Dentist Service Trust Agreement
It is common practice for dentists to use a service trust (service entity). A service trust is often a:
1. Family Trust - if just one dentist
2. Unit Trust - if 2 or more dentists
3. Company - not common as profit is trapped and no CGT relief. But useful if you have no family because of the 30% tax rate
Build these 3 types of service trusts on our website.
The service trust is a second business. The service trust provides services to the dentist. It charges a fee for providing those services. Service trust profits are shared with the dentist's spouse, children and family. They pay tax at a lower marginal tax rate. Therefore, the service trust saves tax. It helps with superannuation benefits and the spreading of income to family members.
But it is not enough to have just a service trust. You need the agreement between the dentist and the service trust. This agreement is called a Dentist Service Trust Agreement. The Service Trust Agreement is a contract. It allows the service trust to supply equipment, staff, receptionist, premises and administration services to the dentist's practice.
Service Trust Agreements are also popular for:
1. Other professionals such as engineers, doctors, lawyers and accountants that can’t otherwise share profit easily.
2. Asset protection - one entity holds the high-risk activities (employees, tenancies & advice) the other keeps all the 'good' assets (land, intellectual property) in a low-risk entity.
3. Companies wanting to liberate wealth and move profit into a trust structure. Unlike a company, the service trust can access the CGT tax concessions. Therefore, the service trust often holds appreciating assets. These include real estate, franchises, copyright and ‘leased out’ business names.
Where is the tax advantage?
The service trust is a business. Via the Dentist Service Trust Agreement, it provides services, for a profit, to the dentist. The services are provided at ‘market rates’. This is required by the ATO TR 2006/2. The service trust then distributes the ‘profit’ it makes. This is from running the business. The profit goes to the non-working spouse, children and other taxpayers at a lower tax rate.
The dentist brings in revenue of $1.6m. The Service Trust provides services to the dentist. The Dentist Service Trust Agreement sets out the services. Services include cleaning the clinic, providing secretaries, nurses, maintaining dentist's diary, computers, marketing, office lease and bookkeeping. The service entity owns the equipment and employs all non-medical staff.
The Service Trust (via the Service Trust Agreement) charges the dentist $1.4m in fees.
By providing these services the Service Trust makes a profit of $.8m. (This is after it pays its expenses of $.6m.) That profit is distributed to the dentist's spouse, children and other trust beneficiaries.
The dentist can't share 'personal services income'. However, the service trust 'income' is not personal services income. This is because the service trust is a separate business to the dentist's medical practice. The service trust operates on an 'arm's length basis'. Therefore, the income is distributed to the spouse, children and other beneficiaries related to the dentist.
Independent Contractors Agreement
A Service Trust Agreement is an Independent Contractors Agreement ('contract for services').
The principal (dentist) requests and pays for the services. The person providing the services is the contractor (service trust). The agreement between the principal and contractor is the Dentist Service Trust Agreement.
The contractor is 'independent'. The contractor is not an employee of the principal (dentist).
What should the Service Trust charge?
Your accountant, each financial year, tells you what to charge. The Service Trust Agreement allows for this. You charge 'market rates'. Treat the service trust as a separate non-related business. The Service Trust Agreement allows the service trust to provide many services, including:
(a) plant and equipment (desks, chairs, medical equipment)
(b) non-medical staff to the dentist (build Employment Contracts here)
(d) the premises
(e) budgeting, forecast, bookkeeping, accounting and debt collection services (build Letters of Demand and Writs here)
(f) marketing, corporate design and identity and brand awareness
(g) additional services — as agreed by the parties from time to time
How do I update the Dentist Service Trust Agreement?
The Agreement is updated by an exchange of emails. Add more services as your accountant suggests. You can add a scope of work, plans, diagrams and specifications.
The Service Trust Agreement is silent on what it charges the dentist. So that is never out of date. Your accountant advises you on what the appropriate charges are during the financial year.
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Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
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