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Session One : Service EntitiesA Brief Overview

2007

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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 www.mcminvestors.com.au

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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 2006

• 31 March 2007 start date

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What does a service entity look like?

Patients, whether directly or via insurers

Pay medicalfees to

Doctor’s medical practice entity, which runs the

medical practice

Pays management fee toService Entity, which

provides all non-medical services (eg. staff,

premises, plant and equipment, etc).

Pays profit to persons facing a lower tax rate

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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.

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Common faults with service entities

Medical practice provides its own servicesRelationship is not commercialNo commercial explanation for the relationshipFees higher than accepted benchmarksDocument trail ignoredNo service agreementNo tax invoicesPayments without tax invoices

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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 2007.• Most service trust structures under review

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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%)

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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

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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