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Finance - Service trusts – a means of additional asset protection |
In an environment where litigation is prevalent and insurance premiums continue to increase, a service trust can provide medical practitioners an additional means of asset protection.
Additional asset protection is achieved through separation of the professional practice, which is at a greater risk of being sued, and the assets associated with providing the services of the professional. The service trust is usually owned by non professional members of the family and may hold assets such as the business premises and any plant and equipment that are required. The service trust generally attends to the employment of non professional staff and the administrative roles of the practice.
Income is generated by the service trust via a commercial fee charged to the professional practice. This generally consists of a service fee for equipment and staff, which are used to attend to the day to day running of the practice. A rental charge will also arise if the service trust owns the premises from which the practice is conducted. Where the service trust is owned by non professional family members, it does allow them to generate an income as part of the business operations.
It is very important that the arrangement between the service trust and the professional practice is commercial. The Commissioner of Taxation is particularly mindful of arrangements that are not structured commercially and result in excessive profits being generated by the service trust.
The commercial nature of the arrangement can be further supported by the following points. (the list below is not conclusive of all matters that must be dealt with where a service trust is used)
1. Is there an agreement in place setting out the arrangement between the service trust and the professional practice?
2. Are the fees charged by the service trust commercial?
3. Does the service trust issue regular invoices for the services performed?
4. Does the service trust operate independently of the professional practice?
5. Does the service trust review its operations from time to time, including the fees charged?
Due to the complexity of the arrangements that involve service trusts, the above points do not include a number of other factors that need to be considered as part of ensuring the arrangement between the professional practice and the medical practitioner is commercial and satisfies the requirements of the Australian Taxation Office.
Professional practices that use a service trust as part of their business structure should regularly review their situation to ensure that their service trust is being operated on a commercial basis.
In recent times the Australian Taxation Office (ATO) has started to scrutinise service trust arrangements in a more aggressive manner. The ATO is concerned about the commerciality of these arrangements, and is seeking to ensure that the dominant purpose for setting up a service trust is for reasons other than to facilitate income splitting with family members. Currently the Australian Taxation Office is preparing a draft ruling on the issues surrounding the provision of services by a service trust to professionals, which will include doctors. The timeframe for release of this ruling is unknown.
Russell Franey is a partner at Thomas Noble & Russell Chartered Accountants. For further information, phone Russell or Peter Morrow on 6621 8544.
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