PCG 2021/4 sets out how the ATO assesses whether profit allocations in professional firms reflect commercial reality or present a tax risk. In 2025, the ATO continues to use this guideline to identify arrangements that may divert income away from the individual generating it, particularly where trusts, companies or family members are involved.
Key Takeaways
- PCG 2021/4 applies to professional firms that use entities to allocate profits.
- The ATO assesses arrangements using a risk-based framework, not a blanket prohibition.
- Higher risk zones attract greater ATO scrutiny and potential Part IVA exposure.
- Clear commercial rationale and evidence of value creation are critical.
- Poor documentation and income splitting without substance increase compliance risk.
What Is PCG 2021/4 and Why It Matters
PCG 2021/4 is a Practice Compliance Guideline issued by the ATO to address how profits are allocated in professional firms, including accounting, legal, medical and consulting practices.
Rather than banning structures outright, the guideline provides a risk assessment framework that helps the ATO determine which arrangements warrant closer review. The focus is on whether profits are aligned with the individual who generates them, often referred to as the principal practitioner.
In practice, PCG 2021/4 is used by the ATO to prioritise compliance activity, not to automatically impose penalties.
How the ATO Applies PCG 2021/4 in 2025
In 2025, the ATO continues to assess professional firm structures by examining both income flow and economic substance. The key question remains:
Does the allocation of profits reflect genuine commercial outcomes, or is it designed primarily to reduce tax?
The ATO looks beyond formal structures and reviews how the practice actually operates, including who controls the work, who bears risk, and who benefits financially.
The ATO Risk Zones Explained
PCG 2021/4 categorises arrangements into different risk zones.
Low Risk
These arrangements typically involve:
- reasonable remuneration paid to the principal practitioner
- profit allocations consistent with market value services
- clear evidence of capital investment or non-principal contributions
Low-risk arrangements are unlikely to attract ATO review.
Moderate Risk
Moderate risk arrangements may include:
- partial income splitting
- reliance on trusts or companies with limited justification
- remuneration that is lower than expected but still defensible
These may be reviewed if combined with other risk indicators.
High Risk
High-risk arrangements often involve:
- minimal remuneration to the principal practitioner
- large profit allocations to passive entities or family members
- circular cash flows or artificial arrangements
These are more likely to trigger ATO scrutiny and potential anti-avoidance action.
Common Issues the ATO Identifies
Under-Remuneration of the Principal Practitioner
Paying the individual generating the income significantly less than market value is one of the strongest risk signals.
Lack of Commercial Evidence
The ATO expects documentation showing why entities receive profits, including capital contributions, staff management or operational risk.
Trust and Company Structures Without Substance
Using multiple entities does not, by itself, justify profit allocation. The ATO examines whether those entities add real value.
Interaction With Division 7A
Where profits flow into companies and funds are accessed by individuals, Division 7A risks may arise. This is particularly relevant in family group structures supported by small business services.
PCG 2021/4 and Part IVA
While PCG 2021/4 itself is not law, it is closely linked to Part IVA, the general anti-avoidance rule.
If the ATO determines that an arrangement’s dominant purpose is to obtain a tax benefit, Part IVA may apply, regardless of whether the structure technically complies with other provisions.
This is why the guideline places strong emphasis on commercial reality rather than formal compliance alone.
Evidence the ATO Expects to See
To support a lower-risk position, professional firms should maintain:
- employment or service agreements
- profit distribution policies
- benchmarking data for remuneration
- trust deeds and resolutions
- financial statements showing capital and risk allocation
- records of management and operational involvement
Poor record-keeping increases the likelihood of reclassification or audit.
Practical Steps to Reduce PCG 2021/4 Risk
- Review remuneration annually against market benchmarks
- Document why profits are allocated to each entity
- Avoid structures that exist only to redirect income
- Align cash flow with reported profit allocations
- Conduct periodic independent reviews of firm structures
- Address Division 7A and trust issues early rather than retrospectively
Professional firms that proactively review their arrangements are far less likely to face ATO intervention.
What This Means for Professional Firms in 2025
PCG 2021/4 reflects a broader ATO focus on substance over structure. Professional firms that rely on outdated income splitting strategies face increasing compliance risk, while those with commercially grounded arrangements are better positioned.
As the ATO continues to refine its approach, firms should treat PCG 2021/4 as an ongoing governance consideration, not a one-off compliance exercise.
Speak With a Professional Firm Tax Adviser
If your firm uses trusts, companies or family members to allocate profits, a PCG 2021/4 review can help identify risk and strengthen compliance before issues arise.