Medical Service Entities
Medical professionals’ main frustration is that they pay a significant amount of tax and have very limited ways of reducing this. The main type of income that you will receive as a doctor or dentist is known as personal services income; i.e. income from your personal work and exertion. The principle is that if you do the work, you pay the tax. Despite what you may have heard from colleagues, there are no tax structures for doctors to legitimately distribute this personal exertion income to other family members.
However, there is one structuring option for doctors and dentists in private practice that may be available to you: medical service entities.
What is a medical service entity?
A “service entity” is typically established by doctors or dentists setting up their private practice or GP practice. The medical service entity is the entity under which all equipment is owned, non-medical staff are employed and all business expenses are incurred. The main reasons for using a medical service entity are:
asset protection; and
tax planning.
Asset protection
A medical service entity runs a business and employs staff, which has inherent risks. For a doctor or dentist it makes perfect sense to establish an appropriate structure to help minimise these risks and separate them from yourself.
Tax planning
The income of the medical service entity comes from the doctor/s or dentists to which the business provides the services. The fee paid by you to the medical service entity for the services provided (e.g. administrative support and bookkeeping) qualifies as a tax deduction and represents business income to the medical service entity. Being a business, the medical service entity is entitled to make a profit, so the fee charged to the doctor or dentist will usually include a ‘mark-up’ or profit margin on the actual costs incurred.
For example, a medical service entity may have costs of $300,000 during a year but charge you $330,000 in service fees. The service entity would thus make a profit of $30,000. The income is derived through the operation of a business (not personal services) and as such can be distributed or allocated to other parties, usually associates of the doctor or dentist. Typically, the income tax rates of the recipients of the medical service entity income would be lower than the doctor or dentist’s marginal tax rate, leading to a tax saving.
Be aware
Service fees need to be based on commercial rates and terms, and well-documented. Excessive service fees can be seen as tax avoidance and attract substantial penalties. You should always seek advice from a specialist accountant before establishing a service structure. Please contact our office on 08 9381 2704 or mitchell@affluenceca.com.au if you would like to discuss this tax planning strategy and book your free review meeting.
Disclaimer
Every effort has been made to offer the most current, correct and clearly expressed information possible within this blog. Nonetheless, inadvertent errors can occur and applicable laws, rules and regulations may change. The information contained in this site is general and is not intended to serve as advice. No warranty is given in relation to the accuracy or reliability of any information. Users should not act or fail to act on the basis of information contained herein. Users are encouraged to contact Affluence Chartered Accountants for advice concerning specific matters before making any decisions.