Medical practice arrangements

11. Do the 40% and 45% rates apply to specialist medical practitioners?


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 Tax Office.

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 with 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 unrelated dentist).

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 specialist.

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 determined.

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 Payments)?

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 operates.

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.

    Last modified: 15 May 2015QC 20302