Thomson Hall, Campbelltown Accountants
Small Business tax and accounting
The ATO has released the most recent Project Wickenby results. As at 31 January 2012 the taskforce had achieved:
There are also 12 criminal investigations currently in progress.
The tax office has been collecting building industry data as part of their pilot building industry suppliers data-matching project to identify and address non-compliance with tax obligations.
Data obtained for the building services industry data-matching program includes:
Data matching is one of the main indicators the ATO uses to detect businesses participating in the cash economy.
The ATO has obtained details of individuals or businesses that hold a trade account with purchases between $10,000 and $3 million in the 2009-10 financial year from a major Australian warehouse chain.
They have also obtained complaints and/or licensing information for the 2009-10 and 2010-11 financial years from:
Building industry data is being used to pilot the approach of using supplier data to identify businesses in the building industry who use cash transactions to avoid their tax obligations or who fail to report some or all cash transactions.
The data is used to identify:
Where they identify taxpayers that appear to have not declared all, or part, of their income the ATO will either:
In cases where individuals or businesses fail to comply with their obligations – even after being reminded of them – other actions may be appropriate, including default assessments of tax liabilities.
Many business people use a service trust to supply the use of equipment, staff, premises and administration services to their main business entity. The ATO has been stated concerns about them for decades but has only become active in the last few years.
Law Central have put together a useful guide on how to avoid coming unstuck in the even of a tax audit or liquidation. Below is a combination of their advice plus some of ours.
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?
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.
