Medical Doctor Service Trust Agreement

Medical Doctor Service Trust Agreement – helps with payroll tax and personal service income (PSI)

Medical doctors can not share profits with their spouses and children. However, there is plenty of work in the medical field that does not require a doctor’s degree.

For example, hiring staff, accounting, nurses, receptionists, and marketing can be profit centres for another business. This other business is called a Service Trust. The relationship between the Doctor and the Service Trust is called a Doctor Service Trust Agreement.”

Medical Doctor Service Trust Agreement

It is common practice for a Medical Practitioner to use a service trust (service entity). A Legal Consolidated doctor service trust is often a:

• Family Trust – if just one doctor
• Unit Trust – if two or more doctors
• Company – not common, as profit is trapped and no CGT relief is available. But useful if you have no family because of the 30% tax rate

Build these three types of service trusts on our website.

The medical service trust is a second business. The doctor’s service trust provides services to the doctor. It charges a fee for providing those services. Service trust profits are shared with the doctor’s spouse, children and family. They pay tax at a lower marginal tax rate. Therefore, the service trust saves tax. It helps with superannuation benefits and the spreading of income to the medical doctor’s family members.

But it is not enough to have just a medical service trust. You need an agreement between the doctor and the service trust. This agreement is called a Medical Practitioner Service Trust Agreement. The Service Trust Agreement is a contract. It allows the service trust to supply equipment, staff, receptionist, premises and administration services to the doctor’s practice.

Medical Service Trust Agreements are also popular for:

1. Other professionals, such as engineers, dentists, lawyers and accountants, cannot otherwise share profit easily.
2. Asset protection – one entity holds the high-risk activities (employees, tenancies & advice), the other keeps all the ‘good’ assets (land, intellectual property) in a low-risk entity.
3. Companies want to liberate wealth and move profit into a trust structure. Unlike a company, the service trust can access the CGT tax concessions. Therefore, the service trust often holds appreciating assets. These include real estate, franchises, copyright and ‘leased out’ business names.

Tax advantages of a medical service trust for the Medical Practitioner

The medical service trust is a separate, standalone business. The Doctor Service Trust Agreement provides services to the Medical Practitioner for a profit. The services are provided at ‘market rates’. This is required by the ATO TR 2006/2. The medical service trust then distributes the ‘profit’ it makes. This is from running the business. The profit is distributed to the non-working spouse, children, and other taxpayers at a lower tax rate.

Example of a Medical Practitioner using a Service Trust agreement

The Medical Practitioner brings in revenue of $1.6m. The Service Trust provides services to the doctor. The Doctor Service Trust Agreement sets out the services.  Services include cleaning the clinic, providing secretaries and nurses, maintaining the doctor’s diary, computers, marketing, office lease and bookkeeping. The service entity owns the equipment and employs all non-medical staff.

The Medical Practitioner Service Trust (via the Service Trust Agreement) charges the doctor $1.4m in fees. 

By providing these services, the Medical Service Trust makes a profit of $.8m. (This is after it pays its expenses of $.6m.) That profit is distributed to the doctor’s spouse, children and other trust beneficiaries. 

Personal Services Income (PSI) for medical doctors

Personal services income (PSI) is income. But it is mainly a reward for an individual’s personal efforts or skills.

You receive PSI in almost any industry, trade or profession. These include:

• financial professionals
• information technology consultants
• engineers
• construction workers
• accountants
• medical practitioners

PSI does not affect the medical doctor if you are an employee receiving only salaries and wages. For example, you work as an employee at a hospital. Obviously, if you are an employee, then you personally pay income tax on the salary or wages you receive.

Operating through a business vehicle may not allow you to escape PSI

If you are operating through an entity, such as a company, partnership or trust, and are an employee of that entity then the PSI rules may still apply. So, hiding behind a company, partnership and trust may not be enough to escape the PSI rules.

The PSI rules treat individuals earning PSI as quasi-employee. The ATO looks through any structures, such as a medical company or trust, which may be in place to attribute the income generated back to the individual who earned that income.

When PSI rules apply, there are limits to deductions that you can claim against this income. In general, a medical doctor who earns PSI is treated as an employee. And they are taxed on their earnings.

The doctor cannot ‘share’ the tax burden on personal services income. However, the service trust ‘income’ is not personal services income. This is because the service trust is a separate business from the doctor’s medical practice. The service trust operates on an ‘arm’s length basis’. Therefore, the income is distributed to the spouse, children and other beneficiaries related to the doctor.

ATO focus on Doctors’ Service Entities and Income

The Australian Taxation Office (ATO) maintains a strong focus on compliance regarding the structures used by medical and dental professionals. Having a correctly drafted and implemented Doctor’s Service Trust Agreement is fundamental to defending your structure against an ATO review.

The ATO’s guidance clarifies that even if a practice structure is technically correct, the general anti-avoidance rules (Part IVA) can still apply. The ATO scrutinises arrangements where the dominant purpose may be to split income or reduce tax, rather than for a genuine commercial reason.

This is why your service entity arrangements must be commercially sound and meticulously documented. Our Doctors’ Service Trust Agreement provides the robust legal framework required to justify your structure.

ATO’s Practical Compliance Guideline (PCG) 2024/D2

At the heart of this development is the draft Practical Compliance Guideline (PCG) 2024/D2, which outlines the ATO’s compliance approach to arrangements where a Personal Services Entity (PSE) is used to derive income. This follows the finalisation of Taxation Ruling TR 2022/3, which consolidated and updated the Commissioner’s view on personal services income.

The key takeaway for doctors and other professionals operating through company or trust structures is that simply meeting the criteria to be classified as a PSB will no longer be a guaranteed shield against ATO scrutiny. The tax office has made it clear that it will be closely examining the commercial rationale and the substance of such arrangements.

Mastering Your Practice’s Tax and Structuring Obligations

A properly established service entity helps you navigate the complex compliance landscape for medical practices. Key areas of ATO focus include:

Service Entity Arrangements and Fees

Your service trust is a legitimate business entity providing services to the medical practitioner for a fee. However, the calculation of these fees is critical. The fees must be commercially justifiable and reflect the market value of the services provided (e.g., premises, staff, equipment, and administration). An improperly calculated or documented service fee is a primary target during an ATO audit. Our agreement provides the mechanism and framework for commercial fee setting.

Engaging Practitioners: Employee vs Contractor Risks

The distinction between engaging a practitioner as an employee versus an independent contractor is one of the most contentious issues in the medical industry. An incorrect classification creates significant risks, including:

• PAYG Withholding: If a practitioner is deemed to be an employee, the practice may be liable for back-pay of Pay-As-You-Go withholding tax, plus penalties.

• Superannuation Guarantee: Practices can face substantial liabilities for unpaid superannuation if a contractor is re-classified as an employee for superannuation purposes.

• Payroll Tax: Each state and territory has complex payroll tax rules, with recent rulings and court cases specifically targeting medical practices. We help you stay informed on the latest state-by-state developments.

Navigating Tax Rules for individual Medical Practitioners

Beyond the practice itself, individual doctors face their own set of complex tax rules that interact with their service entity structure.

Personal Services Income (PSI) Rules

It is vital to determine if a practitioner’s income is business income or Personal Services Income. The PSI rules are designed to prevent individuals from reducing their tax by using companies or trusts to split income for personal services. If the rules apply, they can:

• • • Limit the range of deductions that can be claimed.

    • Attribute all the income back to the individual who performed the services, regardless of the structure.

Income Streaming and Profit Allocation

For owner-practitioners, the ATO’s guidelines on the allocation of profits within professional firms (PCG 2021/4) are a key concern. These guidelines assess the risk profile of your profit allocation arrangements. Arrangements that result in low tax outcomes for the practitioner without a sound commercial basis are likely to be classified as high-risk and attract ATO scrutiny.

A Doctor’s Service Trust Agreement is a cornerstone document in demonstrating the commercial rationale of your practice structure and defending against challenges from the ATO.

A Medical Service Trust is a type of Independent Contractors Agreement

A medical Service Trust Agreement is a type of Independent Contractors Agreement (‘contract for services’).

The principal (doctor) requests and pays for the services. The person providing the services is the contractor (service trust). The agreement between the principal and contractor is the Medical Practitioner Service Trust Agreement.

• Principal = Medical Practitioner
• Contractor = medical service trust
• Medical service trust agreement = sets out the services provided by the Contractor

The contractor is ‘independent’. The contractor is not an employee of the principal (doctor). In fact, they are (and must be) two separate stand-alone businesses.

What does the Medical Service Trust charge? To comply with payroll tax and PSI

Your accountant, each financial year, tells you what to charge. The Medical Service Trust Agreement allows for this. You charge ‘market rates’. Treat the medical service trust as a separate, non-related business. The Medical Service Trust Agreement allows the service trust to provide many services. These include:

(a) plant and equipment (desks, chairs, medical equipment)

(b) non-medical staff to the Doctor (build the Employment Contracts here)

(c) consumables

(d) the premises where the doctor practices

(e) budgeting, forecasting, bookkeeping, accounting and debt collection services for the GP

(f) marketing, corporate design, identity and brand awareness of the doctor’s practice

(g) additional services — as agreed by the parties from time to time

(h) providing money and capital to fund the medical practice

(I) Service Trust provides clinical equipment, after talking with accountants and looking at what cuts the mustard with the ATO, we have seen:

• • Peak flow meter
  • Pen torch
  • Spirometer Scales (adult and paediatric)
  • Sphygmomanometer
  • Tape measure
  • Tendon hammer
  • Thermometer
  • Tuning forks – 128 Hz vibration sense
  • Vaginal speculum (stainless steel or disposable)
  • Wood’s(UV)lamp
  • Auriscope
  • Blood glucose monitor
  • ECG
  • Eye charts – visual acuity (Snellen) – colour vision (Ishihari)
  • Examination lights
  • Monofilament – 10 g for pressure sense testing
  • Oximeter
  • Ophthalmoscope – 256 Hz and 512 Hz hearing
  • Cryotherapy spray and liquid nitrogen tank
  • Dermatoscope
  • Digital camera
  • Diathermy
  • Vaccine fridge
  • Oxygen cylinder, regulator, masks and tubing
  • Laryngoscope and intubation set
  • IV cannulation sets, tourniquet
  • Spacer for administering bronchodilator
  • Doctor’s bag emergency supplies
  • Aspirin, paracetamol, antibiotic eye ointment
  • Doppler for fetal heart and arterial pulses
  • Ear irrigation device
  • Magnification loupe
  • Plaster saw
  • Steriliser
  • Surgical equipment for minor procedures
  • Lighting for Pap smears and procedures
  • Self-illuminated vaginal speculate
  • Audiometer

(J) Additional services. GP Service Trust can provide pathology, collection centres and Pharmacy support.

• Onsite Pathology
  • Following deregulation, more approved pathology collection centres are being located in medical practices, providing improved patient convenience. Pathology companies value co-location highly, and it is also beneficial for patients. However, observe the legislation that exists to prevent inappropriate incentives for referrals.
• Collection centres
  • May require a dedicated floor area that is not shared at any time.
• Pharmacy on site
  • With the latest changes to remove distance restrictions, in some States, for the location of pharmacies, opportunities now exist to bring pharmacists much closer to your medical surgery. This both improves patient convenience and strengthens the relationship between doctors and pharmacists. Allied Health Renting space to other health professionals also helps with the service trust relationship. Talk with your insurance adviser, especially regarding your medical indemnity insurance.

How do I update the Doctor Service Trust Agreement?

An exchange of emails updates the Medical Agreement. Add more services as your accountant suggests. You can add a scope of work, plans, diagrams and specifications.

The Medical Service Trust Agreement is silent on the charges it levies against the medical practitioner. So that it is always up to date. Your accountant advises you on the appropriate charges for the financial year.

How do I set up a Doctor’s service trust structure?

Talk with your accountant. Your accountant, for a single doctor with rooms, will:

1. First, build a company as trustee for a family trust
2. Secondly, once my lawyers have checked and incorporated the company then build a family trust deed
3. Finally, build this Doctors Service Trust Agreement (just press the Start Building button on the top of this page)

Estate Planning Standards

Help build the Medical Service Trust Agreement

Need a hand answering the question as you build the Medical Practitioner Service Trust Agreement? Just telephone us. But attempt the free building process first.

Medical service trust owning and leasing cars to a doctor?

Q: I want the medical service trust to own some cars. Can the service trust lease the car for the doctor’s use? Can the staff of the Medical Service Trust also rent a car?

A: The medical service trust is a stand-alone business. It provides services to a doctor. This is on an arms-length basis. As a stand-alone business (like, say, Acme Rent a Car), a business can lease a car to a doctor. Therefore, the Legal Consolidated Medical Service Trust can do so as well. Just include cars and motor vehicles in the list of services in the Service Trust Agreement.

However, there are accounting questions that we cannot answer, as we are lawyers. And we also do not know your individual circumstances. Such questions that your accountant will ask is ‘what percentage of the vehicle is used by the doctor to create income’ etc… Obviously, the services provided by the Service Trust must be to create income and revenue for the doctor.

Your second question does not relate to service trusts. The service trust is a separate business providing services and products to a doctor. A business (which is what a service trust is) providing services to its own staff is another matter. We do not provide advice on this, as it has nothing to do with a Service Trust Agreement.

To put it another way, the relationship between the service trust and the doctor is a B:B relationship. This is Business to Business. Who the Service Trust employs is a separate employment matter between the Service Trust and its employees. It has nothing to do with a Service Trust Agreement. It is not relevant to the B:B relationship.

What is the best business structure for a General Practitioner (GP) in Australia?

Most GPS work in a one-to-one relationship. General practitioners work in a range of different structures – employee, associate, partnership, independent contractor, company shareholder or director.

Q: Is the medical Service trust a ‘normal trust’? The only difference is the doctor service trust agreement.

We are not giving advice on Service Trusts on this page. Rather, we are giving advice on the ‘glue’ between the Service Trust and the doctor. This is called a Service Trust Agreement.

However, since, you ask, any of these vehicles prepared by Legal Consolidated can potentially be used as a service trust:

• Unit Trust
• Company
• Family Trust
• Partnership