Archived News - 2005
2005-08-25
Service Arrangements
It's common for professionals (like lawyers, accountants, doctors and dentists) to set up a separate entity (e.g., a service trust) to provide the business with staff, recruitment, clerical, administrative and other office services.
Generally, there's nothing wrong with this type of service arrangement, but if you have one, you should be aware that the ATO will be looking at it over the next 12 months.
What's the problem?
The Tax Office is concerned that some of these arrangements may be set up to transfer profits rather than pay for actual services and wants to be satisfied that the services are in fact delivered, and at a realistic fee.
IN THE ATO'S SIGHTS
The ATO will target fees and charges that are:
- disproportionate or excessive;
- calculated using arbitrary or unrealistic fixed mark-ups; and/or
- charged without clear evidence that the service arrangement adds value or performs any necessary functions for your business.
What do I need to do?
If you use a service arrangement, you need to get advice to make sure it comes within current ATO guidelines.
The ATO is allowing a period of 12 months for people to review these arrangements. At the end of this period, if your service arrangement is generally in line with ATO guidelines, it's unlikely that the ATO will audit your service arrangement.
Even if the Tax Office does audit you, it's best to be prepared. Here's a checklist of some of the things you should get advice on:
- Are the services provided connected with your income earning activities?
- Is all business with your service entity done on an arms length basis?
- Are the service fees and charges commercially realistic?
- Do you have all the required documentation in place (e.g., service agreement, minutes, tax invoices etc)?