Queensland Law Society Media Release

ATO’s Final Ruling and Guide in relation to Service Entities

Members should now be aware that the ATO has recently released its Final Ruling and Guide on the deductibility of service fees paid to associated service entities, commonly known as Phillips arrangements.

This Ruling considers the operation of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to service arrangements between associated entities of the kind considered in Taxation Ruling IT 276 and supplements that Ruling by providing further guidance on the matter. [ATO Final Ruling re Service Entities]

The Guide includes indicative commercial fees for typical services provided by service entities (at pages 15 and 16) and, by way of Case Studies, indicates what arrangements would be likely to attract a tax audit. [ATO Final Guide re Service Entities]

Higher risk cases which will continue to be subject to the ATO audit program include those where:

• Service fee expenses are over $1 million;
• Service fee expenses represent over 50% of gross fees or business income earned;
• Net profit of the service entity (or service entities) represents over 50% of the combined net profit of the entities involved; and
• Those which raise serious questions as to whether the services were in fact provided by the service entity.

Some good news is that members have until 30 April 2007 to review their arrangements in light of the Final Ruling and Guidelines by the ATO.

I would strongly urge all members who utilise a service entity to read this document and undertake a review of their arrangements in light of the Commissioner’s views.

Peter Carne
CEO
Queensland Law Society