We’ve got some fantastic clients in the medical industry. When we get a new client in this industry, we see the same issues popping up every now and then.
One of these issues is the way that income is recorded in the books of the business, and subsequently, how it is recorded on the BAS and tax return. This is specifically relevant to a medical or dental practice which is engaging multiple practitioners under ‘Service Agreements’.
What we’ve been seeing
The income derived by the practice is a service fee, it is not the patient fee collected by the independent contractor.
We have seen several practices showing total fees collected by independent contractors as top-line revenue – as sales. Therefore, substantially inflating the actual revenue of the practice.
These practices then have a corresponding expense in there for the 65 or 70 percent paid out to the practitioner and their argument is that the net amount that they’re showing in their financial statements is the correct assessable income. And on a net basis, yes, it works out to be correct in the end. However, it is not technically correct, and it is exposing you to unnecessary risk.
How it should be
Patient fees are not the income of the practice, they are the income of the practitioner.
The service fee is usually a % of the practitioner’s fees which is paid to the practice for providing the infrastructure needed for the practitioner to generate their income. It is this service fee that is the income of the practice.
Why it’s important to report income correctly
There is a whole lot more to this story than just showing the correct assessable income. There are other serious issues to consider
If you are incorrectly reporting an inflated total income figure on your BAS and tax return, you are unnecessarily increasing your risk of being targeted from an ATO audit or data matching review.
You may be reporting and paying GST incorrectly (there is GST on service fees, but no GST on medical fees).
You may even be exposing yourself to risk from a payroll tax, superannuation or employee entitlements perspective.
You are also potentially precluding access to small business concessions because you’re over-inflating your turnover (which is a key test for eligibility).
Every doctor and dentist needs an accountant that understands the flow of income through medical practices. We’ve solved this issue for a few of our clients already. If you feel you may have a problem in this area, or you just don’t understand it, please reach out so that we can help you too.