The ins and outs of service trusts
Choosing an appropriate business structure for your private medical practice is a crucial decision that can have significant implications for your tax, liability and asset protection.
One such business structure available for private medical practitioners in Australia is the Medical services trust, also known as the service entity. When you set up a service trust, you are effectively separating the medical and administrative aspects of the business. The medical services are performed by each owner acting as a sole practitioner conducting their independent medical practice, while the administrative aspects are performed by a separate legal entity (the service trust) that provides non-medical services, such as employing staff, leasing rooms, purchasing equipment and billing patients, in exchange for a service fee.
What are the benefits of a service trust?
A service trust can offer private practitioners many benefits, including:
Medical practice exposes doctors to a wide range of professional risks, including legal actions by patients for negligence. When you move into private practice, the risks only increase as you have the added legal risks from running a business. What may be established in unison with a service trust is an investment trust and/or corporate beneficiary which may in turn provide a way of owning assets without putting them in your own personal name. This is one way, your family can benefit from them without worrying about legal issues. For instance, an investment trust or corporate beneficiary may shield your personal assets from being taken away if you are sued.
Streamline your taxation position – legally and legitimately
A service trust provides a legitimate way of streamlining the tax structure of your family group whilst aiding long term wealth creation. It provides a way of separating your personal service income from your practice income, avoiding ambiguity and aiding in effective tax management. It also allows the service trust’s beneficiaries, potentially including family members, to receive income and / or capital which may be taxed at lower brackets.
It may also provide benefits around superannuation guarantee contributions, with service trusts potentially offering effective tax management strategies when paying benefits to yourself and your employees.
Wealth creation and succession planning
Another benefit of setting up a service trust, investment trust and / or corporate beneficiary is the opportunity for ongoing wealth creation and enabling you to structure your practice and personal affairs. Setting up your private practice with a service trust may allow you to create business assets, systems and processes that can be transferred and / or sold to another practitioner if you were looking to transition to retirement or potentially a larger group that might be looking to acquire practices.
Challenges and risks of a service trust
Using a service trust for your practice comes with a number of challenges and risks that should be understood and carefully considered prior to making any decisions about the structure of your practice. Some things to consider include:
- There is a cost to establishing and maintaining a service trust, such as legal fees for the trust deed and trustee company to be established. Ongoing accounting fees, trust taxation returns, etc. will need to be prepared and lodged. You should carefully analyse and understand the potential savings the trust will provide, to determine whether it will be profitable for you to do so. This is a simple mathematical calculation.
- The compliance obligations and reporting requirements of running a trust and trustee company may increase your administrative burden. However, these are generally completed by your accountant / financial adviser. In addition a reputable bookkeeping service can streamline much of these requirements.
- There always exists the possibility of being audited by the ATO if your service fees are excessive or unreasonable, or if your service agreement is not properly documented or executed. Therefore it is imperative that the service fee adopted is well researched and both accountants and lawyers should have specialist experience advising medical professionals.
What can be claimed under a service trust?
A service trust can claim deductions for the expenses that it incurs in providing services to the practitioner, such as:
- Wages and salaries paid to the employees of the service trust (including superannuation)
- Rent or lease payments for the premises or equipment used by the service trust
- Interest on loans taken out by the service trust to acquire assets or fund its operations
- Depreciation of the assets owned by the service trust and used to provide services
- Other operating expenses, such as utilities, insurance, repairs and maintenance, etc.
The service trust must distribute all of its profit that it makes each year to the beneficiaries of the trust. They must be properly recorded and reported in the trust financials and tax return. However, the beneficiaries will have to include their share of the trust income in their own tax returns and pay tax accordingly.
What is a service fee?
A service fee is the amount that the service trust charges to the business that it provides services to, such as administration, accounting, marketing, equipment leasing, etc. The service fee is usually a percentage as outlined by ATO rulings and guidelines, and adjusted according to individual business and other comparable practitioners in the area.
As the service fees are tax deductible to the medical practitioner, this expense may streamline the tax position of the medical practitioner by deducting the service fee as a business expense from the gross income generated. However, we reiterate that the service fee for a service trust must be reasonable, commercial and within the ATO guidelines, otherwise it may be challenged.
The ATO provides some benchmarks for different types of medical services on its website. This has always been more clear cut for General Practitioners (GPs) than medical specialists, with GPs generally able to claim between 40-45%. It is harder for specialist medical practitioners to use the benchmarking approach, (as outlined in the ATO guidelines), because there is so much variation in their service set up and practice management costs. For example, the cost structure for an anaesthetist versus a surgeon are vastly different.
DPM have procured exclusive intellectual property for service fee guidelines
Service Fees for Anaesthetists and Anaesthetic Groups
Service fees have always been particularly challenging for Anaesthetist Groups as they usually operate quite differently from other specialists running private practices where they may not necessarily require physical rooms, nor the same level of equipment and or staff support etc.
To ensure that our Anaethetist clients are able to confidently utilise the benefits of a service trust in a reasonable and fair way, DPM proactively and privately obtained indicative advice, written guidance as well as a specific ruling from the ATO for one of our groups / clients, that puts us in a unique position to advise anaesthetic groups and clients on how a service fee of between 15% and 25% may be applicable for them depending on their structure and circumstances. The 15% is for virtual practices, (no physical rooms or staff), and the 25% is for groups with staff and premises. Please note the ATO protection(s) afforded by utilising and the reliance of the above intellectual property only exists if you are DPM clients in some way.
if you’re considering going into private practice as an anaesthetist, we have a free comprehensive ebook guide to setting up and running a solo or group private anaesthetic practice here.
Anaesthetic Group Structure Review
If you’re currently in private practice as an anaesthetist, DPM may be able to help you and your wider group make the most of the financial options available. Thanks to recent guidelines and exclusive intellectual property DPM has proactively and privately procured with the ATO for Anaesthetists, our consultants are in a unique position to provide specialist advice in this area. If you’d like to find out more and understand whether DPM may be able to help you, click here for a free structure review.
Service Fees for Visiting Medical Officers (VMOs)
Similarly, because of the way that VMO contracts are structured in NSW, QLD and the ACT, many VMO’s are using their private practice facilities to support delivery of medical care for the public patients they are looking after. This is an impost on their private practice resources and in turn reduces the profits of the service entity.
To reflect this and the value that their private services are providing in these circumstances, DPM again privately procured exclusive intellectual property with the ATO for service fee guidelines for these practitioners and circumstances. As a result, DPM is in a unique position to confidently advise our clients on how they may be able to claim a service fee of between 5% – 15% for their VMO work. The 5% is for virtual practitioners, (no physical rooms or staff), and the 15% is for practitioners who either themselves or via the group they are a member of have staff and premises.This ensures that VMO’s in NSW, ACT and QLD are able to take advantage of the tax efficiency that private practitioners are utilising, for the public work they are completing.
Again please be aware the ATO protection(s) afforded by utilising and the reliance of the above intellectual property only exists if you are DPM clients in some way.
Click here for a free and complete review of your VMO contract to find out how DPM might be able to help you possibly identify valuable benefits and opportunities that could improve your financial position.
What agreements are needed for a service trust?
A service trust needs to be a stand-alone, arms length entity with a range of contracts and agreements in place. These are non-negotiables in our mind.
A service agreement is essential to this structure and outlines the arrangement between the service entity and the practitioners. Under these arrangements, the service entity provides the practitioners with all services required to conduct their medical practice, and the practitioners pay a service fee in return. It is essential that this service fee is supported by a written service agreement between the service trust and the business that specifies the nature and scope of the services, the method of calculating the fees, and the terms of payment. Please note that the ATO has approved / vetted via the above rulings / guidance the service agreement our legal advisors and in turn DPM utilise.
Other agreements that may also be required for this set up include:
- Equity Holder agreement – documents the rights and obligations of the various parties involved with the service entity. Depending on the legal structure this agreement sets out the rights and obligations of the shareholders, directors and unitholders. Key decisions and events, such as future admission to the service entity, are also included within the document.
- Associate agreement – documents the arrangements between the practitioners conducting their independent practices at the premises. The agreement specifically outlines the fact that practitioners are associates, not partners. The agreement also documents arrangements in terms of holidays, coverage during periods of absence and illness etc.
- Employment agreements/contracts – for the hiring of staff such as medical receptionists or practice managers.
In summary, a service trust can provide many benefits for private practitioners and groups, but it is not suitable for everyone and you should seek professional advice from an accountant and lawyer who specialises in medical practice structures before making any decisions. DPM are uniquely placed to provide expert guidance on the appropriate business structure for your practice to minimise exposure to any unnecessary risk and optimise your financial position. If you are currently in private practice or thinking about setting one up, reach out to one of our specialist tax consultants for an obligation free chat.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice, as your personal circumstances, needs and goals have not been considered. DPM Financial Services Group recommends you obtain professional advice concerning specific matters before making a decision.