1: Know why you have a service trust

Let me tell you a story with a fun multiple answer quiz:

Assume you get audited. The ATO shows up at your door and water-boards you. They ask why you set up your service trust. So why did you do it?

• I did it to save tax
• I did it for asset protection
• None of the above

If you choose (a) or (b), you need help from your accountant. Run, don’t walk.

Why is (a) wrong?

Repeat after me: Your service trust is not there to avoid tax. Etch this in your brain before reading any further. It helps you fight the urge to sing like a canary when the ATO gets out the crocodile shears.

But can’t I legitimately structure my affairs to save tax? You would think in a democracy that this is the case. But it isn’t. If the dominant purpose is to save tax then no. Remember, there is a fine difference between tax planning (legal) and tax avoidance (illegal).

The Part IVA general anti avoidance provision hovers over every action. If a reasonable person in your position believes the service trust exists solely for the purpose of avoiding tax – then think of a good place to hide your shank in jail.

Why is (b) wrong?

Cleverly (or so you think), you are adamant that your service trust is not there to save tax – you set it up for asset protection. And you’re a man of your word – you say the same thing in a suit in court (when the ATO is grilling you).

Later on, your business goes bust. Here lies the problem. You now can’t plead in the insolvency court that your service trust was there to save tax. The ATO transcripts where you swear your service trust is there for asset protection reasons don’t make good reading in the bankruptcy courts.

Why is (c) correct?

It is rarely wise to cite tax savings or asset protection as a reason for doing anything. If someone asks, service trusts are great to help your Business Succession Planning, Estate Planning and modern business structures – and they really are. Saving tax and asset protection are merely wonderful by-products.

2 – Set up your structures properly

The last thing you want to do is hand the ATO the ammunition to attack you. Poorly drafted or incorrectly implemented arrangements are the kiss of death.

So how do you set up a service trust?

• Make sure the core business structure is up-to-date. Update trust deeds and the Constitution.
• Set up the new service trust vehicle: family trust, unit trust, hybrid trust or company. You now have your service trust (or service company – quite rare). The service trust provides as many services as it can to the main business: this includes cleaning, secretarial, serviced offices, accounting, chattel leasing, property leases etc…
• Build a Service Trust Agreement. This is the ‘glue’ between the core business and the service trust. You need this so you don’t offend our preciously delicate friends at the ATO.

3 – Charge commercial rates

Remember those naughty people we spoke about at the start who got caught. Chances are they were being greedy and charging more than commercial rates. Or were lazy and failing to make the service trust look arms length.

The mantra is:

“My service trust always acts as though it is arms length and a genuine business”

Your service trust can’t be a sham or non-commercial. Forget about “mark-ups”. A commercial business doesn’t charge “mark-ups”. It charges what the market can bear. It can only charge what the market would charge in a normal arms length transaction. Not sure of what the market will bear? Then get some quotes from other businesses in that industry. Is your service trust providing exceptional quality administrative services? Then you can charge more – but only if the market would charge this amount anyway.

Phillips case is the most telling High Court authority regarding service trusts. In a subsequent tax statement the Deputy Commissioner of Taxation stated (correctly in my view):

“There may have been widespread use of service trust arrangements which involved payments that were grossly excessive in relation to the benefit conferred by the service arrangement.”

The Deputy Commissioner is correct. Service trusts are completely valid – as long as they are on valid commercial grounds. But what are valid commercial grounds?

4: Get professional help

Invest in help from your accountant. Their knowledge is invaluable and saves you more than just money.

5: Do what your documents say

If you have an agreement that says that the service trust will provide certain services, don’t let the main business entity pay for them directly. If you treat your two businesses as though they are really just one, don’t be surprised if the Tax Office does the same.

Project Wickenby targets a range of tax avoidance schemes, including the use of offshore tax havens.

“Phoenix” companies are those which deliberately go into liquidation to avoid tax and other responsibilities, such as superannuation payments and service leave entitlements owed to employees. They then re-emerge as another corporate entity, but with largely the same management.

During the year ended 30 June 2009:

• Wickenby raised $230 million in tax liabilities and collected $40 million in cash. In addition Wickenby collected $159 million in tax collected in subsequent years from people who have been subject to Wickenby action.
• Targeting of phoenix practices also raised more than $83 million in tax and penalties within Australia.

Project to date, Wickenby has raised $406 million in tax liabilities and collected $117 million in cash. In addition $235 million in tax has been collected in subsequent years from people who have been subject to Wickenby action. Wickenby agencies have also been responsible for restraining $76 million of assets under proceeds of crime legislation.

The government has allocated  $122 million extra funding for Project Wickenby investigations over the next three years.

The audit results and other key details in the fight against tax crime are contained in a new online magazine published by the ATO Targeting tax crime is available at www.ato.gov.au/targetingtaxcrime

“Tax evasion using secrecy havens to hide assets and to conceal income is a serious crime that affects all Australians through losses in public funding and services,” Mr Lawler said.
“The ACC is working collaboratively with Project Wickenby partners by providing them with intelligence to inform our response to abusive tax haven arrangements.”

This operation is one of nine investigations being undertaken as part of the ACC’s Wickenby Matters Determination where the ACC is investigating tax avoidance, tax evasion and large-scale money laundering by a number of Australian promoters and participants.
Project Wickenby is a cooperative partnership between the Australian Taxation Office, Australian Federal Police, Australian Crime Commission, Australian Securities and Investments Commission, Commonwealth Director of Public Prosecutions with support from the Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian Government Solicitor.

As at February 2009, Project Wickenby investigations have resulted in:
• 23 criminal investigations
• 3 convictions
• 40 people charged on indictable offences
• 444 completed tax audits (and a further 472 underway)
• $287.31 million in tax liabilities raised
• $90.81 million in tax collected (as well as $74.76 million in improved compliance by people reviewed under Project Wickenby)
• $75.7 million worth of assets restrained.

Source http://www.crimecommission.gov.au

The Australian Federal Police (AFP) has charged a 56-year-old man over a multi-million dollar offshore tax avoidance scheme.

Federal agents arrested the Queensland man yesterday afternoon soon after he arrived in Australia on a flight from Vanuatu.

The AFP will allege the man promoted an asset stripping scheme designed to leave Australian companies in a position unable to pay their tax liabilities.

The alleged fraud involved the promotion of tax avoidance through an intricate network of companies in Australia and Vanuatu.

The AFP investigation began after a referral from the Australian Tax Office, which is investigating offshore tax evasion schemes.

AFP National Manager Economic and Special Operations Warren Gray said the joint investigation has identified 69 companies from Queensland, NSW, Victoria, South Australia and the ACT as participants in the asset stripping arrangement, which involves tax fraud in excess of $10 million.

“This operation pre-dates Project Wickenby but it is another example of how the AFP, in concert with its Project Wickenby partners, continues to focus on arrangements involving offshore secrecy havens and money laundering, to ensure those involved pay their fair share of tax,” Commander Gray said.

Two men were arrested in May and are currently before the courts on charges relating to the scheme.

The man was bailed to appear at Maroochydore Magistrates Court on Thursday 14 August charged with conspiracy to defraud the Commonwealth under Section 86(2) of the Crimes Act 1914.

This offence carries a maximum penalty of 20 years imprisonment and/or a fine of $220,000.