Medical practices in Australia rarely operate through a single entity. The dominant commercial structure — recommended by practice management advisers and accepted (with conditions) by the ATO — is the service trust model. Understanding the interentity flows in this structure is the foundation of bookkeeping for any GP clinic, specialist practice, or multidisciplinary health centre.
The Service Trust Model: How It Works
The classic service trust structure has three entities:
- Practitioner entity — typically the individual medical practitioner, or their family trust / bucket company. This entity owns the right to bill for professional medical services.
- Operating entity (practice company) — employs reception, nursing, and administrative staff; holds the practice lease; owns equipment; manages Medicare billing.
- Service trust — the operating company charges the practitioner a service fee for the use of the infrastructure. The trust distributes income to beneficiaries, which may include family members of the practitioner.
The ATO's scrutiny of this structure is extensive. Draft Practical Compliance Guideline PCG 2023/D1 (and its predecessors) sets out the ATO's view on what service fee percentage is acceptable. Excessive service fees — those that strip out more than a reasonable commercial rate for the services provided — may be recharacterised as income of the practitioner personally under the PSI rules in Part 2-42 of the ITAA 1997.
Bookkeepers must understand which entity they are booking to and must not post practitioner billing income directly into the trust or company accounts without flowing through the practitioner entity.
Practitioner Billings: The Split
The core income flow in a service trust practice works as follows:
- The patient's fee is billed by the practice management system (Best Practice, Medical Director, Genie) in the name of the practitioner entity.
- Medicare pays the bulk-billing benefit (or the private gap is collected at the counter).
- The practitioner entity receives this income.
- The practice company invoices the practitioner entity for the service fee — typically 30–50% of billings, depending on the practice's cost structure and the PCG guidance.
- The remaining income belongs to the practitioner, who may distribute it through their personal trust or take it as salary.
Posting Medicare receipts directly to the operating company's income account is a common error and fundamentally misrepresents the entity that earned the income.
Medicare Income: GST Treatment and Recognition
Medical services are GST-free under s.38-7 of the GST Act. This applies to both bulk-billed services (where Medicare pays the scheduled fee in full) and privately billed services (where the patient may pay a gap above the Medicare rebate). The practice does not charge GST on consultations, procedures, or specialist referrals.
Medicare pays bulk-billing benefits electronically, usually within 2–3 business days of claim submission. The reconciliation task is to match the Medicare payment batch (visible on HPOS or the Medicare Online claiming system) to the bank receipt and to the individual claims in the practice management system.
Variances arise from: held claims (under review by Services Australia), rejected claims (item number not appropriate for the service billed), and adjustments for overpayments previously made.
Div 7A Risk for Practitioner-Shareholders
Where a practitioner is also a shareholder or director of the practice company, any amount the company pays to (or on behalf of) the practitioner — including loans, asset usage, and expenses met by the company — may trigger Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) if not structured correctly.
Common Div 7A traps in medical practices:
- The company pays personal expenses (school fees, personal car costs) on behalf of a practitioner-shareholder without a formal complying loan agreement.
- A practitioner draws funds from the company before the service fee interentity transactions are settled, creating an unformalised loan.
- The practice company buys a car used personally by the practitioner without either paying FBT or treating the benefit as a Div 7A loan.
Bookkeepers should flag any payment from the practice company to a shareholder or their associates and ensure a formal agreement or appropriate tax treatment is in place before the income year end.
GST-Free Health Services vs. Taxable Ancillary Income
While the medical consultations are GST-free, not all income from a medical practice is exempt:
- Cosmetic procedures not listed as Medicare benefits are taxable supplies (e.g., botulinum toxin treatments performed for aesthetic rather than therapeutic reasons).
- Medico-legal reports — preparation of reports for insurance or legal proceedings — are taxable supplies.
- Workplace health assessments commissioned by employers for occupational health purposes are taxable.
- Equipment hire or room rental to other practitioners is taxable.
Where a practice generates both GST-free and taxable income, ITC apportionment is required on shared costs — the same principle applies as for pharmacies.
Payroll for Practice Staff
The practice company employs nursing, reception, and administrative staff. Standard payroll obligations apply:
- PAYG withholding from employee wages, lodged via STP Phase 2.
- Superannuation at 11.5% (2025-26 rate) on ordinary time earnings, paid quarterly.
- WorkCover / workers compensation insurance on the state payroll.
For payroll tax, the threshold varies by state. In NSW the threshold is $1.2 million per annum; in VIC it is $900,000. Practices that pay wages above the relevant threshold must register for payroll tax. Where contractors (locum GPs, visiting specialists) are engaged, the payroll tax contractor provisions in each state must be considered — some locum arrangements are captured.
Legislation and Further Reading
- Income Tax Assessment Act 1997, Part 2-42 (PSI), Div 7A (loans to shareholders — actually ITAA 1936)
- Income Tax Assessment Act 1936, Division 7A
- A New Tax System (Goods and Services Tax) Act 1999, s.38-7 (GST-free health services)
- ATO PCG 2023/D1 — service entity arrangements (medical practices)
- ATO website — Medicare bulk billing and private billing reconciliation via HPOS
- Payroll Tax Act (jurisdiction-specific) — contractor and grouping provisions