If your accountant has never mentioned personal services income, service trusts, or payroll tax on your contracted GPs, they are probably not set up to look after a medical practice properly. Medical accounting is not a marketing label. It covers a specific set of rules around how doctors bill, how a practice is structured, and how contracted GPs get paid, and getting any of these wrong is expensive to unwind later. Here is what proper medical accounting services should cover, how to tell if you are getting them, and roughly what it costs to get right.
What Makes Medical Accounting Different From a Generic Small Business Accountant?
A cafe owner and a GP both need a tax return, BAS lodgement and payroll run. Where a medical practice diverges is in three areas most general accountants rarely touch: personal services income (PSI), the GST-free treatment of medical services, and the contractor status of the doctors working through the practice.
PSI rules under the ATO’s personal services income provisions apply when income is mainly a reward for an individual’s own labour or skill, rather than from a genuine business structure. A GP billing through a company or trust can still be treated as earning PSI if the arrangement fails the results test, the unrelated clients test, the employment test and the business premises test. When PSI applies, income splitting and many deductions that a normal trading business would claim are switched off, and the income is attributed back to the doctor personally regardless of which entity banked it.
Most GP consultations are GST-free under the medical services provisions of the GST Act, but not everything a practice bills is automatically exempt. Cosmetic procedures, some workers compensation reports, and certain administrative fees can be taxable. An accountant who treats every line of practice income the same way is guessing, not advising.
A practice we worked with had been operating through a company for four years with a generalist accountant who had never tested the arrangement against PSI. Nothing was wrong on paper until an ATO review flagged it, and untangling four years of structuring cost far more than a proper review would have at the outset.
Is Your Practice Actually Exposed to Payroll Tax on Contracted GPs?
This is the question catching out the most practices right now. Following the New South Wales Court of Appeal decision in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, revenue offices across Australia, including Victoria, have taken a harder look at medical centres that collect patient billings on behalf of contracted GPs and pay them a share after deducting a service fee. That pattern can meet the definition of a relevant contract for payroll tax purposes, even where the GP is genuinely engaged as an independent contractor for tax and super purposes.
Victoria has offered transitional and amnesty arrangements for general practices in response to this shift, and the settings have moved more than once since the Thomas and Naaz decision. Because thresholds, bulk billing carve outs and lodgement deadlines are the sort of detail that changes with each state budget, treat any specific figure you read, including on this page, as something to confirm directly with the State Revenue Office Victoria or your accountant before relying on it.
Here is the practical test. If your practice receives patient payments, banks them, and then pays contracted GPs a percentage after retaining a service fee, that arrangement resembles a relevant contract and should be reviewed for payroll tax regardless of what the GP’s contract calls them. If instead each GP bills and banks their own patient fees directly and simply pays the practice a fixed, arm’s length licence fee for rooms, staff and reception unrelated to their billings, the payroll tax exposure is generally lower, though it still needs to be documented properly and priced commercially.
Should Your Practice Be a Company, a Trust, or a Service Trust Arrangement?
Many practices separate the clinical activity from the business that owns the premises, employs reception and nursing staff, and holds the equipment lease, using a service trust to charge the clinical entity a fee for those services. This is a long standing and legitimate structure, but the ATO expects the service fee to be commercial and arm’s length. A service fee set purely to shift profit into a lower taxed entity, with no genuine commercial basis, risks scrutiny under the general anti avoidance provisions and the ATO’s guidance on profit allocation in professional firms.
Whether a company, a discretionary trust, a unit trust or a combination suits your practice depends on how many principals are involved, whether you want to bring in an associate down the track, and how PSI rules will treat the income once it’s attributed. This is not a decision to make from a template. It is worth mapping out before you sign a lease or a partnership agreement, not after.
A Worked Example: A GP’s First Year as a Practice Principal
To make this concrete, here is an illustrative example only, using rounded figures rather than your actual numbers. A GP takes over a practice and, in her first full year, generates 420,000 dollars in patient billings through Medicare and private fees. The practice retains a 30 percent service fee to cover rooms, reception, nursing and equipment, leaving roughly 294,000 dollars flowing to her personally before her own expenses and tax.
If her arrangement is tested and found to generate PSI, that 294,000 dollars is attributed to her as an individual for tax purposes even if it was banked through a company, and company-level deductions that don’t relate directly to earning that income, along with income splitting to a spouse who isn’t genuinely working in the practice, are not available. Separately, if the practice’s payment pattern to her looks like a relevant contract, the practice itself may need to include her payments in its Victorian payroll tax calculation once the practice’s total Australian wages cross the relevant threshold. These are two different tests, assessed by two different authorities, and a practice can fail one without failing the other. Confirm the current payroll tax threshold and any GP-specific exemption settings with the State Revenue Office Victoria, since these figures are reviewed regularly.
What Should Medical Accounting Actually Cost, and What Should Be Included?
Fixed-fee pricing is worth insisting on, because medical structuring work does not suit an open-ended hourly clock. At minimum, a proper medical accounting service should include the practice’s tax return and BAS lodgements, payroll and Single Touch Payroll for practice staff, cash flow forecasting so you can see a slow quarter coming, and an annual review of your structure against PSI and payroll tax settings, not just a one-off review when you first engage them. Compare that ongoing cost against the alternative: a payroll tax audit reaching back several years, with interest and penalties, tends to dwarf several years of proper advice fees.
What to Ask Before You Engage a Medical Accountant
Ask a prospective accountant how they test whether your income is PSI, and ask them to explain it in their own words rather than reciting the four tests from memory. Ask whether they have reviewed a medical practice’s contractor arrangements against relevant contract provisions before, and what they found. Ask how they price a service trust arrangement to keep it commercial. If they haven’t got a clear, specific answer to any of these, they haven’t done this work before, and your practice will be the one paying for their learning curve.
This article is general information for Victorian medical practices and doesn’t take into account your specific structure, billings or staffing. Speak with an accountant who has actually reviewed medical practice arrangements before making structural changes.
The single most useful next step if any of this sounds familiar is a practice structure and payroll tax risk review, specifically checking your current arrangement against the PSI tests and against the relevant contract provisions, before you sign a new associate agreement or lease. You can book that directly with our medical accounting team, and where the review points to broader structuring or cash flow work, our business advisory and taxation services pick up from there.
Written by Ravi, Principal Accountant and Registered Tax Agent (TPB No. 26161185), RPS Accountants and Business Advisors, Epping.
