Service Entity arrangements are just one method of remuneration by Medical Practices to Medical Professionals. There are many other methods Medical Practices used to pay Doctors and the income tax and GST treatment is very different depending on the nature of the arrangement.
A service entity arrangement between a Medical Professional and Service Trust is the ‘’Vanilla” arrangement we find most medical practices use. However some practices are struggling to understand the detail surrounding this arrangement and so we are seeing very loose and undocumented service entity arrangements. While some arrangement are not Service Entity Arrangements but something completely different.
A correctly documented service entity arrangement will detail the Patient Fee split in the service entity agreement. The agreement will confirm the percentage of Service Fee paid to the practice (usually between 30% and 40% of patient fees) and the percentage of the patient fee disbursed to the doctors. The arrangement in one where the Service Entity bills the patient on behalf of the medical professional under their Medical Professionals provider number.
Since the Medical Professional is billing the individual patient then the revenue received by the doctor will be GST Free. The Service Fee paid by the doctor to the Service Entity is however subject to GST and so the Service Entity will charge the doctor an additional 10% GST on the service fee amount. Where this is well document there will be a monthly Pro- Forma Medical Practice Tax Invoice which details the service entity fee as well as the Patient Fee Disbursement to the Medical Professional. This pro-forma tax invoice can be set up in the cloud accounting program where one is utilized and used as a template each month.
In relation to the Personal Service Income rules the medical professional under a service entity arrangement is able to pass the results test. So the income tax treatment is as a personal services business and the Medical Professional can claim business related deductions including claiming a deduction for the employment of administration staff. Even if they didn’t pass the results test they would still pass the 80% income test and unrelated clients test and still be considered to be a personal services business.
However we see some Practices with remuneration arrangements that are Contractor Arrangements and not Service Fee Arrangement. The two should not be confused. A Contract arrangement is where the Patients are being billed by the Practice under the Doctors Provider Number. The Doctor remuneration here is subject to GST as the service provided by the Medical Professional is to the Practice and not to the individual patients.
In relation to the Personal Service Income rules the Medical Professional under a contractor arrangement may also be able to pass the results test. So for income tax the income they may still be treated as a personal services business and still be able to claim business related deductions, including the employment of administration staff. However where they do not pass the results test they would be unable to pass the 80% income test and unrelated clients test and so income would then be considered personal services income.
Although both a Service Entity Arrangement and Contractor Arrangement may work fine we find medical practices do not completely understand the differences between the two arrangements. With some arrangements we see a combination of Service Entity arrangement and Contractor Arrangements.
We recently prepared the taxation for a Medical Professional and found the Tax Invoices issued to the Medical Professional were incorrect and the remuneration and GST amounts were being calculated incorrectly. We also noticed that the doctor remuneration was dependent on the level of patient fees and the Medical Professional could receive the higher of the 70% of patient fees billed and $150 x hours worked. As this was a relatively new practice with patient numbers steadily growing the hourly rate calculation was more often higher than the Service Fee Calculation. Since this doctor was paid on an hourly rate basis the income received ought to be a Contract Remuneration Arrangement and subject to GST. This remuneration arrangement still works and is suitable for a growing practice with insufficient patients to adequately remunerate a Medical Professional on a Service Fee Arrangement it is a different arrangement to a Service Entity arrangements and so tax and GST is look at differently.
Medical Professionals and Medical Practices should review their current Service Entity Arrangement Documentation including their tax invoices to confirm what type of arrangement is actually in place. If they have a cloud based accounting system in place such as Xero then the Pro-forma Tax Invoice Template should be set up correctly to ensure the process is systemized. If you are not sure and just want to have this reviewed to avoid concerns at tax time then the Practice should discuss this as soon as possible with their adviser. The Medical Professionals should also ask their adviser to take a closer look at the Tax Invoices they have been issued by the practice to determine what arrangement is in place and if the income and GST calculations are correct.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.