ATO issues ruling on service companies

The Australian Tax Office has issued a final ruling
and guide to help professional firms determine if fees paid under a service arrangement are tax deductible.

The ruling confirms the Tax Office’s long standing view that service arrangements are acceptable provided they are entered into for commercial reasons – and that the fees charged are not grossly excessive.

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.

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.

Professionals have until 30 April 2007 to review their arrangements in light of the final ruling and guidelines by the Tax Office.

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