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PCG 2021/4: What professional practices need to know about profit allocation
- 26 June 2024
- by Tim Olynyk | Partner | Tax Advisory
- 6-minute read
Over many years, the ATO has raised concerns about how the profits of professional practices are allocated to the owners of the business. In particular, the ATO is concerned about owners redirecting income to their associated entities on lower tax rates. In response, it has issued guidelines called PCG 2021/4, which clarifies its position. Learn more about PCG 2021/4 here.
Who does PCG 2021/4 apply to?
The scope of professions considered a ‘professional practice’ when it comes to PCG 2021/4 is very wide. It includes accountants, lawyers, doctors, dentists, architects, and engineers among others.
How does PCG 2021/4 work?
PCG 2021/4 outlines the ATO views on the level of ATO audit risk of professional practitioners in relation to their tax affairs. These new guidelines replaced previous guidelines issued on the ATO website in 2015 called “Assessing the Risk: Allocation of profits within professional firms guidelines”.
In particular, PCG 2021/4 outlines a risk assessment matrix. If a taxpayer is in the green zone, they are considered low risk of ATO audit; if they are in the orange zone they are considered a moderate risk of ATO audit; and if they are in the red zone, they are considered a high risk of ATO audit.
The risk assessment tests in PCG 2021/4 are based on two or three separate test calculations:
Test 1 – Profit share entitlement recognised by taxpayer in their personal name
| Score | 1 | 2 | 3 | 4 | 5 | 6 |
| Profit share recognised by professional practitioner personally | More than 90% | Between 75% and 90% | Between 60% and 75% | Between 50% and 60% | Between 25% and 50% | Less than 25% |
Test 2 – Average rate of tax on profit share entitlement
| Score | 1 | 2 | 3 | 4 | 5 | 6 |
| Overall effective tax rate | More than 40% | Between 35% and 40% | Between 30% and 35% | Between 25% and 30% | Between 20% and 25% | Less than 20% |
Test 3 – Profit share entitlement versus benchmark remuneration of non-partner that performs similar duties
| Score | 1 | 2 | 3 | 4 | 5 | 6 |
| Remuneration of professional practitioner compared to benchmark | More than 200% | Between 150% and 200% | Between 100% and 150% | Between 90% and 100% | Between 70% and 90% | Less than 70% |
In most circumstances, the risk matrix in PCG 2021/4 will be calculated using test 1 and test 2 above as there will not be a practitioner at the practice that is a non-partner that provides similar duties to the partner.
The risk levels outlined by the ATO in PCG 2021/4 are as follows:
| Risk level | Score (if using 2 tests) | Score (if using 3 tests) |
| Low risk | No higher than 7 | No higher than 10 |
| Moderate risk | 8 | 11 or 12 |
| High risk | 9 or higher | 13 or higher |
By way of hypothetical examples using the above matrix and using test 1 and test 2 only, if a particular lawyer who owns equity in their legal practice received their profit distributions from the practice via their family trust:
- If their family trust distributed 60% of its income to the practitioner personally and the average rate of tax payable by the practitioner and their associated entities that also received distributions from the family trust was say 35%, the risk assessment matrix in PCG 2021/4 would classify the practitioner as low risk of ATO audit.
- If their family trust distributed 40% of its income to the practitioner personally and the average rate of tax payable by the practitioner and their associated entities that also received distributions from the family trust was say 35%, the risk assessment matrix in PCG 2021/4 would classify the practitioner as moderate risk of ATO audit.
- If the family trust distributed 40% of its income to the practitioner personally and the average rate of tax payable by the practitioner and their associated entities that also received distributions from the family trust was say 28%, the risk assessment matrix in PCG 2021/4 would classify the practitioner as high risk of ATO audit.
When does PCG 2021/4 apply from?
PCG 2021/4 applies from 1 July 2022 (i.e. the commencement of the 2023 financial year). However, PCG 2021/4 states that if a taxpayer complied with the terms of the previous 2015 guidelines but does not comply with the terms of PCG, 2021/4, they can continue to rely on the old guidelines until 30 June 2024.
What should you do if you are a professional service business owner?
The PCG 2021/4 guidelines can be hard to navigate without professional tax advice. We recommend speaking to a professional like our Tax Advisory Partner Tim Olynyk who can give you tailored advice regarding how PCG 2021/4 might affect you. Tim can be reached on +61 3 9810 0700 or
Contact us
Wondering how PCG 2021/4 might affect you? Contact your BG Private advisor or our Tax Advisory Partner, Tim Olynyk, on +61 3 9810 0700 or
