In this podcast, Tax Specialist and Director Craig Meade from DPM Financial Services will be discussing the ATO’s position on service fees, including what Service Agreements and service trusts are, what can be claimed under a service trust, what the ATO looks for when assessing service trusts and more.
This podcast is brought to you by DPM Financial Services, DPM is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals. DPM Financial Services is all about you getting the right advice that suits your personal and professional needs and making sure you have confidence in your financial future. You can get in touch with DPM at email@example.com or by calling 1800 031 039
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The financial journey of a doctor is unique and complex. DPM Financial Services is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals.
DPM Financial Services is all about you getting the right advice that suits your personal and professional needs and making sure you have confidence in your financial future.
Today I’d like to welcome to the PodMD studio Craig Meade from DPM.
Craig is a Certified Practising Accountant and a Fellow of the Taxation Institute of Australia. He is a specialist in managing the unique needs of the medical profession. Craig advises his client base of high net worth professionals on taxation, structuring, investments, retirement planning, asset protection and finance.
*We do hope you enjoy this podcast but please remember that the here is of a general nature and is not intended to serve as advice. The views and opinions expressed in this podcast are those of DPM and Fletcher Clarendon, not PodMD.
Legal services are offered by DPM in partnership with Fletcher Clarendon Lawyers. DPM Financial Services recommends you obtain medical financial advice or legal advice concerning specific matters before making a decision.
Craig, thanks for talking with us on PodMD today.
Craig: Pleasure. Thank you for having me.
The topic of today’s discussion is the ATO’s position on Service Fees and what private practitioners need to consider.
To get us started, can you briefly explain what Service Agreements are, what they cover and why they are so important to get right?
Craig: Yeah. Thanks, Peter. I think what I’ll do to start with is might give you a little bit of a history about service trusts and service fees and they’re really governed from 1978. There was a case called Phillips Case and from 1978 to 2006, Phillips case basically laid down the rules as to what you could charge, but then the ATO fundamentally tipped it all on its head and they released tax ruling 2006-2, which came out and governed what could be paid in terms of service fees for medical practitioners.
Now the guidelines is the important document here because it’s specified the GP could have 40% and rural GP’s were 45%. However, it was silent when it came to specialists and also especially anaesthetists. Now the specialists from our research having thousands of doctors is that we knew that the specialists could charge between 25 and 35% roughly, and that information has allowed us to advise proactively our clients in regard to this space, however, and anaesthetists Peter, they operate very differently. They don’t have large amounts of equipment, basically a booking service and they are very, very different.
So what applied to an anaesthetists was always going to be very difficult to ascertain. And until recent times and I and I’ll talk a little bit that later on, however, the most crucial thing you need. Is to establish the structure correctly in accordance with guidelines and the most vital document that you can have is the actual service agreement between the practitioner and the service trust that is vital to actually have that in a format that is in line with what the ATO commercially want to see.
What is a service trust and who can benefit from one?
Craig: OK, what happens Peter is that medical practitioners are very busy across all specialties, and so what they are effectively doing is they’re establishing a service entity, generally through a trust, and that trust is running their practice. So it takes away the day-to-day running’s of the practice. It employs the staff, it pays the rent, it books the patients it chases up the fees and effectively what happens is it’s an arms length third party entity and that service trust will then make a profit and the profits of that trust can be distributed to beneficiaries in line with the trust instrument, which is the trustee, and that will generally be to spouses or partners, other family members, children, it will go to pay expenses such as education costs, etcetera and fundamentally can be a real asset protection and wealth creation mechanism going forward and into the future.
What can be claimed under a service trust?
Craig: Well, service fees are actually tax deductible and the service fees that are paid by the practitioner are accessible in the service trust and fundamentally all costs are then deductible to the service trust, which will generally leave a profit. I’d just like to turn our attention, Peter to a couple of other very specific DPM things that we have some intellectual property.
What we have is the situation in the ACT in NSW and Queensland is that we have a situation where they earn a substantial amount of money from visiting medical officer contracts and what happens is that the private rooms end up paying costs to generate this and these are costs and services that the hospitals should be providing, but don’t. So what DPM have done is we’ve gone off to the tax office and we’ve applied and received some written guidance and indicative advice that in actual fact we can charge service fees of between 5 and 15% on VMO contracts. The differential in those percentages, Peter, is that 5% is for a virtual practice, so they don’t have rooms or staff. 15 is where you have rooms and the physical presence of staff also. In addition to that I’ve mentioned previously that we’ve got enough knowledge and IP with regard to specialists, but we’ve gone off and done the same thing with anaesthetists and anaesthetic groups Peter.
And what we have is that we have not only do we have an indicative advice written guidance, but we also have a specific ruling to one of our clients where anaesthetic groups can charge between 15 and 25% in service fees. Once again, the distinction being 15 are for virtual practises, 25 are for practices with premises and staff and this is a massive win for anaesthetic groups, but also for VMOS in those three states. So the anaesthetic one applies Australia wide and the VMO one is for Queensland the ACT and NSW, so it’s a bit of a feather in our cap, Peter, that we’re very proud of and it’s a real distinction in terms of our service offering that we can help those two groups of people.
Is a service fee tax deductible?
Craig: Absolutely, it is under the income Tax Assessment Act and the other point which I’ve made previously was that we also do have a specific ruling to one of our clients who is an anaesthetist in one of these anaesthetic groups that it actually stipulates that it is tax deductible. So once again the protection that can be afforded to clients of DPM under these rulings and these advices that we have protects that it is deductible to the individual.
What does the ATO look for when assessing service trusts?
Craig: What they will be looking for, Peter, is that they’ll be looking for commerciality. The service trust needs to be a an arms length third party entity and therefore you need to have contracts in the service entity, things like rental leases, telephone contracts, staff employment agreements, those sorts of things. So it’s a stand-alone entity and what ties it together is that service agreement. And when you’ve got all those ducks in a row, then you can have the protection of the documentation we’ve got from the ATO, which will put everyone in a very low audit possibility and that is added protection for clients who are entering into service arrangements.
Are there any other important factors to consider when structuring your private practice?
Craig: Yeah, Peter, there’s many, many factors and you know asset protection and wealth creation are a couple, but service trusts aren’t for everyone. You actually have to analyse the figures and you have to make sure that the service entity is going to stand on its own 2 feet and it’s going to be profitable. You don’t go into any business to make a loss, so you want to make sure that it is profitable to set these structures up is not a cheap exercise and then they have to be run.
There are compliance costs. So you want to analyse exactly how cost effective they are, and that it is going to be profitable. So as I said, it’s not for everyone, but to have to have some ATO guidance in terms of the visiting medical officer ruling and also the anaesthetic group ruling and our knowledge on specialists of all shapes and forms gives us the comfort that we’re able to analyse and make sure that the service entity concept is applicable to clients individually.
Thank you for your time here today in the PodMD studio. To sum up for us, could you please identify the three key take home messages from today’s podcast on Service Trusts?
Craig: OK. But the first one is fundamentally analyse the profitability versus the cost, the cost to set it up and the cost to run it. I have a saying that don’t let the lawyers and the accountants win because lawyers and accountants cost money. But you, the practitioner, need to ensure that you are going to benefit and your family unit is going to benefit. That’s number one.
#2 set it up correctly. Have the right agreements have the right trustees have the right company constitutions. Make sure it’s established correctly, don’t scrimp and save a service agreement shouldn’t be a three-page document. It is a substantial document, so ensure you’re taking the correct advice.
#3 is, I’d look at the ATO protection with what we’ve got in terms of VMO and service fee rates that we’ve been provided by the ATO. And I will. I will throw in a little bit of a fourth one there, Peter, if I may, is that these structures can aid in wealth creation and asset protection and that is really, really important for long term family wealth development over time. So, it it’s probably a chat for another day. But it can be an adjunct as well, so that’s very important.
I’ll throw in the fourth one for free there, Peter.
Thank you for your time and the insights you have provided