ATO rules on dental service trusts

The Australian Taxation Office has recently published a fact sheet for general dental practitioners to supplement their previous Guide Booklet (Your Service Entity Arrangements).

In the instance that your service trust provides a full range of services (listed below), the Tax Office now considers fees paid to the service entity of as much as 60% of the dentist's gross fees would constitute a commercial service charge.

In a previous article in the January/February 2007 edition entitled "Service Entities and Mark-ups... Back to the Future", we looked at the effect of the Tax Office's Ruling TR2006/2 on service entity arrangements. We gave detailed guidance as to what would and would not constitute a commercial service trust arrangement.

Of particular note in that article was that the AMA had lobbied and worked with the Tax Office to generally accept a blanket service charge equal to 40% of gross fees derived in the medical profession. Whilst there was significant public and private information reviewed in respect of the medical profession, curiously, a detailed analysis of the dental industry was not made at that time. As such, the dental profession could not avail itself of a similar straight forward blanket service charge rule.

In any event, it is important to note that the average dental practice is a 40% net profit business, compared with 60% net profit in the case of a medical practice. As such, it is immediately apparent that whilst a service fee totalling 40% of fees provides a commercially acceptable result in a medical practice, a similar service fee charged within the dental profession would not. As such, the Tax Office's recent general acceptance of a service charge equal to 60% of gross dental fees is welcome.

The fact sheet outlines the full suite of services that a service trust would generally provide to a dental practitioner includes:

• Employment of staff;
• Administration - including general administration and responsibility for the expenses of the dental practice, billing and collection, administration of patient records and payments to suppliers;
• Provision of premises (usually leased); and
• Provision of dental equipment.

Where some of the services listed above are not being provided by the service entity, or the dentist has a greater degree of involvement in the conduct of the practice (including providing premises and equipment), the Tax Office considers a service fee of 40% of gross fees is more appropriate.

However, the Tax Office has advised that service fees of 40% (even where the dentist remains responsible for their own premises, equipment and consumables) would not warrant further scrutiny.

Consequently, the practical upshot is that service fees ranging between 40% to 60% of gross fees still need to be substantiated in line with the scope of services provided from the list above.

What should be stressed is that this ruling is not a re-write of the service trust rules. It is simply the ATO's written acknowledgement that a blanket service charge fee, similar to that previously accepted for medical practitioners, has equal application in the case of dental practitioners.

For those practitioners with properly administered service trusts, this ruling will come as an opportunity to review your current arrangements and possibly obtain a simpler, better outcome whilst still within industry benchmarks.