Edited version of your private ruling

Authorisation Number: 1012483944441

Ruling

Subject: Service trusts- assessable income

Question 1

Are the service fees charged to the specialists by the X Unit Trust (X), which are calculated at a flat rate of 40% of professional medical fees earned by those individuals, considered assessable income derived by the X under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The X Unit Trust (X), has applied for a private binding ruling (PBR). The following facts and circumstances have been provided:

The X was settled by Deed of Trust X (the 'Trust Deed') between Y Pty Ltd as trustee and Z Pty Ltd and F Pty Ltd as the first unit holders;

Clause 28 of the Deed of Association Agreement (the "Deed") states that:

28.1 The Service Entity is the trustee of the Service Trust

28.2 Commencing on the Commencement Date, the Associates engage the Service Trust to provide the Services to the Association in consideration for the payment of the Service Fee. The Service Trust accepts that engagement.

28.3 The Service Trust must render and issue separate accounts to the Associates' patients for services provided by that Associate and all fees paid pursuant to the accounts rendered will be credited to and become the personal property of that Associate;

28.4 All cash received in respect of any fees or income due to the Associate must be credited to each Associate's designated bank account.

X provides administrative services to five independently practising medical specialists ("Associates");

The Associates work from the same premises (the "premises");

Each Associate conducts their own separate practice from the premises;

The Associates are not in partnership with one another;

The X has always engaged its own independent practice manager;

No related parties of the Associates work for X;

The service fees derived by X have exceeded $X since the year ended 30 June 2011;

X has incurred expenses in excess of $X since the year ended 30 June 2012.

Services provided by SMSUT

provides administrative services;

employs a practice manager, administrative staff and two practice nurses; and

provides medical instruments and equipment;

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision

A "service entity" is an entity in a business structure that has the role of providing certain defined services (including the provision of property) to other entities in the structure. Service entities can be trusts, companies or partnerships, with trusts. The types of services that are generally provided include:

· Clerical and secretarial support;

· Debt collection;

· Premises;

· Office supplies;

· Photocopying; and

· Plan and equipment.

X is operating as a service entity, and provides administrative services to the Associates.

Section 6-5 of the ITAA 1997- "ordinary income"

"Ordinary income" means income according to ordinary concepts, pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). It is included in a taxpayer's assessable income unless it is exempt, or is made non-assessable.

There is no specific guidance on what is meant by "ordinary concepts". However, typical examples of income include salaries, wages, proceeds of carrying on a business, rent, interest, and dividends.

Conversely, examples of items which are not generally income include lottery prizes, proceeds from a mere hobby, loans, and gifts. Profits from the sale of a capital asset are generally not income, although they may be assessable statutory income (e.g. under the capital gains provisions).

The courts have identified a number of factors that indicate whether an amount has the character of income according to ordinary concepts. These include:

whether the payment is the product of any employment, services rendered, or any business (FC of T v. Harris 80 ATC 4238; (1980) 10 ATR 869);

the quality or character of the payment in the hands of the recipient (Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286);

the form of the receipt, that is, whether it is received as a lump sum or periodically (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82); and

the motive of the person making the payment. However, motive is rarely decisive, as in many cases a mixture of motives may exist (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 82).

Although the above factors can assist in the conclusion that an amount is more likely to be ordinary income, none of the factors are exhaustive, nor conclusive.

A frequent characteristic of income receipt is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to employment or services rendered.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

· are earned;

· are expected; and

· are relied upon;

In the present case, the service fees received by X are considered to be income according to ordinary concepts. They are earned, received regularly, are expected, and relied upon. Furthermore, the service fees are paid to the X as a result of services rendered, namely, the provision of administrative services, staff, and equipment, which is provided for the benefit of the Associates.

Accordingly, the service fees received under the Deed are ordinary income, and are therefore assessable under section 6-5 of the ITAA 1997.