• Comparable and indicative service fees for certain service arrangements

    In this chapter we provide market rates that we consider are commercial benchmarks for the typical service arrangements described. These rates are based on our current findings and commerciality of rates can change over time. We also provide higher indicative rates that reflect a degree of divergence from comparable market rates, above which we consider there to be a level of tax compliance risk that supports an audit.

    Individual circumstances will be taken into account where:

    • arrangements exceed these indicative rates, or
    • the characteristics of the arrangement differ significantly.

    You will have the opportunity to explain these circumstances, and why you consider your payments to have an objective commercial explanation before any adjustment is made in relation to your arrangement.

    Higher rates can be acceptable

    Some reasons that higher rates may be acceptable include:

    • industry specific comparable data
    • specialised or highly skilled nature of the service provided
    • the extent to which services are provided in excess of comparable third party arrangements
    • the economic contribution to profits of the main business that is attributable to the activities of the service entity (the activities of on-hired staff are not activities of the service entity), and
    • level of business risk associated with the activities of the service entity and the nature of the service model used.

    Comparable market rates

    Service fees at the following comparable rates for the typical services are considered to be appropriate commercial benchmark rates where the arrangement has the characteristics described. If your arrangement involves fees and charges not disproportionate or grossly in excess of these rates, the expenses will be accepted if the arrangement has the characteristics described, and the services have a relevant connection with your business.

    Higher rates may be acceptable if appropriate evidence is provided. We acknowledge that further enquiry can establish that rates higher than those we have found may ultimately be found to be deductible. This is relevant in our approach to risk assessment and audit case selection.

    It is not possible to provide general advice on comparable market rates for gross mark-up on cost due to the diversity of circumstances behind different companies' pricing models.

     

    Arrangement

    Characteristics

    Fees and charges

    Labour hire - temporary staff

    • the service entity employs staff on a casual basis or on short-term employment contracts, where:
      • a casual employee is a person not entitled to holiday pay or sick leave, and
      • a short-term employment contract is an employment contract the duration of which is, or is reasonably expected by the employee, to be less than 12 months
       
    • the service entity on-hires the staff to you for a limited period under a hiring contract that sets out your respective rights and obligations regarding the staff
    • you pay a service charge which is calculated as a multiple of the hours worked and an hourly rate specified in the hiring contract
    • the service entity meets the costs of premises and equipment it uses and employs its own managers and HR staff (who are not on-hired to you in relation to the service arrangement) who are responsible for recruiting, employing, administering and on-hiring the temporary staff, and
    • the service entity, and no other entity, meets all the costs associated with carrying on its activities out and only out of the fees it earns. These include rent on its premises, purchase and hire of items of office equipment, costs of its own office management and staff, advertising, hospitality and travel, insurance, legal expenses, leave entitlements, cleaning and maintenance, utilities, and depreciation.
     

    Comparable rate

    • Net mark-up on costs - labour hire fees that result in the service entity deriving a net mark-up not exceeding 5% on the direct and indirect (note 1) operating costs associated with its on-hiring of the temporary staff.
     

    Labour hire - permanent staff

    • the service entity employs staff on a permanent basis or on long-term employment contracts, where
      • a permanent employee is a person who is entitled to holiday pay or sick leave, and
      • a long-term employment contract is an employment contract the duration of which is, or is reasonably expected by the employee to be, equal to or greater than 12 months
       
    • the service entity on-hires the staff to you for a nominated period under a hiring contract that sets out your respective rights and obligations regarding the staff
    • you pay a service charge which is calculated at a rate specified in the hiring contract
    • the service entity meets the costs of premises and equipment and employs its own managers and HR staff (who are not on-hired to you in relation to the service arrangement) who are responsible for recruiting, employing, administering and on-hiring the permanent staff, and
    • the service entity, and no other entity, meets all the costs associated with carrying on its activities out and only out of the fees it earns. These include rent on its premises, purchase and hire of items of office equipment, costs of its own office management and staff, advertising, hospitality and travel, insurance, legal expenses, leave entitlements, cleaning and maintenance, utilities, and depreciation.
     

    Comparable rate

    • Net mark-up on costs - labour hire fees that result in the service entity deriving a net mark-up not exceeding 3.5% on the direct and indirect (note 1) operating costs associated with its on-hiring of the permanent staff.
     

    Recruitment

    • the service entity undertakes staff search and recruitment activities on your behalf
    • you pay the service entity a once-off success fee if you engage a candidate identified by the service entity, and
    • the service entity maintains its own premises and equipment and employs its own managers and recruitment staff who are responsible for undertaking the search and recruitment activities.
     

    Comparable rate

    • Net mark-up on costs - recruitment fees that result in the service entity deriving a net mark-up not exceeding 5% on the direct and indirect (note 1) operating costs associated with the recruitment activities.
     

    Expense payments

    • the service entity provides bill administration and payment service, and
    • the service does not involve the provision of finance or other financial supply.

    Note: If finance is provided, the appropriate rate will have regard to individual factors including the cost of finance, and source of funds for the service entity and the terms of credit offered to you.

    Comparable rate

    • Net mark-up on costs - a mark-up not exceeding 5% on direct and indirect (note 1) operating costs associated with its expense payment activities.
     

    Equipment hire

    • the service entity owns the equipment, and
    • the service entity leases the equipment to you on ordinary commercial terms.
     

    Comparable rate

    • Return on assets - the hiring fee results in the service entity deriving a return on assets not exceeding 7.5% of the opening written down value of assets used in the hiring activity (note 2).
     

    Rental

    • the service entity owns or leases the property
    • the service entity leases or subleases the property to you on ordinary commercial terms, and
    • you do not provide any guarantees or undertakings for the service entity's borrowing obligations in relation to the property (if any) or for its obligations under the head lease.
     

    Comparable rate

    • Comparable market price - the rent is at market rates (plus finder fees where appropriate).
     

     

    Notes

    1.  Indirect operating costs should be apportioned on a reasonable basis. For example, if the service entity provides both temporary and permanent labour hire services then its indirect operating costs should be allocated between the temporary and permanent hire functions in the same proportion as the temporary and permanent on-hired staff bear to each other.
    2. The actual hiring fee charged by the service entity would generally also cover depreciation on the equipment, direct and indirect hiring costs in addition to this return on assets component. That is, the hiring fee will give the indicative return after allowing for these expenses.
     

    Indicative rates

    If you use the indicative rates below and no greater than 30% of the combined profits of the professional firm and the service entity (or service entities) is earned by the service entity (or service entities) due to the service arrangement, there is little risk of being audited because of the amount of the deduction claimed.

    This is because we believe that the potential compliance risk would generally not justify audit activity where the rates are less than or equal to these indicative rates. This does not mean that we are satisfied that the indicative rates are in fact commercial benchmark rates.

    Service fees charged above these levels may result in an audit of the service arrangement as would cases where there is no clear connection between the service arrangement and the earning of income by the business (refer to step 1).

    If your arrangement involves fees and charges above these indicative rates and you are audited, you will be asked to explain why the fees and charges are higher and how they are connected with earning your business income. If the payments are considered to be grossly excessive and we adjust your claim, we will allow deductions based on what we consider to be the appropriate commercial benchmark rates in the circumstances. You will, of course, have rights of objection and appeal.

    We provide indicative rates at a net mark-up on costs level for labour hire and recruitment services because net mark-ups provide a widely accepted comparable measure of commerciality that is not dependent on the detail of the particular arrangement. These indicative rates are based on evidence we have found.

    Indicative rates for gross mark-up on costs are based on all costs associated with providing the service being wholly met out of the service fee. If a service entity meets all direct and indirect operating costs associated with the activities carried out in providing its services out of the service fees and charges, a gross mark-up on costs at the indicative rate shown is not expected to represent a high compliance risk.

    If you choose to rely on a gross mark-up on costs taken from the table in this guide, the type of expenses that are on-charged should be those that are directly attributable to the services or benefits provided. All other expenses of conducting the activities of the service entity should be absorbed or defrayed by the service entity out of the service fees charged. The mark-up rates that we accept from a compliance risk perspective are based on this approach.

     

    Type of service or benefit provided

    Fees and charges

    Labour hire arrangements

    • Arrangements that are broadly in line with conventional service arrangements for the provision of labour hire services, that is arrangements that are not fundamentally different to arrangements with the characteristics described in the previous table.
     

    Indicative rate*

    • Gross mark-up on costs - labour hire fees that result in the service entity deriving a mark-up not exceeding 30% of salary and benefits of the on-hired staff paid by the service entity, provided that all direct and indirect (note 1) operating costs associated with the on-hiring of staff are absorbed by this mark-up. Operating costs would be expected to represent about 18% of salary and benefits (note 2).
    • Net mark-up on costs - labour hire fees that result in the service entity deriving a net mark-up not exceeding 10% on the direct and indirect (note 1) operating costs associated with its on-hiring of staff. See also note 3.
     

    Recruitment

    • Arrangements that are broadly in line with conventional service arrangements for the provision of recruitment services, that is arrangements that are not fundamentally different to arrangements with the characteristics described in the previous table.
     

    Indicative rate*

    • Net mark-up on costs - labour hire fees that result in the service entity deriving a net mark-up not exceeding 10% on the direct and indirect (note 1) operating costs associated with its recruitment activities. See also note 3.
     

    Expense payments

    • Arrangements that are broadly in line with conventional service arrangements for the provision of expense payment services, that is arrangements that are not fundamentally different to arrangements with the characteristics described in the previous table.

    Note: If finance is provided, the appropriate rate will have regard to individual factors including the cost of finance, and source of funds for the service entity and the terms of credit offered to you.

    Indicative rate*

    • Net mark-up on costs - expense payment fees that result in the service entity deriving a net mark-up not exceeding 10% on the direct and indirect (note 1) operating costs associated with its expense payment activities.
     

    Equipment hire

    • Arrangements that are broadly in line with conventional service arrangements for the provision of equipment hire services, that is arrangements that are not fundamentally different to arrangements with the characteristics described in the previous table.
     

    Indicative rate*

    • Gross mark-up on costs - the hiring fee results in a gross mark-up not exceeding 10% on the cost to the service entity of the equipment with all relevant costs relating to the equipment being met by the service entity.
     

    Rental

    • Arrangements that are broadly in line with conventional service arrangements for the provision of property rental services, that is arrangements that are not fundamentally different to arrangements with the characteristics described in the previous table.
     

    Indicative rate

    • Comparable market price - the rent is at market rates (plus finder fees where appropriate).
     

     

    Notes

    1. Indirect operating costs should be apportioned on a reasonable basis. For example, if the service entity and business share premises the rent paid on the premises should be apportioned between the service entity and the business. A reasonable basis of apportioning this cost would be based on the floor area of the premises used.
    2. As a guide, it would be expected that such costs would not be less than 18% of the salary and benefits of the on-hired staff. If costs are below this level, we expect for the following year, that the gross mark-up on costs would be proportionally reduced or the proper costs of the service trust would come up to this level (or a combination of both). For each 1% that costs are less than 18% we expect the indicative 30% gross mark-up to be reduced by 1%. Relevant costs include accommodation, payroll tax, recruitment, training, supervision and personnel. For labour hire arrangements, the treatment of expenses in working out this gross mark-up on costs is set out below.
    3. When applying this method, it is important that the costs of the service entity do not exceed the costs that are associated with the labour hire service. For example, we may adjust the amount if excessive or inflated costs are charged to the service entity by related parties. For the purpose of this method, it is not essential for costs that are incurred by the service recipient that are partially attributable to the service entity to be dissected and apportioned to the service entity. Typical costs of this kind include rent, electricity and salary costs incurred by the service recipient where the service entity occupies premises or uses staff of the service recipient in conducting its activities. Any cost apportioned in this way would simply be charged back to the service recipient either at cost or within an acceptable mark-up. There is no additional risk in using this method if these costs have not been fully attributed and this can be overlooked in the interests of practical compliance and sensible administration.

    *     These rates may not apply if greater than 30% of the overall profit of the group is earned by the service entity or service entities (see page 14 of this guide). These situations will be considered on a case by case basis.

     

    Attention

    You are at a low risk of audit if you are below these indicative rates and you keep documentation which is adequate to establish that your service arrangement is connected to the income earning activities of your business.

    End of attention

    For the purposes of these indicative rates, the treatment of typical expenses for labour hire arrangements is shown below.

     

    Labour hire arrangements

    Expense type

    On-charge

    Absorb cost

    with mark-up

    at cost

    Cost absorption pricing

    Direct salary and other employment costs connected with staff on-hired:

         

    Salary of on-hired staff

    tick

       

    Other remuneration costs, for example, superannuation, other benefits, sick leave, annual leave, long service leave, termination payments and other benefit accruals.

    tick

       

    Other employment related costs, for example, payroll tax, workers' compensation premiums, recruitment, training, supervision and personnel costs.

       

    tick

    Note: apportioned on a reasonable basis if staff are not wholly on-hired.

         

    All other direct costs

         

    Salary and employment on-costs of service entity staff directly involved in the provision of the benefit or service.

       

    tick

    Other direct costs like payroll services, other third party charges (for example, advertising, security checks), incidental expenses and disbursements attributable to the services provided like photocopying, postage, telephone.

       

    tick

    Operating and financing expenses of the service entity

         

    Costs of conducting the business of the service entity that are not attributable to the provision of the benefit or service under the service arrangement.

       

    tick

    Note: Typically, labour-hire arrangements involve a mark-up based on the full employment cost of the on-hired staff with all other expenses met out of this mark-up. The treatment of expenses can differ from this. However, the rate that we accept would be adjusted to take this into account.

    Calculating the mark-up

    Generally, we will rely on the mark-up as calculated in the service entity's accounting records. In some cases, we may ask you to explain the way the mark-up has been calculated and we may adjust the mark-up rate before comparing it to the comparable market rates.

    The calculated rate may not be appropriate where:

    • it has been worked out on an incorrect basis, for example, the rate would be adjusted if it takes into account expenses not connected with the service provided or it double counts expenses already attributed in the calculation for other services
    • expenses of the service trust are inflated
    • expenses of providing the service are not paid by the service entity either for the full amount or within a reasonable period of time
    • the accounts are not prepared in accordance with applicable accounting standards and generally accepted accounting practices, or
    • the arrangement contains contrived features to artificially reduce the mark-up rate.
      Last modified: 15 May 2013QC 18677