If you work in, own or run a private medical practice, you will be familiar with service fees being charged for the use of the facilities.
This may include the use of the rooms, medical / office equipment, nurses, administration and support staff, and all other medical / office consumables.
In determining how much service fee to charge each doctor working in the practice, the method used is usually based on a percentage of the doctor’s income (i.e. patient receipts) generated in the practice during the period. As such, the service fee can fluctuate from month to month depending on how many patients a doctor attends to or the type of procedures performed.
How Much Can Doctors Be Charged?
The Australian Taxation Office (ATO) has provided benchmarks to assist medical practices in working out the service fees to charge. Generally, a rate of 40-45% for general practitioners will be considered as being reasonable to charge doctors for service fees. However, that is not to say a higher rate cannot be used, as long as the practice is able to substantiate how the rate is obtained.
If the doctor working in the practice is also a related party or an associate of the medical practice, then there will be special considerations that are required to minimise the risk of an audit or review by the ATO. These considerations are discussed below.
Specialists cannot rely on the 40-45% of patient fees to minimise the risk of a review or audit by the ATO, but can determine a reasonable rate to use in the particular circumstances having regard to the type of services being provided to doctors and the ATO guidelines outlined below.
Medical Practices Owned By Doctors
The ATO guidelines on service fees were introduced to discourage medical practices from overcharging a related entity for service fees. The ATO has caught onto some individual doctors benefiting from claiming high levels of service fees in order to reduce their taxable income as they are usually on the highest marginal tax rate.
Most medical practices are set up as either a company or a trust, whereby the service fee income may be taxed at a lower tax rate, or in the case of a trust, the income can be distributed to another beneficiary within the doctor’s group who may have a lower marginal tax rate.
In order to bridge any perceived or actual tax gaps, the ATO has provided guidelines to determine if the service fee charged by the practice to an associate (related party or practice owner) doctor is reasonable or not. We provide some key benchmarks below you should be aware of.
| Method | Benchmarks |
| Mark-Ups on Services Provided | The mark-up reflected in the service fees charged should not exceed the indicative rates published by the ATO. These rates vary depending on the services and benefits being provided to the doctor, but the mark-up allowable is 10% for most services.
Alternatively, comparisons to other commercial arrangements can be used in lieu of the indicative rates. Further analysis and documentation is required if this method is used. |
| Gross Service Fee Income | The service fees charged should not represent more than 40% to 45% of the gross fees charged by general practitioners.
This metric is not applicable to specialists, who must use one of the methods above instead. |
| Combined Profits of the Service Entity & Doctor | The net profits of the service entity should not represent 30% or more of the combined profits for the service entity and the doctor. |
As the above guides suggest, the practice may not necessarily be required to apply a fixed rate when charging service fees to an associate. It may be able to charge any amounts as long as it is within the above guidelines and is reasonable in comparison with other rates charged within the industry or for the type of practice. Where the above guidelines are not met, this increases the risk of an ATO review or audit.
Therefore, regularly reviewing the service fee calculations and applicable methodology is recommended to ensure that the tax obligations for the practice and any associated individuals/entities are being met.
Contact Pilot
If you would like to learn more about service fees, please feel free to contact Kristy Baxter or Angela Stavropoulos on taxmed@pilotpartners.com.au or 07 3023 1300.