Professional services profit allocation: How to maximise advisory opportunities

Bill Mavropoulos, straight-talking tax advisor from VT Advisory, gives us the lowdown on the impact of PCG 2021/4 and what might put your clients in the ATO's compliance cross-hairs. He also gives some tips on how to talk about it with clients, maximise advisory opportunities with existing clients, and even go for the moon shot: winning over an entire professional services firm.


Listen to the podcast below. Also available on Podbean and Spotify.

Got questions? Want more?

We'll be doing an in-depth interview with Bill Mavropoulos at our next live virtual event on Thursday, 24 February 2022. You'll get the chance to ask Bill your questions about the PCG and how it will impact your clients.

Learn more

Summary

Timestamps

0:20 - Protect your own practice - audit insurance
1:16 - Winning clients at the start of their careers
1:54 - 4 things you can do with your own client base
4:42 - The Moon Shot - going for the whole firm win
5:42 - What's a Practical Compliance Guide?
7:11 - Who does PCG 2021/4 apply to?
8:43 - 6 key criteria to assess if the PCG applies
18:47 - The Risk Assessment Framework
19:26 - Scoring & Colour Zones
28:49 - Have the goalposts moved?
31:52 - Planning ahead with your clients
33:31 - Don't forget the opportunities!


Summary

PCG2021/4 comes into effect on 1 July 2022. It could be a massive risk for your practice as well as a huge opportunity to drive growth in advisory services and engage with clients on a deeper level.


Who's potentially affected?The following industries may be impacted:

  • accounting,

  • architecture,

  • engineering,

  • financial services,

  • law,

  • medicine, and

  • management consulting.


However, this is not an exhaustive list. Think about knowledge workers that sell services (largely intangible) and are part of a profession such as:

  • Quantity Surveyors,

  • IT Consultants, and

  • Dentists.


Protect your own practice firstReview whether you'd be at risk under the rules. Check your level of tax audit insurance with your insurer or broker, in case the ATO comes knocking.


Maximise advisory opportunities 

There are opportunities to pursue with both prospective and existing clients to generate more fees, or win an entire firm altogether (the 'moon shot')! Clients in the early stages of their careers will often need an accountant to guide them with setting up their practices; established clients may need help reviewing whether their current allocation is high risk. 


Here's what you should do with your clients: 

  1. Risk evaluationDiagnose whether these rules apply to them? 

  2. Risk mitigationUpdate your engagement documents to de-risk clients who may not want you to consider these rules

  3. Basic advisory and tax planningOffer advisory services to conservative clients and work out the tax cost of 'swimming between the flags' 

  4. Advanced advisoryFor clients that have evaluated and understand the risk, help them manage their exposure to Part IVA - the general anti-avoidance provisions. This can include a reasonable arguable position paper. 


Moon Shots!This is an opportunity to pitch for advisory work for the whole professional services firm. For example, if you look after one partner at a law firm, this is your opportunity to pitch for the entire law firm. The PCG rules are best addressed at a firm level, rather than on the partner level. It's a great opportunity to get in front of your clients, and getting an additional win would be pretty sweet. 


Who does the PCG apply to?There are 6 criteria. The first 4 are basic things such as the individual is engaged in professional services and PSI rules do not apply. 


The last 2 criteria are key. 

  • The arrangement is commercially-driven ("Gateway 1") 

  • There are no high-risk features present ("Gateway 2"). For example, those that are covered in a Taxpayer Alert. If these are present, the PCG does not apply and the Commissioner would likely devote more compliance resources to those arrangements. 


How do you self-assess the risk?If you pass Gateway 1 and 2, you then self-assess your level of risk of compliance action. There are 3 risk assessment factors:

  1. Proportion of profit of the firm returned to the individual professional (broadly, the higher the profit the lower the risk)

  2. The overall effective tax rate for income of the professional's group. This includes the practice and the individual's associated entities (broadly, the higher the effective tax rate of the group, the lower the risk)  

  3. Remuneration returned in the hands of the professional as a percentage of commercial benchmarks (broadly, the higher the percentage the lower the risk)


Based on some prescribed scoring system, each factor is given a score between 1 - 6, and then total score puts you either in the Green (low risk), Amber (medium risk) or Red (high risk) zone. The higher the score, the higher your risk that the Commissioner will devote compliance resources to your arrangement. 


Once that's done, you can continue the conversation with your client (or a potential client!) about the risks, any potential associated costs to comply, and options they can take to manage the risk of scrutiny by the ATO. They can also take some pre-emptive actions, like review their own insurance coverage.


And don't forget about those 'moon shots'!