Service Trusts - Update on ATO Views

© July 2005 by Joe Lederman, BALDWINS Australian Lawyers and Consultants

Although on 4 May 2005 the Australian Tax Office (ATO) issued a draft ruling re-examining the tax law applicable to Service Trusts used by businesses and professional practices (Draft Taxation Ruling TR 2005/D5), the Commissioner appears to be backing-off from a more aggressive approach to the subject. Whereas paragraph 5 of the draft ruling had indicated that the review of taxpayers would be retrospective, the Tax Office has since assured a Senate Committee that there would be no retrospectivity in applying the proposed new ruling. Furthermore, the consultative timeframe on the draft ruling has been extended, and a media release by Tax Commissioner Michael Carmody on 29 June 2005, at the same time as the release of a draft ATO booklet on the subject, announced that

“Our [the ATO’s] general approach is to allow a period of 12 months for people to review their arrangements with the benefit of the guidance provided”.

The essence of the draft ruling and the subsequent pronouncements by the ATO on Service Trusts is that in order for payments to the Service Trust to be tax deductible under section 8-1 of the ITAA 1997 and not to be caught by the anti-avoidance provisions of Part IVA of the ITAA 1936:

• the service payments need to be genuinely incurred in earning assessable income and not be of non-income producing advantage,

• the service payments must be commercially reasonable and not be disproportionate or excessive in relation to the service provided;

• the service payments must not be based on arbitrary mark-ups but reflect commercial reality in the marketplace for those services;

• there must be sufficient separation between the business of the service entity and that of the business which is making the service payments, including different employees;

• there must be documentation which reflects the true transaction and

In his media release on 29 June 2005, the Commissioner emphasised that the ATO would continue its current audit program in relation to “highest risk cases”, which Mr Carmody defined as meaning “cases where the service fees paid are over $1 million and represent over 50 percent of the gross fees earned by the firm”. However, in addition, he siad the ATO would look also at “cases where there are serious questions as to whether the services were in fact provided by the service entity”.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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