Under proposed ATO personal services income rules you may be subject to higher personal income tax and GST liabilities unless you have a legitimate tenant doctor arrangement.
If you are an independent contractor operating as a personal services business, it is important to note that both you and your medical centre or practice have additional tax obligations to fulfil moving forward.
This will normally not apply to genuine tenant doctor arrangements.
The latest rules will have the following impact on non-employee independent subcontractor practitioners who are not sole trader tenant doctors.
11.5% employer super guarantee on contractor payments
Employer super guarantee scenario: If you are a genuine independent medical contractor and your medical centre or practice is paying payroll tax, technically, they must also pay the contractor practitioner 11.5% employer guarantee superannuation under the latest ATO rulings.
10% GST contractors must charge their medical centre or practice on all earnings
If you are a subcontractor, 100% of all payments received should be billed 10% GST to the medical centre or practice and paid to the ATO every time you lodge your BAS.
Merely labelling your arrangement as a “tenant-doctor” arrangement does not automatically exempt you from these recent rulings. You have to prove it.
There are no GP exemptions or thresholds you can rely on.
Are you a genuine personal services business?
If you operate a genuine personal services business, here is how the new ATO personal service income rules may impact your bottom line.
The ATO has released a draft Practical Compliance Guideline, PCG 2024/D2 (PCG), which outlines how general anti-avoidance rules apply to personal services income (PSI) earned through a personal services entity (PSE) operating as a personal services business (PSB).
This ruling has significant implications for medical and healthcare practitioners who derive PSI from a PSE practice company, trust or sole trader independent subcontractor. The ruling specifically addresses medical practitioners.
The PSI rules were implemented to ensure that income generated by a PSE is taxed to the individual earning the PSI. These rules also restrict the types of deductions an entity can claim related to income derived from an individual’s personal services.
However, if specific conditions are met, for example, you have a genuine tenant doctor arrangement, the PSE may be considered as conducting a PSB. In such cases, the PSI provisions do not apply, and the income would not be taxed to the individual at a higher marginal rate of tax.
In other words, you can still benefit from substantial income splitting and enhanced tax deductions, but you must take additional steps to prove it.
This ruling is attacking two arrangements commonly used by medical and healthcare practitioners:
Retention of profits arrangements
The PSE retains income rather than distributing it to the individual who performed the services. By retaining profits within the PSE, tax on that income is often deferred, allowing the income to be taxed at a lower corporate rate or retained for future use.
In some cases, this results in the profits being distributed at a more advantageous time, or for the income to be used for non-commercial purposes, raising the risk of Part IVA being applied if the dominant purpose is to obtain a tax benefit through deferral.
Income splitting arrangements
This occurs when the income earned by the individual providing the personal services is diverted to associates (such as family members or related entities) rather than being fully allocated to the individual. It aims to reduce the overall tax by distributing income to entities at relatively lower tax rates, achieving a reduced overall tax rate or gaining other benefits such as spreading income across multiple taxpayers.
The ATO views these arrangements as higher risk under Part IVA, particularly if the income split is disproportionate to the value of the services provided by the associates.
Related
Attribution of income
The new ATO rules ensure that PSI is attributed to the individual who performed the services unless the income is earned while conducting a PSB.
Meeting PSB tests
To avoid the PSI rules, your business must meet one of the four PSB tests:
- Results test: at least 75% of your PSI must be for producing a result, you must supply the necessary equipment, and be liable for rectifying defects. Tenant doctors who independently advertise their services directly to the general public through their own website and utilise a centralised limited fee collection company to cover administrative staff, premises, and practice facilities can satisfy this test. However, this is subject to having a meticulously prepared legal agreement and robust accounting systems that support these arrangements.
- Unrelated clients test: you must provide services to two or more clients who are not associated with each other, and the work must be gained through public invitations, e.g., individual websites, letterheads, tax invoices, and external signage. Unlike an independent subcontractor medical or health practitioner, a tenant doctor or practitioner would not be forced to work at multiple locations if they can satisfy the results test.
- Employment test: you must employ others to perform at least 20% of the principal work, or engage an apprentice for at least half the income year. For medical negligence reasons, independent medical and healthcare contractors avoid where possible to employ another medical practitioner.
- Business premises test: you must maintain business premises that are exclusively used for your business, physically separate from your home and clients’ premises. If you are an independent medical or healthcare subcontractor usually this means the medical or healthcare facility is providing these facilities to you, unless you have a tenant doctor arrangement where it is stipulated that your fees go towards the maintenance of the premises.
Mitigating the impact
There is no need to panic.
The good news is that there is a way to comply. Start with clear written advice.
The rules are clear and not ambiguous or uncertain, as some high-profile advisers suggest.
Low-risk vs higher-risk arrangements
Low-risk arrangements: These include scenarios where the net PSI is ultimately recognised as assessable income of the individual who produced the income, and the income is distributed in a manner that reflects the value of the services provided. For example, paying a fair salary to the individual and not retaining profits in the entity without a legitimate business reason.
Higher-risk arrangements: These involve income splitting with associates, retaining profits in a lower-taxed entity, or distributing income in a way that is not commensurate with the value of the services provided. Examples include paying remuneration to associates who do not contribute to the business or retaining profits in the company to avoid higher individual tax rates.
Key indicators for higher-risk arrangements
Income is retained in a PSE (retention of profits arrangements) or diverted to associates of the individual (income splitting arrangements), resulting in a lower overall tax rate or other benefits such as timing benefits.
A disconnect between the amount of income distributed to the individual and the value of the personal services provided.
Significant retention of income in a lower-taxed entity without a legitimate business reason.
Poor accounting practices and tax records are a key focus of the ATO.
A genuine tenant doctor solution
A genuine tenant doctor arrangement means you should be able to pass the PSB tests easily.
A common mistake we see is practitioners relying on hearsay, piecemeal advice from their advisers, software suppliers, friends, colleagues or their professional body. Any advice must cover all tax laws, not just some of them, such as payroll tax specific to your needs.
If your accountant does not tell you, then at least your lawyer may be able to mount a defence and seek compensation under a negligence claim. Some may not tell you if they have made a mistake.
You must seek professional legal and tax advice to utilise the safe harbour rules.
Consult your legal and accounting advisors to determine if they have obtained any public or private tax rulings to protect your interests.
We all operate within a complex and interrelated ecosystem of tax rules and laws, where each component is interconnected and influences the others. When one aspect changes, it has a ripple effect on the entire system.
The following series of federal ATO Rulings impact all practices and their practitioners:
- Practical Compliance Guideline (PCG 2024/D2) by the Australian Taxation Office (ATO) Personal Services (PSI) Rules 11th October 2024
- Practical Compliance Guideline PCG 2023/2 Classifying workers as employees or independent contractors – ATO compliance approach,
- 19th January, ATO’s Decision (Contractor Super) Impact Statement 15th May 2024,
- TR 2023/4DC1: Income tax and superannuation guarantee: who is an employee?
The good news is that the tenant doctor arrangement is a cost-effective, legal, and ethical way to comply, and everybody wins, especially patients.
Practices that adapt effectively to these changes will gain a competitive edge in recruitment and retention. The new ATO ruling should have minimal impact for those practices that implement the necessary adjustments.
Most importantly, if set up correctly, the issues of fragmented care, cash flow problems, and disputes arising from separate or direct practitioner banking should be eliminated, allowing business to proceed as usual.
By ensuring compliance and maintaining a cohesive team environment, practices can continue to provide high-quality care without significant or disruption.
You must seek professional legal and tax advice to utilise the safe harbour rules.
Consult your legal and accounting advisors to determine if they have obtained any public or private tax rulings to protect your interests.
David Dahm is the principal of health advisory firm Health and Life. This is an edited version of an article originally published by David Dahm on his Health and Life website HERE.
