Medical doctors can not share profit with their spouse and children. However, there is plenty of work in the practice that does not relate to being a doctor.
For example, the hiring of staff, accounting, nurses, receptionist and marketing can be profit centres for another business. This other business is called a Service Trust.
The relationship between the Doctor and the Service Trust is called a Doctor Service Trust Agreement.
Medical Doctor Service Trust Agreement
It is common practice for a Medical Practitioner to use a service trust (service entity). A service trust is often a:
1. Family Trust – if just one doctor
2. Unit Trust – if 2 or more doctors
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 medical service trust is a second business. The doctor’s service trust provides services to the doctor. It charges a fee for providing those services. Service trust profits are shared with the doctor’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 the medical doctor’s family members.
But it is not enough to have just a medical service trust. You need the agreement between the doctor and the service trust. This agreement is called a Medical Practitioner 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 doctor’s practice.
1. Other professionals such as engineers, dentist, lawyers and accountants that cannot 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.
The medical service trust is a separate standalone business. Via the Doctor Service Trust Agreement, it provides services, for a profit, to the Medical Practitioner. The services are provided at ‘market rates’. This is required by the ATO TR 2006/2. The medical 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 Medical Practitioner brings in revenue of $1.6m. The Service Trust provides services to the doctor. The Doctor Service Trust Agreement sets out the services. Services include cleaning the clinic, providing secretaries, nurses, maintaining doctor’s diary, computers, marketing, office lease and bookkeeping. The service entity owns the equipment and employs all non-medical staff.
The Medical Practitioner Service Trust (via the Service Trust Agreement) charges the doctor $1.4m in fees.
By providing these services the Medical Service Trust makes a profit of $.8m. (This is after it pays its expenses of $.6m.) That profit is distributed to the doctor’s spouse, children and other trust beneficiaries.
Personal services income (PSI) is income. But it is mainly a reward for an individual’s personal efforts or skills.
You receive PSI in almost any industry, trade or profession. These include:
PSI does not affect the medical doctor, if you are an employee receiving only salaries and wages. For example, you work as an employee at a hospital. Obviously, if you are an employee then you personally pay income on the salary or wages you receive.
If you are operating through an entity, such as a company, partnership or trust, and are an employee of that entity then the PSI rules may still apply. So, hiding behind a company, partnership and trust may not be enough to escape the PSI rules.
The PSI rules treats individuals earning PSI as a quasi-employee. The ATO looks through any structures, such as a medical company or trust, which may be in place to attribute the income generated back to the individual who earned that income.
When PSI rules apply, there are limits to deductions that you can claim against this income. In general, a medical doctor who earns PSI is treated as an employee. And they are taxed on their earnings.
The doctor cannot ‘share’ the tax burdon on 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 doctor’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 doctor.
A medical Service Trust Agreement is a type of Independent Contractors Agreement (‘contract for services’).
The principal (doctor) 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 Medical Practitioner Service Trust Agreement.
The contractor is ‘independent’. The contractor is not an employee of the principal (doctor). In fact, they are (and must be) two separate stand-alone businesses.
Your accountant, each financial year, tells you what to charge. The Medical Service Trust Agreement allows for this. You charge ‘market rates’. Treat the medical service trust as a separate non-related business. The Medical Service Trust Agreement allows the service trust to provide many services. These include:
(a) plant and equipment (desks, chairs, medical equipment)
(b) non-medical staff to the Doctor (build the Employment Contracts here)
(d) the premises where the doctor practices from
(e) budgeting, forecast, bookkeeping, accounting and debt collection services
(f) marketing, corporate design and identity and brand awareness
(g) additional services — as agreed by the parties from time to time
The Medical 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 Medical Service Trust Agreement is silent on what it charges the medical practitioner. So that it is never out of date. Your accountant advises you on what the appropriate charges are during the financial year.
Talk with your accountant. Your accountant, for a single doctor with rooms, will:
Need a hand answering the question as you build the Medical Practitioner Service Trust Agreement? Just telephone us.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers & Solicitors
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