Tax Life Cycle of a Medical Professional - Part 1

Speaker:
The Tax Life Cycle of a
Medical Professional – Part 1
Brett Beaver
Associate Partner
Gooding Partners Chartered Accountants

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Disclosure Statement
The information presented in this presentation is for general
guidance only. It is essential to take professional advice on
specific issues and their impact on any individual or entity. No
liability can be accepted for any errors or omission or for any
person acting or refraining from acting on the information
provided in this presentation.

Outline of the session:
 Employee tax considerations
 Choosing your business structure
 Recent Australian Taxation Office (ATO)
Developments surrounding tax structuring of
professional practices
 Service Entities

Just starting out…
Employment phase

Employee tax overview
 The typical profile of a new General Practitioner:
Employee for tax purposes.
All income will be derived from personal services.
Significant HELP, HECS or SFSS debts.
Individual marginal income tax rates between 4% - 8% higher
due to HELP, HECS or SFSS debt repayments.
 Tax minimisation and asset protection strategies should be
the focus.

Employee tax strategies
 Consider tax minimisation strategies such as the use of
effective salary sacrifice arrangements. Options include:
 Salary sacrifice exempt fringe benefits tax (FBT) benefits
(work related items or otherwise deductible expenses).
 Salary sacrifice superannuation contributions.
 Consider asset protection strategies, including:
 Separation of investment assets into a Family Trust or
Superannuation Fund.

Taking the dive…
Business start up phase

Choosing your business structure
 If you are considering starting your own Practice, speak to
your advisors regarding your structuring options.
 There are a number of options available to you all with their
own tax and accounting compliance obligations.
 There can be income tax, capital gains tax and duty
considerations if you have to change your structure –
so plan ahead!
 There is no point in designing a business structure around
taxation considerations alone!

Types of Structures available
 The options available for structuring your medical
practice include:
 Sole Proprietor
 Company
 Discretionary Trust
 In addition to the above, you may also wish to
consider a Service Entity to compliment your
medical practice (more on this later!).

ATO Rulings:
structuring medical practices
 No matter what legal structure is chosen, where there is no
“business structure” (which may be typical of a new
practice), we note that the following Tax Office Rulings must
be adhered to:
 Tax Office Ruling IT 25: all profits/taxable income derived from
the personal services of the GP must be paid out to the GP as
salary and/or super contributions.
 Tax Office Ruling IT 2503: reinforces IT 25 and adds that there
should be no diversion of personal services income to related
parties (i.e. spouse or adult children).

ATO Rulings:
structuring medical practices
 Tax Office Ruling IT 2503: sound business reasons and commercial
reasons should exist before incorporating.
 Incorporated medical practices cannot own income-producing
property or plant and equipment unless the property or equipment
is connected to the medical practice.
 Service entities are acceptable, provided the amount paid is
reasonable.
 Note: ATO Tax Rulings address the use of practice
companies, but it is specifically stated that practice trusts
are a valid structuring option for a medical practice.

No hard and fast rule on what is a
“Business Structure”
 If the practice is undertaking a “business” and generating
“business income”: no requirement to comply with the rules
regarding taxation of profit per Tax Ruling IT 2503.
 Tax Ruling IT 2639 outlined the ATO view on whether the
income of a medical practice is being derived from a
“business structure”.
 The general rule of Tax Ruling IT 2639: if the practice
company or trust has at least as many non-principal GPs as
principal GPs, the income is considered to be derived from
the “business structure”.

Recent ATO developments:
Allocation of Profits
 “Goalposts have been moved” with regards to the allocation
of profits from professional services (including medical
professionals).
 From as far back as 2005… all the way to September 2014,
when the ATO released guidelines titled “Assessing the Risk:
Allocation of Profits Within Professional Firms”, there have
been inconsistent messages when compared to ATO Rulings.
 Conservative approach is to maintain compliant with the
ATO Rulings in relation to personal services income OR
request a Private Ruling from the ATO.

Recent ATO developments:
Partnership of Discretionary Trusts
 If you are using or thinking of using a Partnership of
Discretionary Trusts as a structuring option, be aware:
 The ATO released a Taxpayer Alert (TA 2013/3) dealing with
changes in practice structures involving “the purported
alienation of income through discretionary trust partners”.
 The Alert does not specifically say partnerships of
discretionary trusts are not acceptable structures, but there
must be commercial reasons and the arrangement must be
legally effective.

Other general tax related
structuring considerations
 Effective rates of
taxation
 Assessable income and
allowable deductions
 Access to concessions
 Tax losses
 Financing costs
 Cash flow
considerations
 Superannuation
concessions
 Anti-avoidance
provisions

General structuring considerations
 Exposure to liabilities
 Compliance costs
(keep it simple!)
 Control over assets
and income
 Ability to obtain finance
 Wealth creation
 Disclosure of results
 Family situation
 Succession and
estate planning
 Ability to
restructure

Structuring summary
 Weighing up the types of structures available, the ATO
compliance requirements and general other structuring
related considerations, in most cases trusts are the most
beneficial type of structure to run a medical practice.
 Trusts offer reduced overall compliance costs and
administrative time, whilst providing longer term flexibility.
 Remember, if your medical practice is not considered a
“business structure” deriving “business income”, all income
must be distributed to the GP who generated it, and not
distributed to any other person.

The ATO and Service Entities
 ATO has always required Service Trusts to be set up for a
valid commercial reason;
 Tax Ruling (TR 2006/2) and Guidebook contain strict
guidelines for Service Entities;
 Guide sets out mark-up rates, that if applied, would leave
you at a “low risk” of audit;
 Guide outlines two approaches that taxpayers may choose in
working out whether service fees were acceptable:
 comparable market prices
 comparable profits (net or gross mark up on costs).

Service Entities: minimum
compliance requirements
 Ensure that your service trust meets the ATO minimum
requirements:
 The service trust needs to provide the service!
 Leases, employment agreements and invoices should all be in
the name of the service trust.
 Monthly tax invoices issued by the service trust and paid by the
medical practice.
 Service entity agreement is a must, with annual review.
 Consider the commercial benefits of the service entity.
 Maintain a set of accounts, document service entity charges and
reviews for commerciality, director minutes, etc.

Service Entities:
are they still relevant?
 Use of service entities is in decline.
 Compliance costs associated with maintaining service
entities v benefits of the structure.
 Changing landscape of preferred structuring strategies:
 Use of trust structures for medical practices (where there is a
business structure).
 Superannuation contribution strategies.
 Family involvement in medical practice (employment strategies).
 Consider your own structure and circumstances!

Tax Life Cycle of a Medical Professional - Part 1

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