Edited version of your written advice

Authorisation Number: 1013140492696

Date of advice: 21 December 2016

Subject: Tax consequences of a service agreement

Question 1

Is the management fee received by the trustee for X Family Trust under the Service Agreement ordinary income of X Family Trust according to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply in relation to the management service arrangement?

Answer

No

This ruling applies for the following periods:

From 1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances:

The trustee of the Y Unit Trust operates a business.

X Family Trust holds interest in Y Unit Trust.

X Pty Ltd is the trustee of X Family Trust.

All persons who have day to day operational responsibilities of the business are employed by the trustee of the Y Unit Trust and receive salaries subject to PAYG Withholding and are issued with PAYG Statements. Individual X has an employment position with the Trustee.

X also provides board like management services for which they are paid director's fees.

The trustee for Y Unit Trust wished to separate the management services from the employment duties whereby the management costs would be recognised and reflected in the business results to provide a more accurate statement of business performance.

Accordingly, X has entered into a Service Agreement with the trustee for Y Unit Trust through X Family Trust to carry out management services to the business.

As per the Service Agreement, management fee is calculated based on a set formula with regard to the value of the unitholder's contribution as well as the time and effort to look after the affairs of the business. The management fee is comparable to the market rate for the provision of similar management services.

The Service Agreement also states that in relation to expenses payment for the provision of services, the mark-up must not exceed 5% of actual direct and indirect operating costs to the service provider.

No employment or partnership relationship is created by the parties as a result of the Service Agreement. The service provider operates as an independent contractor under this agreement. The management services are stated clearly in the Service Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Reasons for decision

Question 1

Section 6-5(1) of the ITAA 1997 states that:

Your assessable income includes income according to ordinary concept, which is called ordinary income.

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;

Considering the above factors, it is concluded that the management fees received by trustee for Family Trust is income received from the running the service business under the Service Agreement and therefore ordinary income of Family Trust according to section 6-5 of the ITAA 1997

Question 2

Based on the facts and circumstances of this case, the Commissioner determines that the scheme, namely the execution of the Service Agreement and payment of the management fees, was not entered into or carried out for the dominant purpose of obtaining a tax benefit for the relevant entities and hence Part IVA of the ITAA 1936 does not apply to the scheme.