Medical practitioners in private practice have for many years used service entities to separate the administrative aspects of operating a medical clinic from the provision of medical services. Effective use of this arrangement gives practitioners an opportunity to implement tax effective business structures. They also limit a clinic’s exposure to claims made against individual practitioners. However, poorly drafted service agreements can have a significant adverse impact your clinic, particularly if the practitioners who practice in the clinic are deemed employees of the clinic.
How do service arrangements work?
The operation of a medical clinic, regardless of its size, can be divided into two broad tasks:
- The provision of medical services to patients by medical practitioners; and
- The provision of administrative and support services together with the facilities required to carry on a medical practice. For example: consulting rooms, reception and nursing staff.
Under a properly implemented service arrangement:
- each medical practitioner practicing within a medical clinic carries on his/her own independent medical practice as a sole practitioner. This means they practice on their own account, and issue invoices which show their individual ABN;
- a tax effective entity (e.g. a trust) operate an administrative support services business. This entity provides administrative and support services to each practitioner; and
- each practitioner pays a portion of their gross billings to the service entity as a service fee.
A fundamental characteristic of the arrangement is that the practitioner pays the service entity for administrative services. Put another way, the clinic does not pay the practitioner to practice medicine from the clinic. Documenting the relationship in this way reflects the fact that the practitioner carries on an independent medical practice. This ensures they are not an employee for the purposes of superannuation entitlements, leave entitlements and/or payroll tax. The resulting arrangement can protect the clinic (and the other practitioners) from claims made against a particular practitioner.
So what are the risks?
As mentioned above, the use of a service arrangement is not a new development. Practitioners and their accountants have been implementing these structures for years. Given the prevalence of these arrangements, how and why do people still get them wrong?
No written service agreements
A 40/60 division of gross billings between a clinic and a practitioner has become so commonplace that many people operate as if the service arrangement is simply implied. This means neither the doctor nor the clinic pay much attention to properly documenting the relationship between them. The failure to document the relationship can expose the clinic to risks such as:
- a practitioner making a claim for employee entitlements and superannuation on the basis that they were an employee; and
- the State Revenue Office conducting a payroll tax audit. If this occurs, the SRO will seek to determine whether payroll tax ought to have been paid by the clinic. Given that payroll tax is payable as a percentage of remuneration to employees, such an assessment could have a catastrophic effect on the viability of a clinic.
In the absence of a written agreement documenting the arrangement, a decision maker (e.g. the SRO, a court, the Fair Work Commission or the ATO) will look at the characteristics of the relationship to determine whether the practitioner was an employee. To answer this, they’ll ask if the practitioners are engaged for the provision of labour. A practitioner who turns up to a specific clinic, treats patients from that clinic and receives a portion of the gross billings from those patients as remuneration, will likely be considered an employee.
Poorly drafted service agreements
Even where the relationship between a practitioner and the clinic is in writing and stated to be a ‘service arrangement’ or ‘independent practitioner agreement’, compliance risks often arise. This is commonly because:
- of a poorly drafted document that does not take into account regulatory changes;
- it contains terms which are at odds with a true service arrangement; or
- the activities of the clinic are at odds with what the agreement actually states.
In our experience, the following areas pose a risk to clinics:
- Too much control: there is a natural inclination for the operator of a medical clinic to want to exercise control over those who practice within the clinic. However, control is an indicator of an employment relationship. A well drafted service agreement balances the needs of the clinic with the independence of the practitioner in order to fit within the current regulatory framework.
- Patients: if a practitioner is truly independent, then they must be treating their own patients. We often see cases of a clinic seeking to protect its interest in retaining patients, but inadvertently undermining the independence of a practitioner (and therefore increasing the likelihood that they will be deemed an employee). This will often be a determinative factor in a payroll tax audit of the clinic.
- Leave restrictions: leave and leave entitlements are concepts that are indicative of an employment relationship. If these issues are not properly dealt with in the agreement, the likelihood of the practitioner being deemed an employee increases.
- Intellectual Property: similarly, a person who practices independently should own any intellectual property he/she creates in the course of practice. Any assignment of these rights to the clinic may be indicative of an employment relationship.
Even well understood and widely implemented business structures can pose a risk to a business if appropriate steps are not taken to understand the regulatory framework in which the business operates. If you have any concerns as to the efficacy of the service agreement used in your practice please feel free to get in touch.