Tax Traps for Medical Professionals
Enterprise1 manages the financial affairs of medical professionals including general practitioners, surgeons, anaesthetists, dentists, and also nurses and ancillary staff. In this article, I answer several questions that are often asked by our medical practitioner clients.
Is it true that I can pay less tax by operating via a practice company?
No. As per Taxation Ruling IT 2503, the ATO only accepts incorporation1 of professional practices for legitimate commercial reasons and only if it does not result in the practitioner gaining an income tax advantage (apart from superannuation) or diverting income to family members.
Accordingly, all practice company profits must be paid the principal medical practitioner(s) by way of salary and wages, and are therefore taxed at individual marginal tax rates, leaving the practice company with no taxable income2.
However, if an incorporated medical practice derives its income from a ‘business structure’, as opposed to the personal services of the practitioner(s), it will be permitted to retain profits and pay income tax at the corporate tax rate. Furthermore, it’s also allowable to split income by assigning equity to a spouse or other relative (known as an ‘Everett assignment’), provided reasonable remuneration is attributed to the practitioner(s) for their personal exertion3.
Taxation Ruling IT 2639 outlines factors that might indicate a business structure, including:
the nature of the practice’s activities;
the extent of reliance on the practitioner’s own skill and judgement;
the use of income producing assets;
the number of employees, contractors and other staff;
the ratio of principal to non-principal practitioners.
In summary, incorporation of medical practices typically cannot reduce a medical practitioner’s income tax. Any such schemes would almost certainly attract severe penalties. Exceptions exist for medical practices that derive income from a business structure.
The concepts contained within Taxation Ruling IT 2503 apply equally to the formation of practice trusts and partnerships.
The ATO will allow a minor taxable income arising from uncertainty in determining the exact profit prior to the 30 June year-end, and also to allow for non-deductible items such as entertainment expenditure, unpaid superannuation, etc. However, any such profits should be paid to the medical professional via franked dividend in the following financial year.
The ATO has recently suspended and is currently reviewing its guidelines around income splitting within professional practices. However, the ATO has previously shown a willingness to accept income splitting to spouses and other family members within strict limits, and as such we feel that any changes will be limited to more complex arrangements.
Can I pay a family member for administrative or clerical support?
Yes. Whilst Taxation Ruling IT 2503 specifically prohibits diversion of profits to a spouse or family member, this restriction does not apply to reasonable payments made to a relative for genuinely provided services.
However, all other employer obligations must be paid, including compulsory superannuation, withholding taxes, fringe benefits taxes, workers’ compensation and, if applicable, state payroll taxes, etc.
I am contracting to a hospital as a Locum or VMO, do I need to charge GST?
Supplies of medical services are typically GST-free where the supply is made by a registered medical practitioner and the treatment is covered by Medicare and/or is generally accepted as necessary for the appropriate treatment of the patient; — refer to Sections 38-7 and 38-10 of the GST Act.
However, there has been confusion as regards multi-party arrangements where the medical professional is contracted, as a Locum or VMO, by the hospital to deliver their services, rather than engaging directly with the patient.
In these cases, there are two separate supplies; one supply from the medical professional to the hospital, and a separate supply from the hospital to the patient. It was considered that the former could be subject to GST, as the supply of services is to the hospital and not the patient.
This issue was addressed with the Tax and Superannuation Laws Amendment Bill 2012, which inserted Section 38-20 into the GST Act to make the medical professional’s supply to the hospital GST-free if the underlying service to the patient would also be considered GST-free under the GST Act.
Accordingly, Locum and VMO arrangements with public hospitals will now generally be considered GST-free. However, parties can still voluntarily contract that GST will apply, and, for administrative ease, some hospitals have adopted this as standard policy when engaging in Locum or VMO arrangements.
Taxation of medical professionals is complex and penalties for non-compliance can be severe. We recommend that medical practitioners seek professional advice before establishing their own practices and then undertake regular reviews of their arrangements thereafter. This ensures that the practitioner has properly mitigated risk and will avoid becoming yet another test-case for the Australian Taxation Office.
If you believe that your arrangements might be non-compliant, or if you want to optimise your existing affairs to pay less tax and retain more wealth, please contact our office to arrange a free confidential discussion and review; — Link to Contact Form.
Or if you have any questions about the article, email the author; — Luke@Enterprise1.com.au