Many professional practice owners including medical practitioners and pharmacists enter into an agreement with an associated entity to provide services to the practice, such as the provision of staff, administrative or clerical services, premises, plant or equipment in consideration for the payment of a services fee.
Depending on its structure, these service arrangements may have a number of potential benefits including asset protection, quarantining business risk and tax planning.
The particular service arrangements for a practice can vary widely, however if set up in accordance with Tax Ruling TR 2006/2 they can deliver advantages to a practice owner to facilitate claiming a deduction for service fees and charges as expenditure which the practice incurs in the conduct of its professional services.
Service fees and charges are usually calculated by way of mark-up on the base costs incurred by the service entity. Based on the ATO’s guidance, it is important that service fees are paid for the provision of services and equipment in the production of income and that the fees charged are commercially reasonable and properly calculated.
The ATO’s guidance in Your Service Entity Arrangements provides some parameters in determining whether service fees have been correctly calculated.
Ultimately the deductibility of service fees is a question of fact, however if ambiguities arise and a service might otherwise be characterised as being for some other purpose, it may invite a presumption that has been established solely for the purpose of obtaining a tax benefit.
There have been recent cases where the ATO has successfully challenged the deductibility of alleged service fees due to a lack of evidence which otherwise confirms that the fees were appropriate or that the service arrangement was legitimate.
Review of service arrangements?
Service agreements between a practice and an associated service entity can be a useful addition to your business structure and if established properly, the payments you make under your service arrangements can be deductible under income tax law.
Tax Ruling 2006/2 was issued 11 years ago, and many practice owners may not have recently reviewed their service arrangements for compliance with the ATO’s guidance in Your Service Entity Arrangements, which was last modified in May 2013.
Should you require a review of your service arrangements, advice on the preparation of a new service agreement, or assistance with strategies involving a service entity, please contact our Principal Mark Fitzgerald.