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An Australian Tax Office (ATO) practical compliance guideline called PCG 2021/4 is quietly reshaping the landscape for professional services firms.
If you’re a partner, director, or owner in a professional services firm, you need to know about it. As of this year, adopting and adapting to this guideline is essential.
How PCG 2021/4 indirectly affects business structures
The ATO uses PCG 2021/4 to test whether professional firms are complying with the law when they distribute profits. It restricts professional firms’ ability to use trusts and property as a way of diverting profits from personal income.
It applies to you if you redirect income from a business or activity to an entity and:
- That redirected income includes income from providing professional services
- The outcome of redirecting your income greatly reduces your tax liability.
While it was released in 2021, 2025 is the first year it applies to professional firms. Because of this slow start, it has gone under the radar for many. And it’s catching some people who it affects by surprise. Another reason many have been unaware is because of the confusion around what a professional firm is. A common misconception is that this title only applies to doctors, lawyers and accountants. In reality, it applies to engineers, architects, IT support, and anyone else who charges for their time and expertise.
Less flexibility, more scrutiny
Historically, professional firms could use trusts and other structures to distribute profits in tax-effective ways. For example, you might have a trust, and then the trust could distribute income to someone for lots of different reasons – but in reality, this reduces tax and keeps tax at a lower rate. PCG 2021/4 changes this. 
The guideline restricts how much income can be split among family members or entities, aiming to ensure professionals pay a fair share of tax personally. A fair share for a full equity partner is at least 50% in their own name. That means the individual could be paying a lot more tax in their own name.
Let’s say a partner in a law firm is earning $1 million a year. In the past, they’ve been paid $200,000 in their own name and distributed the remaining $800,000 through a trust. That allowed them to use the income for other ventures, for example, servicing loans on property.
Under PCG 2021/4, this partner now must take at least 50% of their profit (at least $500,000) as personal income. After paying higher personal tax on that income, they have half or less of the capital to maintain their investments. This shift might force the partner to rethink how they fund property and investment structures.
Or consider a mid-tier partner who once channelled profit to a trust for negative-geared investments. This individual now faces a dilemma. With no income flowing to the trust, the losses on those investments can’t be offset elsewhere. They might now sell the asset or move it into their personal name. This solves the cash-flow problem, but at the same time, exposes them to higher risk if they’re ever sued, because asset protection no longer applies.
Assessing risk and ensuring compliance
The ATO uses PCG 2021/4 to understand a professional firm’s compliance risk. As part of our accounting service, we use the risk assessment framework to understand your risk profile, which provides a score that puts you in a ‘risk zone’.
Your zone might be green, amber or red. Red means you’re at risk of distributing income in a non-compliant way and are likely to attract an audit. If you’re in the green, you’re mainly reporting personal income and, while being safe, may be paying more tax than you need to. We try to make sure you’re in the amber so you stay out of the ATO audit target list, while minimising taxes as much as possible.
For example, one full-equity partner in an engineering firm found themselves in the red zone because only 30% of their profit was reported personally. Their adviser restructured their distributions so 50% went to the person and 50% to the family trust. That adjustment brought them into the amber zone, reducing audit risk, but increasing personal tax by about $70,000 a year.
Meanwhile, a senior associate on a partial equity arrangement found they couldn’t use an Everett assignment to direct any income to a trust at all. This means all profits must now be taxed in their own name.
Face the change and adapt
PCG 2021/4 is here to stay, at least for now. The best way forward is to accept the new reality, work with your tax adviser, and ensure your structures and profit allocations are compliant.
The most immediate effect of PCG 2021/4 is higher personal tax for many people. If you are in a high-risk red zone, the ATO will likely try to assess all of your profit allocation. To avoid this happening, we need to make sure your profits are distributed in the right ways.
This may lead to simpler business structures for many. As mentioned, some are electing not to use a trust, instead taking profit distributions directly to their own personal name. With the inflexibility around how you can distribute profits, this indirectly affects other business structures you might have, and you will need to consider whether investments are viable.
But there are opportunities, too. Take a practical approach to assessing your risk and understand the consequences. By working with your accountant and using the risk assessment framework, you can still minimise tax within the rules.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
