The remuneration schemes for partners in law and accounting firms in Australia has come under intense scrutiny after KPMG agreed a A$100 million ($69 million) payout to the Australian Taxation Office (ATO) for allegedly breaching anti-avoidance tax rules.
The ATO's action involved all partners from KPMG's Melbourne and Adelaide offices in the 1996-97, 1997-98 and 1998-99 financial years. KPMG's southern Australian partnership had diverted the personal income of its partners to a so-called service trust which was then used to split income to other parts of the firm to avoid high rates of tax.
Ernst & Young settled a claim against its service trust arrangements between 1997-98 and 2001-02. The ATO cleared PricewaterhouseCoopers following a similar investigation. A number of large law firms are believed to be negotiating with the ATO over their service trust arrangements.
The latest ATO action came as a shock to many tax specialists, according to Joe Galea, a tax partner at Deloitte in Sydney. "KPMG were probably relying on what they thought were industry norms and were then surprised by the ATO's action."
The last guidance on service trusts was issued back in 1978 in a high profile court case. But in 2002 the ATO commissioner Michael Carmody hinted that the tax authority would be looking at service trusts as part of an overall crackdown on tax avoidance.
The ATO is expected to issue a ruling on service trusts soon. "I don't think it will necessarily change the way partnerships operate," said Galea. "There will always be service trusts for asset protection and legitimate commercial reasons, but there is likely to be greater scrutiny of the margins and fees for advisers on service trusts."
"I suspect the ATO will require arm's-length or commercial justification for service trusts," Galea added. "Service trusts will have to be revisited to review the margins. It will require something like a transfer pricing exercise."
KPMG and Ernst & Young confirmed they had settled their cases with the ATO but did not wish to comment.
Simon Briault
