Current circulation:
6953
DATE: ISSUE NO:
17 March 2006 117
Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice. Writer in charge: Mr David Dahm CPA, BA Acc, FTIA, ASIA, FAAPM,GLF.
Business v Medicine - They Do Not Mix Part I - Is your practice company or service trust at risk? The Problem - Service Trusts and Medical Practice Companies Denied Tax Deductions This is Part 1 of a two part series. This first edition explains the concept of a profit and the need to maintain a clearly identifiable profit in your practice in order to avoid scrutiny from the Tax Office.
New Court Ruling! A recent taxation Court case called Ell v. Commissioner of Taxation (10 February 2006) has denied a taxpayers business all their tax deductions because there was “no intention to make a profit” and therefore it could not be seen to be carrying on a business for taxation purposes. The revenue generated would never exceed the expenses and outgoings that the business incurred or paid. The case decided, “it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see Tweedle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see FCT v Stone (2005) ATC 4234 at 4243”. This decision has wide implications for practices that operate their structures on this basis. Our opinion comes in light of the Tax Office’s position on Service Trusts. Some advisers have recommended practices in order for their services entities to be “safe” that practices should not create a profit in their service entities at all. Clearly we would strongly recommend against this approach. This is then admitting your arrangements are a “sham” and will be struck down for this reason alone. To avoid the scrutiny of the tax office your service entity cannot have a “zero” profit margin (or just a “cost sharing arrangement”), a NIL profit or an excessive profit margin. A practice must set a commercially realistic rate, that can be compared to the industry and/or similar practices. In Part II we will explain why and how medical practice companies and service entities such as trusts are significantly affected by this decision. We note in some instances this Court Ruling will override long held Tax Office opinions and rulings.