Service Entities – Tips and Traps
When doctors establish their own practice, start taking rooms, employing staff and purchasing equipment, they essentially create a new business. From a tax and structuring perspective, there are two businesses operating – the individual medical practice of the doctor and the new service business.
The service entity employs all staff associated with the practice, provides all administrative materials such as stationery, postage and telephones, operating premises and perhaps the equipment used by the practice. The service entity then charges a fee to the doctor for the supply of these services.
The use of this structure is extremely common within the medical profession and the Australian Tax Office (ATO) has accepted the use of service entity arrangements. However, where there is an overcharging of service fees or a service fee is charged at non-commercial levels to the doctor/s, it can be seen as tax avoidance and attract substantial penalties.
In determining the appropriateness of a service fee, ask yourself, “If I did not control the service entity to which I am paying the service fee, would the level of the payment differ?” That is, would I pay an external provider the same amount that I currently pay my own service entity? If the answer is no and you would in fact be paying less, it is possible you are overpaying your service fee. The ATO are placing greater scrutiny on this area.
There have been a few cases in recent years, where the service entity arrangement has not been upheld by the courts and some taxes such as payroll tax have been made to be payable by these entities. However, if the service fee entity and its service fee arrangement is set up correctly and is appropriately documented, neither the relevant contract provisions nor employment agency contract provisions should apply. Therefore, payroll tax and employee entitlement provisions (such as leave and superannuation) would not be payable in these circumstances.
The key components of these arrangements are as follows:
- It is not the medical professional providing any services to the service entity, but rather the service entity is providing premises and administrativesupport to the doctor, which allow
- them to operate their business from the premises in exchange for a mutually agreed fee.
- The patients under this model are patients of the individual doctors and not the service entity.
- A correctly worded service fee agreement – beware of any back of the envelope-type contracts as they may not stand up in court.
- Use of advertising – ideally practice advertising should focus on the practice’s clients which would be medical practitioners who wish to use the premises, rather than patients. Also, the doctors should not be identified as ‘our staff’ .
These factors must exist in order for an arrangement to be considered a correctly administered service entity arrangement.
1. DO I NEED TO OPEN A SEPARATE BANK ACCOUNT TO RECEIVE THE PATIENT FEES OF THE INDIVIDUAL DOCTORS?
This is not a mandatory requirement, provided you can track and record each medical practitioner’s patient fees for each payment period and are able to use these numbers to calculate a service fee. We advise clients to maintain a patient fee liability account on the balance sheet for each doctor
utilising the practices services, to track this income, their service fee and the net payment owing to them. Where this process is followed, a separate bank account is not required.
2. DO I NEED A WRITTEN SERVICE AGREEMENT BETWEEN EACH INDIVIDUAL MEDICAL PRACTITIONER AND THE SERVICE ENTITY? SHOULD THIS CONTRACT BE A LEGAL CONTRACT PREPARED BY A SOLICITOR?
The answer to both of these questions is absolutely yes! This is the only way that you, as the owner of the practice, can be sure that you fall within the service fee arrangement guidelines and can gain some reassurance that the doctors utilising your
services will not be classified das employees or contractors
3. THE PRACTICE’S AGREEMENTS FALL UNDER THE EMPLOYEE AND CONTRACTOR PROVISIONS, WHAT DOES THIS MEAN FOR MY PRACTICE?
If this does occur, then this may be very costly to your practice. This will mean that the practice must pay superannuation, leave entitlements and potentially payroll tax if you exceed the $1,100,000 taxable wages threshold.
It never hurts to seek a second opinion. As an AMA Queensland member, William Buck provides you with a complimentary consultation to review your financial laffairs and ensure you are compliant with tax legislation. This second opinion is at no risk to you and will give you peace of mind that you are doing the right thing and can stay off the ATO radar.
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon with seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation.