Date Event Comment
1978 F C of T v Phillips The Full Federal Court affirms that fees paid to a related service entity are deductible provided they are commercially realistic.
1978 IT 276 issued to Tax Office staff The Commissioner stated that the decision in Phillips was not seen as requiring any alteration to existing policy concerning payments of this nature.
1981 IT 25 issued to Tax Office staff Paragraph 12 of this ruling noted that in a considerable number of cases service arrangements had been entered into by medical practitioners and that these arrangements generally complied with the official guidelines in this area and had been approved by the Tax Office's branch offices. Made available to the public in 1984.
1981 General anti-avoidance rules introduced (Part IVA)
1981 Comments made at a seminar by Deputy Commissioner of Taxation Mr Nolan Deputy Commissioner of Taxation Mr Nolan stated that Part IVA would not apply to service trusts if the mark-up was commercially realistic. If a taxpayer was in doubt they should seek a ruling from the Commissioner.
1983 IT 276 issued to public under Freedom of Information Act 1982 IT 276 made publicly available in September 1983.
1985 Trust Assessing Manual published by CCH Australia Limited Assessing manuals were used within the Tax Office to give its assessors a guide to both the procedural and technical aspects of assessing income tax returns.
1985/6 Introduction of self assessment The Tax Office does not review income tax returns for individuals, partnerships and trusts when assessing income tax returns.
1986 Address by Commissioner to Taxation Institute of Australia (TIA) Queensland Division's Annual Tax Convention The Commissioner stated that 'the operation of a service company or trust where the charges are commercially realistic does not attract the operation of section 260.
1988-89 IT 2494, IT2503 and IT2531 issued These rulings all refer to service entity arrangements. IT 2503 confirms that the comments in IT 25 still applied.
1990 and 1991 Opinions issued to major accounting firm These opinions confirmed that mark-ups of proposed service fees were acceptable and that these mark-ups could be applied to clients of the firm as well as to the firm itself. These mark-ups were consistent with those in the Tax Office's previous trust assessing manual.
1991 Fletcher v FCT handed down This is a High Court decision on the deductibility of expenses generally. The Tax Office has stated to the Inspector-General that it considers that this case dealt with the question of purpose which was central to the Phillips decision. The Tax Office did not however refer to the impact of this case on service entities in any ruling until the issue of the draft ruling on service entities in May 2005.
Mar 1994 Paper delivered by tax officer (Peter O'Donohue) to TIA SA Annual Convention This paper is titled 'The ATO perspective on Phillips' and indicates that the Commissioner was not specifically targeting service trust arrangements in the audit program at that time. However, the paper states that fees in excess of commercially realistic levels detected in the course of an audit would be looked at. The paper also states that the ATO does not endorse any particular percentage as a suitable level for mark-ups.
May 1994 Tax Office issued Taxation Determination TD 94/45, together with an addendum to Taxation Ruling TR 92/20 TD 94/45 states that in the Tax Office's view, Tax Office Assessing Handbooks cannot be relied on as evidence of the Tax Office's position. Taxpayers who wish to know the current ATO position should refer to Tax Office documents such as Taxation Rulings and Determinations or seek a private binding ruling.
1996 Tax Office's Service Industry Team in Large Business commences a scoping/data mining review of the accounting and legal profession Phillips case service arrangements are one issue identified out of this review.
1998 Management of the accounting & legal project is brought within the Aggressive Tax Planning area of the Tax Office Project assistance was largely from staff working in the Tax Office's Large Business Area.
May 1998 Tax Office sends questionnaires to 10 legal and accounting firms covering the periods from 1 July 1995 to 31 March 1998 Letters are sent to major accounting associations advising those bodies of the review. The key areas for review were wider than service entities.
May 1998 Paper delivered by tax officer (Stuart Forsyth) to Taxation Institute of Australia Queensland State Convention

The paper is titled 'Professional income structures and personal service income'

The paper noted that some taxpayers believe that a rule of thumb exists that a 50 per cent mark-up on wages and 15 per cent mark-up on all other costs will always be accepted by the ATO. However, the Tax Office considers that all cases have to be determined on their own facts.

Nov 1998 Paper delivered by tax officer (Chandra Sharma) to TIA Sunrise Seminar, South Australian Division The paper is titled 'Service Entities (Trusts/Companies) The Commissioner's Perspective'.
Apr 1999 Tax Office prepares an analysis on the results of its work on service entities to date
Oct-Nov 1999 Tax Office notifies two large accounting firms of its intention to audit a number of issues, including Phillips service arrangements This followed on from responses to the May 1998 questionnaires, where service entity arrangements, among other items, were identified as an issue which should be audited by the Tax Office to ascertain the commerciality of service fee pricing and the extent of the use of service entities for income alienation.
Jan-Feb 2000 Fieldwork commenced in relation to audits on two large accounting firms
29 Feb 2000 Strategy paper developed by LB area in conjunction with ATP area to undertake 14 audits of LB accounting & legal firms partners who were participating in Phillips and Everett type arrangements
Mar-Oct 2000 Three internal Tax Office meetings are held about Phillips and Everett arrangements. ATO participants include LB, OCTC and ATP representatives and a number of external consultants
Feb 2000-Dec 2002 Field phase in relation to audits on two large accounting firms, culminating in the issue of position papers. The field phase consisted of several meetings between the Tax Office audit teams and the accounting firms, the issue and response to numerous information requests / questionnaires, and preparation/issue of position papers.
Feb 2001 OCTC and LB representatives meet to discuss application of Part IVA to Phillips and Everett arrangements
Mar 2001 LB prepare an internal minute outlining four possible strategies for dealing with Phillips and Everett arrangements, indicating that it prefers the strategy of the Commissioner announcing that Phillips arrangements are no longer acceptable and that OCTC's preferred view is to litigate on a case by case basis.

The four strategies are:

  1. The Commissioner publicly announces that Phillips/Everett type arrangements are no longer acceptable to the Commissioner. Part of this strategy would involve the Commissioner seeking independent counsel advice on whether Part IVA applies to Phillips and Everett arrangements. If counsel decides Part IVA applies, IT 276 and related rulings are withdrawn.
  2. Litigating Phillip and Everett arrangements on a case by case basis.
  3. Do nothing.
  4. Seek legislative change.

The minute indicates that the 'do nothing' option is imprudent and that legislative change, while the most preferred option, would be difficult to implement because:

  1. the complexity of the issue would cause drafting issues;
  2. it would be difficult to get on the agenda with legislative resources that were at the time devoted to business tax reform; and
  3. the government would expect the Commissioner to first fully test his powers under Part IVA.
Nov 2001 Tax Office issues 2001 Annual Report

At page 54 the Commissioner noted that the Tax Office was reviewing some accounting and legal firms and these investigations uncovered that one arrangement used to minimise tax was payments by the partnership to service trusts.

The Commissioner noted that:

'In accordance with Taxation Ruling IT 276, payments to service trusts which are commercially realistic will not be challenged. We have concerns in some cases under examination whether the service trust arrangements are commercial and effective for tax purposes.'

Mar 2002 Internal ATO workshop to discuss service trusts cases under audit At this workshop the Tax Office made a decision to look at the pricing structures of the two cases under audit and to see if the service fees paid were commercially realistic. The Tax Office decides to engage an ATO economist to establish what are current commercial rates for independent businesses carrying on similar activities to service trusts (occurs during 2002-2003).
Apr 2002 Proposal to issue a short tax determination that arbitrary mark-ups for service arrangements are not acceptable and that services provided must be provided at commercially justified rates The proposal was made in an email by a Deputy Chief Tax Counsel.
Apr 2002 Article published in Institute of Chartered Accountants magazine (CA Charter) by a tax officer (Kevin Fitzpatrick) The article noted concerns that service arrangements were being used in a manner seemingly beyond the scope of the decision in the Phillips case. Referring to a particular case, concerns were said to include the reasonableness of the mark-ups.
29 Jul 2002 Commissioner makes speech to Financial Review- Leaders' Luncheon The topic of the speech was 'Issues Confronting Australia's Tax System'. In this speech he stated that Phillips case authorised the use of service trusts to provide administrative services to professional partnerships but that lately the Tax Office had seen cases where the arrangements have varied significantly from those reflected in the Phillips case. He also stated that the Tax Office was not seeking to re-open the Phillips decision but was examining whether the cases have moved beyond what was accepted in the Phillips case as explicable on commercial grounds.
5 Sep 2002 NTLG Meeting The professional bodies raised the issue of service entity arrangements at the NTLG meeting held in September 2002 and in particular the question of reasonable rates. This flowed from the Commissioner of Taxation's address at the Leaders' Luncheon on 29 July 2002. Industry association members of the NTLG indicated that any Tax Office guidelines which may impact on professional firms would benefit from being developed in consultation with professional bodies. The Tax Office indicated that a ruling was not in planning, but feedback was sought on this and other appropriate strategies to deal with concerns about service entity arrangements.
Nov 2002 Position papers presented to two accounting firms being audited
Dec 2002 Phillips Scan Report

As a consequence of serious questions about whether the service fees paid by legal and accounting partnerships were at commercially realistic rates and that audit findings were confirming the concerns set out in the earlier Legal and Accounting Sector Project Plans (1998), the Tax Office decides to review the whole legal and accounting industry on a project basis with a focus on commercial profit outcomes.

This review resulted in the Phillips Scan Report and led to the Tax Office commencing further work to identify cases where they considered there was a high risk that service trust arrangements were not being implemented in accordance with the law

Dec 2002 The Tax Office decides to issue public guidance on service entities
Mar 2003 NTLG meeting The Tax-Office prepared minutes of the meeting note that, despite a request at the September 2002 NTLG meeting, no response had been provided to the Tax Office concerning appropriate strategies to deal with concerns about service entity arrangements. The minutes state that the Tax Office advised that review of service arrangements in the legal and accounting sectors would continue and that, on completion, it anticipated issuing a discussion paper and/or public ruling setting out the Tax Office view on the way forward. The minutes also state that the professional bodies' assistance was sought in developing strategies and that features of service arrangements the Tax Office was seeing raised issues as to whether the service fees were commercially realistic. A table is attached to these minutes detailing some of the differences between the service arrangements in Phillips and arrangements more recently encountered.
Jun 2003 Commissioner makes speech to the NIA in Perth WA The topic of the speech was 'Future Directions in Tax Administration (A Relationship of Mutual Dependency)'. The Commissioner presented a table which summarised some of the differences between the Phillips case and what was appearing in current arrangements. He foreshadowed the issue of 40-50 questionnaires to accounting and legal firms who had been selected based on an analysis of the proportion of net profit in the service entity as compared to the net profit in the partnership. The speech was reported on pages 1 and 4 of the Australian Financial Review.
Jun 2003 Tax Office sends questionnaires referred to by the Commissioner to 56 accounting and legal firms

These firms were a sample of legal and accounting firms identified by the Phillips Scan of 2002.

Draft questionnaires are issued to professional bodies which were members of the NTLG and their comments sought. No comments or input is received by the Tax Office.

The covering letter to the questionnaire advised that the firms are not subject to audit.

Responses are received over the following six months.

Oct 2003 Tax Office Steering Committee formed and first meeting held

Objectives of the meeting were:

  1. to recommend a practice statement or ruling;
  2. to consider further audit work;
  3. to discuss questionnaire results;
  4. to consider development of a go-forward strategy for executive approval

No clear decision is made at this time on whether the Tax Office view would issue as a practice statement or a draft public ruling

Oct 2003 Public Rulings Panel decision is made that the Tax Office view on service entity arrangements should be expressed in a ruling and not a practice statement TCN view was that guidance should be in the form of a practice statement while the view of the business area was that a public ruling was preferable, given its potential to have a greater impact on compliance for the target population
Oct 2003 Drafting of ruling commences
Nov 2003 Minute issued by Office of Chief Tax Counsel placing a restriction on advice issuing on service arrangements

The Minute was issued to Tax Office staff restricting the issue of advice in relation to the deductibility of expenses for any cases with similar features to Phillips service trust arrangements.

The ATO has advised that this Minute was not intended to prevent business as usual in relation to the provision of advice but to ensure consistency of advice.

Dec 2003 Public Rulings Panel meeting The initial draft public ruling was discussed at this meeting.
Dec 2003 Settlement agreement executed for one of accounting firms subject to audit
Dec 2003 NTLG meeting The NTLG was invited to form a subgroup to consult with the Tax Office in development of the draft ruling. This consultation process took more than 12 months.
Feb 2004 Public Rulings Panel meeting A revised and more advanced draft of the ruling is discussed, which includes economic issues.
Mar 2004 NTLG meeting

The minutes of the meeting confirmed that a NTLG subgroup was to be formed to consult with the Tax Office on the proposed public ruling on service entity arrangements.

Additionally, the Tax Office advised that it was continuing to analyse the responses received from the questionnaire process.

Mar 2004 Public Rulings Panel meeting Further revisions are made to the draft ruling especially to address concerns about an undue emphasis on transfer pricing
May 2004 Public Rulings Panel approves release of draft ruling to NTLG subgroup on a confidential basis
May 2004 Draft public ruling circulated to NTLG subgroup
May 2004 ATO prepares report on results of questionnaires The report lists questionnaire results and analysis and ATO actions to be taken following survey results, including the selection of a pool of potential audit cases
Jul 2004 Settlement agreement finalised for second accounting firm subject to audit
Aug 2004 Tax Office's Compliance Program for 2004-05 is released

At page 20 of this Program the Tax Office advised that in the small to medium enterprises section service trust arrangements within the legal and accounting profession continued to be of concern and that a number of firms' arrangements are being examined. The Program stated that this activity would be supported by an educational program following the issue of a public ruling supplementing IT 276.

At page 20 of this Program the Program stated that for large business the Tax Office audited a number of firms last year and is now examining these arrangements across a wider group of legal and accounting firms.

Sep 2004 NTLG meeting The minutes confirm that a submission on the draft ruling had been received by participating members of the NTLG subgroup. The meeting was advised that two workshops had been scheduled with NTLG members to discuss the issues raised in the submissions.
8 & 10 Sep 2004 Two NTLG subgroup workshops are held
21 Sep 2004 NTLG members participating in the subgroup raise concerns about the content of the draft ruling and the conduct of confidential discussions in a letter to the Commissioner
Late 2004 Management of service entity arrangements within the Tax Office is transferred from the Large Business area of the Tax Office to the Small Business area of the Tax Office
30 Sept 2004 Draft ruling is revised and resubmitted to the Public Rulings Panel. Commissioner has decided to issue a separate compliance booklet.
13 Oct 2004 Commissioner provides reply to the NTLG members in response to consultation process concerns The Commissioner gives assurance that copies of the draft booklet and draft ruling would be released to NTLG members for further consultation prior to public release.
21 Oct 2004 Second Commissioner-Law revises the ruling
15 Dec 2004 A draft ruling and draft compliance booklet are issued to the NTLG subgroup for comments by Feb 2005
Feb-Mar 2005 Draft ruling and booklet are further revised by a Second Commissioner-Law and the Deputy Commissioner, Small Business These revisions followed consideration of submissions received from the NTLG subgroup.
17 Mar 2005 OCTC area of the Tax Office prepares a report on how to deal with audit cases in hand in terms of position papers and settlements The report indicates a preference for a draft voluntary disclosure package to issue with ruling and booklet.
Mar 2005 NTLG meeting The professional bodies sought release of the draft ruling, but were advised that the ruling would need to be referred to the next meeting of the Public Rulings Panel for approval to release. NTLG members sought information about a further round of consultation but the Commissioner did not commit to this.
30 Mar 2005 Public Rulings Panel meeting The draft ruling is considered by the panel. On 6 April the Second Commissioner clears the draft ruling for release.
4 May 2005 Publication of draft ruling on service entity arrangements — TR 2005/D5
25 May 2005 Advance release of draft booklet to NTLG members
2 Jun 2005 Commissioner indicates to a Senate Economic Committee (SEC) that the Tax Office would not audit prior years where the service fees were less than $1 million and less than 50 per cent of the gross fees of the professional firm
29 Jun 2005 Issue to the public of draft booklet on service entity arrangements The booklet confirms that the Tax Office would not audit prior years where the service fees were less than $1 million and represented less than 50 per cent of the gross fees of the professional firm.
29 July 2005 Submissions received on draft ruling and draft booklet A compendium of submissions and ATO responses is subsequently prepared.
Aug 2005 ATPF meeting The Tax Office advised the meeting that it would recommence auditing non-high risk service entity cases from July 2006.
Aug 2005 NTLG SME subcommittee meeting The Tax Office advised the meeting that taxpayers would have a full 12 months period of grace from the date of issue of the final ruling to restructure their affairs.
21 Sep 2005 Meeting between Institute of Chartered Accountants (ICAA) and Tax Office senior executives The meeting was to discuss progress on the ruling and guidance booklet. At this meeting the Commissioner agrees to introduce a third criterion for auditing prior year service entity arrangements, namely that the profits of the service entity were more than 50 per cent of the combined profits of the service entity and professional firm.
Oct 2005 Public Rulings Panel meeting The panel's recommendations are taken into account in revising the draft ruling.
Oct 2005 Tax Office has phone hook up with NTLG members and others on draft booklet figures The purpose of the hook-up was to discuss the figures, referred to in the draft booklet as publicly available, on which the Tax Office arrived at its acceptable margins and levels of profitability for labour hire services.
Oct 2005 ICAA submits several papers to the Tax Office
Oct 2005 Regular consultation with the Australian Medical Association (AMA) commences. AMA submits papers to the Tax Office
Oct/Nov 2005 Consultant Economist engaged
Nov 2005-Mar 2006 Consultant Economist reports Various reports are received from the consultant economist, including the suitability of benchmarking on a net or gross mark-up basis, comparative benchmarks for certain services, and commentary on the Tax Office's econometric work.
3 Nov 2005 Commissioner makes statement to Senate Estimates Committee that a new third requirement would be added for service entity arrangements to be considered a high risk case The new third requirement was that the profit of the service entity had to be more than 50 per cent of the combined profits of the service entity and professional firm. This criterion was added to the original two criteria for high risk audit cases. These original criteria were that the service fees had to be more than $1 million and that these fees had to represent more than 50 per cent of the gross income of the professional firm.
12 Dec 2005 NTLG meeting NTLG members requested that the Tax Office hold back the ruling so that it be issued together with the guidance booklet.
Dec 2005 Second Commissioner- Law approves the ruling
Jan 06 New Tax Office rulings regime implemented New regime is the result of Treasury's 2004 Review of Aspects of Income Tax Self Assessment (RoSA)
17 Feb 2006 Tax Office holds meeting with several general practitioners in Melbourne The meeting was organised by the AMA at the request of the Tax Office. The meeting sought to independently verify information tendered in submissions concerning the medical profession.
Feb 2006 Further representations from ICAA
Feb 2006 Minutes of NTLG's SME subcommittee are published The minutes indicate that taxpayers would have a full 12 months period of grace from the date of issue of the final ruling to restructure their affairs.
Mar-Apr 2006 ATO has further consultation with AMA regarding booklet rates
April 2006 Issue to the public of final ruling on service entity arrangements (TR 2006/2) and accompanying booklet (Your service entity arrangements)