Services Trusts for Visiting Medical Officers and Anaesthetists

Service Trusts

Q: What are the main differences between a service trust and a traditional company structure?

A: The traditional, incorporated medical practice is something we don’t do a lot here at DPM. We would generally have our doctors operate as sole traders in their own name. However with a service trust, a service trust will normally have a trustee company and the company will have directors and shareholders which will generally be the practitioner themselves. But it is very, very important to analyse how you should structure yourself as a medical practitioner because there is a misconception that you just operate as a company and pay company tax and that is not the case. 

Q: What are the biggest misconceptions doctors have about service trusts? 

A: Some of the misconceptions are that clients think that they can just run their whole practice through a service trust and you cannot do that. You have a service trust to operate the business and there is a prescriptive percentage based on ATO guidelines that you can pay across to the service trust. So it is an entity that’s removed from the practice itself. 

Q: What are some of the red flags that a service trust might not be a good fit for a doctor? 

A: When you analyse a client’s affairs you have to look at the ATO guidelines and rulings, do some market research and come up with an appropriate service fee percentage. When you‘ve calculated what that is, it might be 25%, 35%, 40%, rural GPs are 45%; when you’ve calculated that you have to analyse ‘what is the profitability of the service trust?’ And it’s not always going to be profitable, you have to analyse the expenses and you might then recalibrate what that service fee percentage is. But it’s very important that you do the financial analysis before you establish a service trust.

Q: How can service trusts help with asset protection?

A: It’s an interesting concept, asset protection, and what you want to do is have the assets not in the practitioner’s name. However with the service trust you wouldn’t accumulate a great deal of assets. If you’re going to buy the practice premises you’d use a separate structure from the service trust for that. But in a service trust you generally have your plant and equipment, your chattels, these sorts of things; so, the assets in a service trust would generally be very minimal and therefore from an asset protection point of view you’d use other structures other than the service trust. 

Q: What are the upfront costs of setting up and maintaining a service trust?

A: To set up a service trust you’re going to need a trustee company, generally speaking. The cost to set that up would be in the realm of a few thousand dollars, between $3,000 and $5,000 depending on how complex it is. And then to run it, generally speaking if you’ve got good record keeping, and that is key, you’ve got to have good record keeping and have a good technology platform; the after tax cost to run it could be somewhere between $1,000 to $2,000 a year. But the benefits you’ve got to analyse have to far outweigh whatever the setup costs and whatever the running costs are. We have a bit of a saying – ‘Don’t let the lawyers and accountants win’. Make sure you’re aware of the benefits, and it has to be beneficial.

Q: How can practitioners avoid compliance issues with service trusts?

A: To be compliant with all ATO lodgements and rulings you have to run it as a truly third party commercial vehicle. You have to make the payments, you have to have all the documentation, and the better the record keeping the lower the compliance costs as well. You need to make sure that all documentation, staff employment contracts, you have to have your i’s dotted and your t’s crossed.

Visiting Medical Officer

Q: What is a Visiting Medical Officer?

A: A Visiting Medical Officer, or VMO, is something that generally applies to hospital appointments. They’re very, very widely used in Queensland, the ACT, and New South Wales. Generally in Victoria the practitioner will have a public appointment and do half a day, or a session at the hospital; and they’ll be taxed and have superannuation paid on their behalf. What a VMO contract will do is that the doctor will go in there, sometimes there will be super, sometimes there won’t. But it’s quite substantial the amount that a practitioner can earn under a VMO contract in Queensland, New South Wales, and the ACT. 

Q: How do VMO contracts differ in New South Wales, ACT, and Queensland?

A: Fundamentally, it’s just a quantum. They can be very, very large contracts. You can have doctors that might have private fees of $400,000, $500,000, $600,000, they might have exactly the same for their VMO contracts. And what happens is that the practice will generally do things for the practice that the hospital should be doing, but they don’t. And this is where you have to analyse whether you can actually have a service agreement with your VMO contract. At DPM we have some information from the ATO that we actually can (have a service agreement) and then it depends on whether you’ve got a virtual practice or a real practice. Virtual meaning there’s no rooms or staff, and a real practice meaning you have rooms and you have staff.

Q: How can a service trust help VMOs in New South Wales, ACT, and Queensland?

A: If they have a substantial VMO contract then the practice will be doing things that the hospital should be doing, and you need to be able to charge for that. We have some proprietary information where we can actually charge a service fee on VMO contracts in certain circumstances and that needs to be analysed on a case-by-case basis. However, if a practitioner is doing work under the VMO contract on behalf of the hospital, that should be reimbursed via a service fee arrangement, a service agreement. There’s a separate service agreement for VMO contracts and that will aid in the profitability of the practitioner’s service trust. 

Q: How can VMOs ensure their service fees are reasonable and within ATO guidelines?

A: There was a ruling that came out in 2006 and the guidelines to that ruling say that service fees for GPs can be 40%, rural GPs 45%, and then all the other specialists have to fall within that. You have to do the financial analysis to make sure that it’s profitable and within the ATO guidelines because you do not want to be setting up these agreements and trusts and company structures when there’s no benefit financially. Having said that, taxation is only one factor in all this, there are other factors that need to be considered on a commercial basis. I think the main point though is that the practitioner needs to take advice. They need to have some analysis done by not just any financial advisor but somebody that specialises in their field – like ourselves (DPM). But you must actually analyse each individual circumstance on its own merits. 

Q: What’s your key takeaway for VMOs?

A: You have to look at the quantum of the VMO contract, you have to analyse whether you can have a service type arrangement. And that will come back to actually analysing the contract with the hospital or the network and really understanding if you can apply a service trust structure to it, how much it’s going to cost, and what are the financial benefits to the practitioner and their family group of having such a structure. So do not jump in where angels fear to tread… 

Q: What are some useful resources that might be able to help?

A: The ATO website is an excellent place for people to get some reading and get some understanding of what they can and can’t do. But there’s nothing better than having a financial check up and coming and seeing somebody like ourselves. We can also direct you to our website, there’s plenty of information in our knowledge centre there that we can assist you with. But it’s really just having an understanding and seeking advice from a practitioner, and a trusted financial advisor that understands your journey that you’re about to go through in your professional life.

Anaesthetists

Q: How can a service trust help an anaesthetist in private practice?

A: An anaesthetist is either a solo practitioner on their own or they’re a member of a group. Either way, they can analyse whether they do have a service entity. With a group structure, they’re normally mutual organisations where there are token amounts paid in every month. However, you can turn or look at having a service entity and make it a truly profitable enterprise; and that again needs to be analysed on a case-by-case basis. 

Q: How can anaesthetists ensure their fees are reasonable and within ATO guidelines?

A: That’s a good question because anaesthetists operate very differently to any other specialists. They don’t have massive amounts of equipment, that’s all provided for them. So where an orthopaedic surgeon or a neurosurgeon might have a service fee rate of 35%, anaesthetists aren’t at that level. However what we’ve done at DPM is that we have some advice, some guidance, and some rulings from the ATO where we know what anaesthetists and anaesthetic groups can have as service fees. And I’d suggest that having a discussion with one of our DPM consultants regarding that and how it applies, would be of great value to any solo anaesthetist or group. 

Q: Can you elaborate on the unique challenges groups face with service fees, and how DPM’s intellectual property helps?

A: What we find is that with some of the larger groups is that some practitioners are … resistant to change and to restructure them comes at some cost. But generally the benefits will far outweigh the cost; but it’s getting everyone on the same page to either commence or to restructure the group in line with the intellectual property that we have from the ATO. So that’s very unique to get everybody singing from the same hymn-book so to speak. And that’s really unique to anaesthetic groups. 

Q: What are some additional considerations for anaesthetists when setting up service trusts?

A: They have to consider how they want to operate in the long term. A lot of groups operate as mutual co-ops if you like. However they can have a group structure whereby it’s a truly profitable entity or enterprise and that can help with wealth creation for their families and also ensure that the taxation is as efficient and effective as possible. 

Q: What are your top tips for anaesthetists setting up individual, or group private practice?

A: Take advice. Understand what your options are. Service trusts are not for everyone. They have to be implemented and operated commercially and properly. So making sure that the practitioner, or the practitioners, understand the financial aspects, both good and bad, as to what they’re getting into and what they’re setting up.

Q: Can you recommend some resources for anaesthetists going into private practice?

A: The ATO website will give you plenty of information which is very, very useful; they’re professional associations. But what we have at DPM is that we have a lot of collateral, which is on our website – dpm.com.au. We’ve got private practice ebooks, but I think the most important thing is actually having a consultation with somebody who understands their structure and how that is going to operate through their career and their professional lives. 

Outro:

Tracey: Thanks for your time today Craig

Craig: Thank you, Tracey, for your time, it’s been a pleasure talking to you.