Saving tax with a medical service entity

Yves SchoofFinance

Doctors’ main frustration is that they pay a significant amount of tax and have very limited ways of reducing this. The main type of income that you will receive as a doctor is known as personal services income; i.e. income from your personal work and exertion. The principle is that if you do the work, you pay the tax. Despite what you may have heard from colleagues, there are no tax structures for doctors to legitimately distribute this personal exertion income to other family members.

However, there is one structuring option for doctors in private practice that may be available to you: medical service entities.

What is a medical service entity?

A “service entity” is typically established by doctors setting up their private practice or GP practice. The medical service entity is the entity under which all equipment is owned, non-medical staff are employed and all business expenses are incurred.

The main reasons for using a medical service entity are:
– asset protection; and
– tax planning.

Asset protection

A medical service entity runs a business and employs staff, which has inherent risks. For a doctor it makes perfect sense to establish an appropriate structure to help minimise these risks and separate them from yourself.

Tax planning

The income of the medical service entity comes from the doctor/s to which the business provides the services. The fee paid by you to the medical service entity for the services provided (e.g. administrative support and bookkeeping) qualifies as a tax deduction and represents business income to the medical service entity. Being a business, the medical service entity is entitled to make a profit, so the fee charged to the doctor will usually include a ‘mark-up’ or profit margin on the actual costs incurred.

For example, a medical service entity may have costs of $300,000 during a year but charge you $330,000 in service fees. The service entity would thus make a profit of $30,000. The income is derived through the operation of a business (not personal services) and as such can be distributed or allocated to other parties, usually associates of the doctor.
Typically, the income tax rates of the recipients of the medical service entity income would be lower than the doctor’s marginal tax rate, leading to a tax saving.

A final word of caution on the medical service entity

Service fees need to be based on commercial rates and terms, and well-documented. Excessive service fees can be seen as tax avoidance and attract substantial penalties. You should always seek advice from a specialist accountant before establish a service structure. Please contact me if you would like me to refer you to a specialist in this area.

About Yves Schoof

I specialise in medical financial planning and coordinating the financial affairs of medical professionals. I have been recognised as one of the Top 10 financial planners in Perth and Australia. I am a Certified Financial Planner and member of the Financial Planning Association of Australia.

As I understand your time is extremely valuable and scarce, I am able to offer flexible meetings times, including outside business hours and during the weekend. I can even come and meet you somewhere convenient, or talk via videoconference on Skype.

My first consultation is free. I allocate up to 90 minutes to discuss your personal circumstances and to establish how I may best assist you. Where you already have an existing adviser, I would be happy to offer a second opinion. I always quote a fixed dollar fee before we start working together.
Please contact me on yves@affluenceprivate.com.au or call me direct on 0432 885 295. You can follow me on Twitter @YvesSchoof or connect with me on Linkedin to receive new articles.

Disclaimer

Yves Schoof and Affluence Private Wealth are Authorised Representatives of Synchron, AFS Licence No. 243313.
The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs.
Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.

Yves Schoof
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Yves Schoof

Author | Specialist Adviser for Medical Specialists and Surgeons at Affluence Private Wealth
I specialise in managing and coordinating the financial affairs of medical professionals and have been recognised as one of the best financial planners in Australia. I am a Certified Financial Planner and member of the Financial Planning Association of Australia.

As I understand your time is extremely valuable and scarce, I am able to offer flexible meetings times, including outside business hours and during the weekend. I can even come and meet you somewhere convenient, or talk via videoconference on Skype.

My first consultation is free. I allocate up to 90 minutes to discuss your personal circumstances and to establish how I may best assist you. Where you already have an existing adviser, I would be happy to offer a second opinion. I always quote a fixed dollar fee before we start working together.

Please contact me on yves@affluenceprivate.com.au or call me direct on 0432 885 295. You can follow me on Twitter @YvesSchoof or connect with me on LinkedIn to receive new articles.

DISCLAIMER
Yves Schoof and Affluence Private Wealth are Authorised Representatives of Synchron, AFS Licence No. 243313. 

The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs.
Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.
Yves Schoof
Follow me

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