After consultation with professional and industry groups, the ATO last week issued a final ruling and guide to help law firms, mostly those with more than ten partners, as well as accountants and medical professionals, to determine whether fees paid under a service arrangement are tax deductible.

Tax Commissioner Michael D’Ascenzo said that since Federal Commissioner of Taxation v Phillips (1978), the Tax Office has accepted service arrangements as long as they were entered into for commercial reasons.

“However, we found deductions were being claimed for fees and charges which were grossly excessive relative to what most people would expect to pay for the services provided,” said D’Ascenzo.

“The final ruling confirms our view of the law that service fees will be deductible if the service arrangements are entered into for commercial reasons and the service fees are not grossly excessive,” he said.

Kelvin Fitzalan, Deloitte tax partner, said the ruling is a long time coming, but that his firm felt it contained no surprises. “The rule of thumb of what is an appropriate mark-up is quite low at three to five per cent but it is what we were expecting,” he said.

“The Commissioner has acknowledged that higher values could apply but at the same time made it clear that would need to be backed up by rigorous analysis.

“The firms this will affect most are those with practices of 10 or more partners, and I would strongly urge them to seek independent advice from an appropriately qualified specialist.”

A guide, also released by the ATO, is designed to help firms assess their own situation and provide them with “practical certainty”. But Fitzalan recommended that professionals using service trusts get advice to determine whether fees charged under current arrangements are appropriate. They cannot be disproportionate in relation to the benefits received, he said.

“Services performed by the trust must be distinct from the recipients’ activities. For example, the trust employs specialist staff to undertake the administrative functions relating to the trust,” he said.

“Where the size of the fees is not explained from a practical or business point of view, the Tax Commissioner may undertake a broader inquiry of the arrangements.”