Industry Focus

HEALTHCARE Best business structures Implement the best structure for your medical practice and set yourself up for success WORDS: PAUL COPELAND When structuring any medical practice, some typical issues to consider are asset protection and tax minimisation. To build an optimal structure, it is essential that you understand your business model. It's also important to remember that as circumstances change, it may be necessary to review your structure to ensure it is still suitable to your arrangements. Having the ability to allow new practitioners to join or buy into a practice is becoming another factor to consider when determining the legal structure under which a medical practice operates. Locums and contracting doctors Consider a medical practitioner who essentially works as an employee contractor. Under these arrangements the doctor tends to be either: working for a medical practice that collects the doctor's patient fees and charges a service fee to the doctor, or receiving a payment directly from the medical centre for medical services provided on a fixed or percentage basis. Over the years, many doctors have incorporated their personal practices because of benefits available for superannuation contributions. However, changes to the tax legislation in 2007 removed this need because, under both contracting methods, the use of a separate legal structure, such as a trust or private company, offers little to no benefit. It's not uncommon for healthcare professionals to misunderstand structuring arrangements. For example, they may believe that the use of a company or trust structure allows them to divert income earned from their medical practice away from their person such that it does not need to be included in their personal income tax returns; that using a structure enables more tax deductions to suddenly become deductible; that a company adds additional asset protection in relation to potential legal claims made by patients; and that family members can be employed and receive large salaries that effectively reduce the income of the doctor. 4 Industry Focus Unfortunately, for contractors or locums, none of these 'myths' are compliant with the requirements of the Australian Taxation Office (ATO). In fact, some accounting practitioners have placed their medical clients into these arrangements without proper consideration. Currently, for most locums and contracting doctors, the most efficient and cost-effective structure is to operate as an individual sole trader with a personal Australian Business Number (ABN). Doctors in private practice using service entities When doctors establish their own practices, take rooms, employ staff and purchase equipment, they essentially create a new business. From a tax and structuring perspective, there are two businesses operating: the individual medical practice of the doctor and the new service business. The service entity employs all staff, registrars and trainee doctors, provides all administrative materials, the premises from which the doctor practises and, in most cases, all equipment. The entity then charges a fee to the doctor for the supply of these services. For both medical and dental professions, the ATO has accepted the use of such arrangements. However, overcharging of service fees or the charging of a service fee at non-commercial levels can be seen as tax avoidance and attract substantial penalties. If you are concerned about the level of your service fee, ask yourself if you would pay an external provider that amount. If the answer is 'no' and you would, in fact, be paying less, it is possible you are overpaying your service fee. Group practices The trend for multi-practitioner practices in the medical, dental and specialist fields is now common, with healthcare professionals recognising the economic benefits of a group practice, such as lower occupancy, staff and general overheads. There is also a degree of work-life balance (the idea is that groups can more easily coordinate patient coverage over weekends and other down times). Most importantly, these arrangements require a structure that can offer a fixed entitlement to each individual doctor. As the doctors share ownership of a group practice, the ability to determine and identify an owner's entitlement is critical. The main income of the group practice is service fees, which the specialist doctors pay to the service entity. A key to the success of the arrangement is ensuring that service fees can be maximised without the high-income earning doctors subsidising those who generate lower patient fees. Likewise, fees charged to doctors should reflect each person's time spent practising. Many existing group practice structures do not have the flexibility to achieve the financial outcomes that are required to maintain harmony. Historically, services have been charged as fixed amounts, percentages or at agreed mark-ups. Distributions of profit from the practice are then made based on fixed entitlements. However, there are a number of structures that can offer flexibility and fairness to practitioners, which are often tailored to the particular practice and specialisation. Investment structure Medical practitioners tend to be more exposed to legal liability than many other professions. As such, the choice of an investment structure for the accumulation of passive investments is particularly important. When considering investment for wealth creation, the circumstances of the individual, the asset being purchased and the size of the investment will all impact on the most appropriate structure to use. In most circumstances, a trade-off is necessary between the ability to claim tax deductions through negative gearing (holding investments in your own name) against increased asset protection from holding investment in another entity. In the current low-interest environment, the benefit of negative gearing has been

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