Session One : Service Entities A Brief Overview 2007

Service Entities A service entity is a company, a trust or a partnership that provides administrative services to a professional practice in return for a management fee Management fee may be a percentage or a mark up Once very common Commissioner’s New Ruling and Guidelines May 2006 Now less common But not dead yet Read the full story at the Doctors’ Guide to Service Entities downloadable at

A brief history of service trusts Phillips Case Audit of large professional firms Commissioner’s report to the Parliament Draft ruling 4 May 2005 Consultative process Final ruling and guidelines 20 April March 2007 start date

What does a service entity look like? Patients, whether directly or via insurers Pay medical fees to Doctor’s medical practice entity, which runs the medical practice Pays management fee to Service Entity, which provides all non-medical services (eg. staff, premises, plant and equipment, etc). Pays profit to persons facing a lower tax rate

Potential benefits of a service entity Assets in the service entity are protected from the risk of patient litigation; Your accountant’s kids’ education costs are paid and their wellbeing generally enhanced Incidentally, there may be some tax benefits.

Common faults with service entities  Medical practice provides its own services  Relationship is not commercial  No commercial explanation for the relationship  Fees higher than accepted benchmarks  Document trail ignored  No service agreement  No tax invoices  Payments without tax invoices

The May 2006 Ruling Discussed in detail later in session ATO Ruling May 2006; ‘Low Risk of Audit’: –service fee ≤ 40% of billings; –45% for solo practitioners and rural doctors. All services must actually be rendered; Little new in the ruling; “Amnesty” until April Most service trust structures under review

Should you use a service trust? Only if you have to. Consider: –costs, –complexity, –risk of audit There are smarter ways to do things: –practice as a business –large superannuation contributions May be worthwhile if: –higher than usual income –lower than usual costs –particularly for solo doctors or rural doctors (45%)

How to satisfy the ATO’s rules Observe the benchmark rates (40%/45%) Make sure the arrangement is real Make sure the arrangement is commercial Service agreement (Dox4Dox) Tax invoices rendered promptly Tax invoices paid promptly No payment without a tax invoice Do not pay personal deductible costs from SE

Is there a risk of an ATO audit? No risk of audit if you observe the ruling, particularly the benchmark rates of 40%/45% ATO has only completed a few audits Doctors are not in the ATO’s audit sights ATO interested in bigger fish 31 March 2007 is the real start date Relax, there is plenty of time But think hard about whether you need a service trust and preferably make it redundant with a practice trust and/or a heavy super strategy