Why the right structure could protect your practice or put it at risk

Many barristers use service entities to manage overheads and simplify admin, but if not set up correctly, they can quietly become a ticking compliance risk.

Service entities pay clerks and employees, manage office space and support services, and allow greater flexibility when handling operational expenses. But while service entities can offer clear benefits, they also carry real compliance risks.

With increased ATO scrutiny on professional services, including legal practices, accountants, and medical professionals, now is the time to ask: could your service entity arrangement survive an ATO review?

What is a service entity, and what does it do?

A service entity arrangement is designed to separate your core professional income, the fees you earn as a barrister, from the business and administrative functions of your chambers.

Typically, a barrister uses a trust or company structure to:

• Employ admin staff or clerks
• Lease and manage chambers or office resources
• Pay for insurance, tech subscriptions, and infrastructure
• Charge service fees back to the practice at commercial market rates

In theory, this structure protects the barrister and allows for better planning around income tax and helps with streamlining administration.

In practice, however, many barristers fail to update contracts, benchmark fees, or ensure that services provided align with ATO guidance. If the arrangement doesn’t meet commercial standards, the ATO may deny deductions, issue penalties, or reclassify income, which could lead to significant tax liabilities and cash flow disruption.

Where things go wrong: 3 red flags that invite an audit

1. Service fees charged are not at market rates

A common red flag is inflating service fees beyond what a third-party provider would charge. If your entity bills $180,000 per year for admin and chambers floor fees when the fair market rate is closer to $90,000, you could be flagged for attempting to minimise income tax without a legitimate basis. Service fees must be benchmarked and commercially justifiable, arbitrary mark-ups without evidence of value delivered can attract audit attention and lead to denied deductions or income reassessments.

2. No written agreements or contracts

ATO reviews often reveal missing or outdated service agreements and contracts. Your service entity must document the scope of services, pricing, frequency, and responsibilities. Without this, you're operating outside tax office expectations and increasing your exposure.

3. High-risk classification under ATO models

The ATO has created a risk assessment framework for practitioners in law, accounting, and healthcare. If your entity falls into the moderate or high-risk category, due to poor documentation or aggressive fee structuring, you're more likely to face a compliance review or audit.

What the ATO expects from barristers using service entities

The ATO doesn’t prohibit the use of service entities, in fact, they acknowledge their legitimate role in structuring professional practices. However, compliance hinges on whether the arrangement reflects commercial reality.

To stay on the right side of the rules, your service entity should demonstrate the following:

A formal written agreement

There should be a current, arm’s-length agreement between your service entity and your practice. This agreement must clearly outline the scope of services provided, the method for calculating service fees, and the roles and responsibilities of each party. Vague or outdated agreements increase the risk of ATO scrutiny.

Evidence of actual services performed

It’s not enough to charge for services, you must be able to prove they were delivered. This includes maintaining supporting records such as staff timesheets, payroll reports, vendor invoices, office leases, and logs of IT or resource usage. The more your service entity resembles a genuine third-party provider, the safer you are.

Service fees at commercial market rates

The fees your service entity charges should be benchmarked against what a comparable independent provider would charge. The ATO has published guidelines for mark-ups, typically around 3.5% to 5% depending on the nature of the service. Inflated fees or token charges that don’t reflect fair market value are a red flag and may be treated as attempts to divert income.

Correct attribution in tax returns

All income and expenses must be accurately reported and attributed to the correct entity. Misstating who earned the income or who incurred the expense, even unintentionally, can result in amended assessments, interest, and penalties.

Compliance with all other obligations

The service entity must meet its own obligations under GST, superannuation, workers’ compensation, and employment law. If it employs staff, it must withhold PAYG, pay super, and ensure proper entitlements. Overlooking these basics can unravel the entire structure.

Case study: a set-and-forget mistake

Tom, a Sydney-based barrister, established a service entity in 2018. It pays his clerk, covers chambers rent, and invoices his practice around $160,000 annually. But Tom hasn't reviewed the structure in over five years. There’s no active contract and his service fees haven’t been benchmarked since setup.

An ATO sweep targeting professional services arrangements flagged Tom for review.

The result:

• He was forced to reclassify income
• Paid backdated tax with interest and penalties
• Was advised to shut down the entity or completely restructure it

What should you do now?

If you’re a barrister with a service entity, don’t assume you’re protected, especially if the setup was done years ago and hasn’t been reviewed.

Take these steps:

1. Review all contracts and service agreements for clarity and currency
2. Benchmark your fees against comparable third-party rates
3. Confirm that employees are doing the work the entity claims
4. Ensure all compliance obligations (like income tax, super,workcover insurance) are being met
5. Get advice from a registered tax agent to strengthen the arrangement

How Causbrooks can help

We work exclusively with barristers, lawyers, and other legal professionals to ensure their service entities are not only efficient, but defensible.

We offer:

• ATO compliance reviews for existing structures
• Independent benchmarking of service fees charged
• Guidance for practice owners and their accountants or tax agents

Book a confidential Service Entity Review now before your structure becomes a problem.