Service Trusts & Your Accountants - Best Practice News Alert 144

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT CURRENT CIRCULATION: DATE: ISSUE NO:

7021 7th May2007 144

Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.

Writer in charge: Mr David Dahm BA.Acc, CPA, FTIA, Ffin, FAAPM, GLFG.

Service Trusts and Your Accountant

Problem – Is your accountant making a meal out of the issue and is time running out?

We must admit people must be going through service trust fatigue at this stage. Having said this we thank readers for their overwhelming support of Health and Life’s editorial position published (including a cartoon) in the Australian Financial Review on 2nd May 2007 called “ATO complaints a bit rich”. We have attached a copy of this article so you can be the judge. Email us if you cannot open the attachment.

Much to people’s surprise, David Dahm did publicly defend the Tax Office in relation to the ATO’s position on service trusts. We did go on to rebuke and challenge the accounting and legal professions understanding of the ruling and remain bemused by the lack of understanding that still exists. Since the publishing of the ruling, nationally we continue to receive conflicting interpretations from accountants, lawyers and ultimately from confused practices.

More importantly we feel many practices could be receiving cold comfort advice or are being short changed and missing out on the real benefits of their structure. The new financial year is just around the corner and for many practices this is the last chance to get it right and to keep your practice restructuring costs to a minimum.

This issue seeks not to rehash in detail our concerns about the advice practices receive from their advisers (please refer to our past editions if you want more in detail). To the contrary it seeks to test whether the advice you have received stacks up in an audit. The attached article clearly states what is required.

We say the process is not like building a Bentley, it but it is like building a house one is a luxury and the other is a necessity. For the final word on this issue we cover our key concerns in this edition.

As a side note, do it correctly today you can overcome the new bankruptcy rules that affect service trusts. We will cover this in our upcoming issue “Family trusts do not really protect your assets anymore?”.

In this issue: 1. Problem – Is your accountant making a meal out of the issue and is time running out?

2. What should you have in place now?

3. Where to from here?

Service Trusts and Your Accountant

1. Is your accountant making a meal out of the issue?

The Tax Office was heavily criticized on the front page of the Australian Financial Review called “ATO lashed over crucial ruling delays” on 26th April 2007 by the Federal Tax Ombudsman legal and accounting profession for its mishandling of the Service Trust Ruling.

We are concerned after reading the comments from the peak professional bodies that they still do not clearly understand the ruling. We have made our point clear in the attached editorial article. To avoid rehashing the issue the simple point is what is the business case for running and operating a service trust? Whether or not you follow the ATO’s suggested rates you can still fail an audit.

By now all practice owners must be able to answer this question without their accountants assistance. Remember it is the taxpayer and not the accountant that is responsible for signing the tax return. As John Mero a corporate governance consultant once said “being an honest fool is no defence”.

2. What should you have in place now?

1. A clear understanding of your service trust business model – How does it make money? Does the structure provide a clear succession plan? How does it work?

Does it really asset protect (most trust don’t have any real assets).If you can’t pass this then you will fail an audit.

2. Benchmark your service trust profits – What profit margins does your service trust make? Can they be supported by national data?

3. Do you have signed agreements – practice and service agreements should have been prepared and signed off. They should actually support in writing the business model as detailed in point 1.

4. Systems – practices should have systems in place that bill, track (reconcile to the last dollar) and issue regular service fee tax invoices. Clients using Health and Life’s Service Fee Calculator database program in conjunction with their practice billing, MYOB or Quickbook accounts can guarantee to their providers that their paperwork is correct. Excel spreadsheets are often inaccurate and clumsy and do not reconcile to the practices billing and accounting systems.

5. Time is running out. Remember it is cheaper to have new structures in place with the correct agreements and systems in place before 30th June 2007. It is harder and more expensive to go back and fix up any mistakes in this new audit period.

3. Where to from here?

The reality is most practices do know what their business is, but often cannot articulate the rationale for it in business or commercial terms. This leaves the practice structure open to conjecture which is not a good start if you receive a call from the Tax Office. To avoid this situation we can offer the following assistance: 1. Advise if your practice legal structure and business case is correct and you understand it.

Consult your adviser or call us on 1800 077 222 for a brief no obligation, no charge consult if you are not sure.

2. Provide a detailed 17 page Business Case, Service Fee and Benchmarking Report that addresses all the issues raised in this news alert and in the ruling. This also includes a rationale for owners having a higher service fee than non-owners of the practice.

We have an exclusive national database with over 1200 practices benchmarked nationally over a 14 year period. We can assist with tailored written opinions if you think your practice needs to justify its service fee. Or you may simply want to know if your practice is running efficiently. There are good succession planning and tax benefits for going down this path.

3. Put in writing all legal arrangements and contracts. We have template service and practice agreements. Visit www.healthandlife.com.au under “Products & Services”.

Ensure your administration or paperwork reflects the arrangements agreed to by all parties e.g. the practice issues regular service trust tax invoices. See our Service Fee Calculator Program at www.healthandlife.com.au or Service Fee Calculator download. We can email example templates.

4. At no charge we provide to accounting clients an Annual Best Practice Benchmark and the Good, the Bad and the Ugly Practice Overview and strategic commentary which addresses the tax ruling requirements and any practice inefficiencies or missed opportunities.

This simple to read “practice dashboard report” and expert commentary is why practices use us rather than a traditional accounting firm. This is a peace of mind solution. You will instantly notice the difference and feel more confident about how well your practice is running. Email us for a sample of our annual financial statements at pa@healthandlife.com.au and compare this to your current accountants reports.

The bottom line is should your practice experience an audit, legal or tax problem, it is hard to back track your arrangements (we would not advise it). An audit is not the right time to restructure your affairs. Auditors will require proof the arrangements that you say are actually in place, are in place. The less evidence you have i.e. written documentation and administrative audit trails, the more questions they ask and the more suspicious they become. Unfortunately there are no short cuts. The burden of proof is always on the taxpayer and where there is no proof then your arrangements are left open to challenge no matter how good your intentions are. Make sure your accountant/advisers have addressed these issues for you or contact us for assistance on 1800 077 222.

Remember we say the process is not like building a Bentley, but it is like building a house one is a luxury and the other is a necessity.

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Health and Life Pty Ltd (formerly acpm.com.au) Accounting & Practice Management Services.

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