TAX Commissioner Michael Carmody has signalled a crackdown on the use of service trusts by professional firms such as accountants and lawyers.
Speaking in Perth earlier this week to a National Institute of Accountants function, Mr Carmody said the Australian Tax Office would shortly start questioning selected firms about their service trusts.
This included instances where professional firms have no profit yet the related service trust has a healthy profit.
He said the ATO accepted service trust arrangements that were entered into for commercial reasons and with realistic, commercial charges.
“The Phillips’ case authorised the use of service trusts to provide administrative services to professional partnerships,” Mr Carmody said.
“We are not seeking to reopen the Phillips decision. However, we are currently seeing features that may tip the scale beyond what is explicable on commercial grounds.
“Very broadly, these features include arrangements that are not established on an arms length basis, commercially unrealistic charge out fees and control and other arrangements seemingly more concerned with increasing the flexibility to distribute income to family members than with operating a commercial service business.”
Specific examples include arrangements where no substantial assets such as premises and equipment are owned by the trust yet all staff, including professional staff, are employed by the service trust and charged back to the partnership.
Mr Carmody said the ATO was currently auditing a limited number of cases.
“In addition, we will be shortly issuing an initial round of between 40 and 50 questionnaires to selected accounting and legal firms seeking further details of their service trust arrangements,” he said.
“Firms have been selected on a risk basis, including an analysis of the proportion of net profit in the practice entity compared to the service trust.
“Interestingly, in at least one case the split was a nil profit for the professional practice and a healthy profit for the service trust.”
© Business News 2017. You may share content using the tools provided but do not copy and redistribute.