that it can easily be matched once all returns of both professional firm and all of its equity holders are submitted.”
Digital record keeping and lodgments are “best tax practice” and are preferred by the ATO, which noted that many partnerships are lodging their tax returns digitally but lodging their hard copy statements of distribution.
“It might surprise people the amount of paper lodgments that are used for these statements of distributions,” said Banister.
While the ATO software is generally effective for professional firm lodgments and can reduce the risk of human error, Banister said there are genuine reasons why firms might opt to lodge hard copy returns, either in part or in full.
For instance, the software limits professional firms to lodging returns for no more than 160 partners, meaning larger firms are required to submit at least some in paper form.
Asked whether he had observed any common errors or misconceptions in professional firm lodgments, Banister answered that some partners or equity holders do not regard their affairs as being complex and therefore opt to prepare their own returns – increasing the chances of falling foul of an ATO integrity check.
