We recommend that you review your service arrangement if you:
- are dealing with an associated service entity and you have entered into an arrangement without fully considering whether the benefits passing to your business under the service arrangement will assist you to conduct your income earning activities or business
- have not taken steps to satisfy yourself that the service fees and charges which you have agreed to pay are not disproportionate or grossly excessive in relation to the benefits passing to your business under the service arrangement, and/or
- are not sure whether you have maintained adequate records on the service arrangement and its perceived benefits.
It will be critical for you to review your service arrangement if one or more of the following has occurred.
- You have agreed to pay service fees and charges that are disproportionate or grossly excessive in relation to the benefits conferred on your business by the service arrangement, particularly if the profit outcomes in the service entity are high relative to either:
- the profit outcomes achieved by independent companies engaged in the provision of the same or similar services to the service entity, or
- the profit outcomes you have achieved given the relative risks you have assumed and functions you have performed.
- You have agreed to pay service fees and charges calculated by the service entity without regard to the value of the services it provides, particularly if:
- you have agreed to pay service fees and charges using an arbitrary or fixed mark-up on some or all of the costs of the service entity on a basis that has no discernible connection with the value or nature of the services provided
- you have effectively guaranteed the service entity a certain profit outcome without obvious commercial explanation, or
- you have agreed to pay service fees and charges calculated by the service entity applying mark-ups to private or domestic expenses it has incurred for the benefit of you or your associates.
- You have not clearly separated or distinguished the business you are carrying on from the business carried on by the service entity, particularly if:
- there is no evidence that the service entity has added any value to your business
- there is no evidence that the service entity has performed any substantive functions for your business, or
- there is no evidence that the services provided were conducted by the service entity.
- You have failed to maintain adequate records that give evidence of the service arrangement and its perceived benefits, particularly if:
- you cannot substantiate the existence of the arrangement, or
- the documentation is not consistent with the business services actually provided.
Once you have completed your review and considered our interpretation of the relevant law as discussed in taxation rulings IT 276 and TR 2006/2 you may decide that your service arrangement needs to be changed. We provide information about indicative service fees in this guide.