11. Do the 40% and 45% rates apply to specialist medical
The guide at pages 24 -25 provides for general medical
practitioners to adopt the 'percentage of gross practice fees'
business model for pricing their service entity arrangements if
they accord with the description provided therein, which is broadly
comparable to those types of arm's length arrangements in the
medical profession where a complete suite of services is provided
by the service entity to the medical practice. Case studies 15
& 16 in the guide are designed to illustrate this point. The
position in the guide, which allows for benchmark rates of 40 &
45% to be used by GPs, was reached after consultation with the
medical profession and following independent verification by the
It was acknowledged in consultation that it is harder to use the
benchmarking approach for specialist medical practitioners, as
their services are subject to sharper differentiation than GP
services and there is considerable variation in practice costs.
There is generally also an absence of public company data in
relation to the provision of specialist medical services, unlike
the situation for provision of general medical services which can
be benchmarked using data from commercial service providers.
If medical specialists have appropriate and comparable
independent (i.e. third party) market evidence, they may be able to
use that under the 'comparable market prices' or 'comparable
profits' approaches explained in the guide to argue the case for
use of the percentage of gross practice fees model and an
appropriate benchmark rate. The need for such evidence and for
their arrangements to demonstrate that the same/very similar level
of service is being provided at the same price or rate as the
independent service provider is paramount. They need to carefully
consider the reliability of the independent data and, where
necessary, make adjustments to reflect any material differences
between the two factual situations so that they are matching like
To give an example: A tax agent has a client
with a dental service entity. One of the dentists has an interest
in the service entity; the other does not have any interest in it.
The non-related party pays over 40% of his gross income to the
service entity. Can the related dentist use this as a comparable
market price? The answer is yes, based on confirmation of
independence, and (as always) confirmation that comparable services
are being provided at the same price (and satisfaction that there
is no distribution back of the profits in the service entity to the
Anecdotal and unsubstantiated evidence such as so-called
"industry norms" are not enough in terms of providing comparable
data, nor is it appropriate to rely upon the arrangements conducted
by GPs because that is not comparing like with like. The comparable
market prices approach in the guide relies on enough information
being available for the Tax Office to make a judgement about the
comparability of the transaction being priced. This involves the
taxpayer being able to produce an appropriate and independent
comparable arrangement in respect of the relevant services being
provided on an arm's length basis to a similar medical
It then involves the Tax Office being satisfied that the
arrangements are the same or similar, which necessitates looking at
all the relevant facts in each situation, including the nature of
the services being provided and relevant functionality, costs
incurred, basis for mark-ups applied, etc.
12. In arriving at a rate of up to 45% for GPs who operate in
rural areas, what does the Tax Office consider as rural?
Acceptance of a higher rate for rural GPs followed
representations from the medical profession and recognises the
higher proportionate costs for these practitioners when compared to
urban practitioners. The higher rate of up to 45% can be relied
upon by rural GPs if their medical practice arrangement is in a
rural area and is comparable with the percentage of gross practice
fees model described in the guide.
What constitutes a rural GP has not been specifically defined.
Accordingly, we have relied upon general acceptance and usage of
the term 'rural' within the Australian medical context.
While a number of geographic classifications have been developed
over the years, embodying concepts of remoteness, it would appear
from discussions with the medical profession that the Rural, Remote
and Metropolitan Areas classification (RRMA) is the most readily
understood framework for categorisation that would be largely
accepted by GPs.
Accordingly, we are prepared to adopt the RRMA classification as
the most appropriate means to identify what is rural for the
purposes of determining whether the higher rate of up to 45% can be
used by certain GPs.
13. Can rates higher than 40 or 45% be used?
Higher rates can be acceptable and may be appropriate in some
circumstances. However, you will be expected to be able to explain
the reasons for the higher rate. The risk of being audited will
increase according to the degree of divergence above those rates or
divergence from the business model on which the rates have been
Reliance on the rates of 40% and 45% assumes that the business
model described in the guide on page 25, whereby the service entity
runs the business of the medical practice and provides GPs with a
complete suite of services in return for a set percentage of their
gross practice fees, is being adhered to. If there are situations,
such as where the service entity only provides a limited service,
or where a GP owns the business premises, which do not accord with
the business model as described, the relevant rates cannot be
relied upon. Instead, GPs would need to rely upon either the
comparable or indicative rates in the guide in relation to the
specific services provided.
14. Do gross practice fees include income received in the form
of PIPs (Practice Incentive Payments) or SIPs (Service Incentive
The treatment of government incentive payments like PIPs
(Practice Incentive Payments) or SIPs (Service Incentive Payments)
can be relevant in the calculation of appropriate
service fees where the 'percentage of gross practice fees' method
is used. It is an issue that we have identified requiring further
clarification. The treatment appropriate for supplementary payments
additional to direct patient consultation fees requires an
understanding of the purpose of the payment and its relationship
with the underlying costs of the practice. Until these issues are
fully considered, we would not accept the inclusion of Practice
Incentive Payments in the general practitioner's professional fees
on which the 'percentage of gross practice fees' method
15. Can I always use listed company data as a comparable?
There are some listed companies which provide practice
management services and some which provide these services as
well as medical or dental services directly to the public. For
the financial results of these firms to be relied upon for the
"comparable profits approach" you need to ensure that the profits
are from providing the same services as the service entity in
question. For example, if the financial results of the listed firm
include substantial income from activities other than providing
administrative services to medical/dental practitioners, then it
may not be appropriate to rely on those results.