Service Trusts - Handle With Care

Many professionals operate a service entity as part of their business structure.  This is a sensible approach as these service entities afford the taxpayer with the added benefit of providing an appropriate vehicle for asset protection as well as greater flexibility with income tax planning.

However, since 2005 these types of arrangements have come under closer scrutiny by the Australian Tax Office (ATO) and have since remained on the ATO's radar screen as a high risk structure for an audit.

In issuing its compliance program for the 2007/2008 financial year, the ATO has again identified that they will continue close scrutiny of taxpayers using these types of structures.

The ATO has made it clear what elements it considers would place service entities at risk.  How close the ATO will look will look at this entities will depend on the following elements:

• the service entity is not commercially based;
• the service arrangement is not a distinct separate business;
• there is inadequate documentation recording the administration and management of the service entity in the provision of its service to the business.

So what can be done to lessen your risk of audit?

We recommend as a minimum that you ensure:

• you have a written agreement in place setting out the arrangement between the service entity and business;
• that the agreement is regularly reviewed;
• that you raise periodic tax invoices;
• that your agreement documents service fee calculations;
• there are separate accounting systems in place; and
• you retain proper and complete business records.

Have you reviewed your, or your clients, service agreement to ensure it is in-line with the ATO’s expectations?

If you have any questions relating to the above, or any questions surrounding your clients service entities, please do not hesitate to contact David Walters or Grahame Kent on (02) 6206 1300,

• Send an email to David Walters
• Send an email to Grahame Kent