A dental trust is a legal entity that provides dental care to its beneficiaries, who are usually employees of a company or members of an organization. A dental trust is different from a dental insurance plan, which is a contract between an individual and an insurance company. A dental trust is funded by contributions from the employer or the organization, and sometimes from the beneficiaries themselves. The trust is managed by a trustee, who are responsible for overseeing the financial and operational aspects of the trust and can be either a corporate entity such as a company or individual persons.
One of the most important decisions for a dentist is whether to start or buy a dental practice. There are many factors to consider, such as location, patient base, equipment, staff, financing, legal and regulatory issues, and taxation.
We focus on one aspect of taxation that is relevant for Australian dentists: the Dental Service Trust (DST).
What is a Dental Service Trust?
It is common practice for dentists to use a service trust (service entity).
The service trust is a business where the dental practice provides services to the dentist and charges a fee for providing those services, such as equipment, staff, receptionist, premises and administration.
Service trust profits are shared with the dentist’s spouse, children, and family. They pay tax at a lower marginal tax rate. Therefore, the service trust saves tax. It helps with superannuation benefits and the spreading of income to family members.
A DST can be a family trust, a unit trust or a company, depending on the number and relationship of the dentists involved.
A DST can provide several benefits for a dentist, such as:
Tax saving: The DST can distribute the profit it makes from providing the services to the dentist’s spouse, children and other trust beneficiaries who are at lower tax rates. This can reduce the overall tax liability of the dentist and their family.
Asset protection: The DST can hold the high-risk assets and activities of the dental practice, such as employees, tenancies and advice. This can protect the low-risk assets of the dentist, such as land, intellectual property and goodwill, from potential claims or liabilities.
Superannuation: The DST can make superannuation contributions for the dentist and their family members who are employed by the DST. This can increase the retirement savings of the dentist and their family and reduce their taxable income.
What should the Service Trust charge?
The fee must be at market rates, as required by the Australian Taxation Office (ATO) TR 2006/2. See Ruling (ATO) TR 2006/2. Amalgam Advisors Pty Ltd will update and advise you if any changes to the market rates occur at the time, they become made available.
Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936), also known as the General Anti-Avoidance Rule, applies to service arrangements between associated entities, such as those in a Service Trust Agreement.
This provision is designed to counteract tax avoidance schemes where the dominant purpose is to obtain a tax benefit. In the context of service entities, it may apply if the fees or charges paid by the business to the service entity are considered excessive or not reflective of the market rates.
For example, if a service trust charges significantly higher fees to the associated entity (e.g., a dental practice) than what would be charged for similar services in the open market, Part IVA could potentially apply. If it does apply, the Australian Taxation Office (ATO) may disregard the scheme, or part of it, for tax purposes and determine the tax liability as if the scheme had not been entered.
However, the ATO has indicated that Part IVA will not apply to a case where a company, trust, partnership, or individual conducting a personal services business pays superannuation contributions up to the age-based limits to a complying superannuation fund in respect of the associate of the main service provider.
Please note that the application of Part IVA is complex and depends on the specific facts and circumstances of each case. Therefore, it is always recommended to seek professional advice when setting up and operating a service trust.
The service trust as a separate non-related business which allows the service trust to provide many services, including:
(a) plant and equipment (desks, chairs, dental equipment)
(b) non-medical staff to the dentist
(c) consumables
(d) the premises
(e) budgeting, forecast, bookkeeping, accounting, and debt collection services
(f) marketing, corporate design and identity and brand awareness
(g) additional services — as agreed by the parties from time to time
What is an Independent Dentist Contractor Agreement?
It is not enough to have just a service trust. You need an agreement between the dentist and the service trust.
A Dentist Service Trust Agreement is a contract that allows the service trust to supply equipment, staff, receptionist, premises, and administration services to the dentist’s practice.
A Service Trust Agreement is an Independent Contractors Agreement (‘contract for services’) that sets out the terms and conditions of the services provided by the DST. The contractor is ‘independent’. The contractor is not an employee of the principal (dentist). The dentist requests and pays for the services. The person providing the services is the contractor. The agreement between the business and dental contractor is the Dentist Service Trust Agreement.
The agreement must be in writing and signed by both parties. The agreement must specify:
– The services provided by the DST
– The fee charged by the DST
– The payment terms and methods
– The duration and termination of the agreement
– The dispute resolution process
The agreement must be consistent with the ATO guidelines and reflect the commercial reality of the arrangement.
What is a dental service?
Dental services are GST-free. A dental service is any service supplied by or on behalf of a dental practitioner that is accepted in the dental profession as being necessary for the treatment of the recipient.
Where the recipient is not the patient but is another business or organization, the supply is not GST-free as a dental service.
Some dental services are not GST-free, including cosmetic procedures and GST is payable – for example, teeth whitening & whitening products.
What are the taxation benefits of a Dental Service Trust in Australia?
A DST can provide taxation benefits for a dentist in Australia, such as:
Income splitting: The DST can distribute its income to lower-tax beneficiaries, such as the dentist’s spouse or children. This can reduce the marginal tax rate of the dentist and their family.
Capital gains tax (CGT) concessions: The DST can access the CGT concessions for small business entities if it meets certain criteria. This can reduce or eliminate the CGT payable on the sale or disposal of assets held by the DST.
Goods and services tax (GST) credits: The DST can claim GST credits for the GST it pays on its expenses. This can reduce the GST payable by the DST on its income.
Where is the tax advantage?
The service trust distributes the ‘profit’ it makes from running the business. The profit is able to be distributed to the non-working spouse, children, and other beneficiaries of the trust at a lower tax rate.
Example
The dentist brings in revenue of $1.6m. The Service Trust provides services to the dentist. The Dentist Service Trust Agreement sets out the services. Services include cleaning the clinic, providing administration, dental nurses, maintaining dentist’s diary, computers, marketing, office lease and bookkeeping. The service entity owns the equipment and employs all non-medical staff.
The Service Trust (via the Service Trust Agreement) charges the dentist $1.4m in fees.
By providing these services the Service Trust makes a profit of $.8m. (This is after it pays its expenses of $.6m.) That profit is distributed to the dentist’s spouse, children, and other trust beneficiaries.
The dentist cannot share ‘personal services income’. However, the service trust ‘income’ is not personal services income. This is because the service trust is a separate business to the dentist’s medical practice. The service trust operates on an ‘arm’s length basis’. Therefore, the income is distributed to the spouse, children and other beneficiaries related to the dentist.
Service Trust Agreements are also popular for:
- Asset protection – one entity holds the high-risk activities (employees, tenancies & advice) the other keeps all the ‘good’ assets (land, intellectual property) in a low-risk entity.
- Companies wanting to liberate wealth and move profit into a trust structure. Unlike a company, the service trust can access the CGT tax concessions. Therefore, the service trust often holds appreciating assets. These include real estate, franchises, copyright and ‘leased out’ business names.
What are the potential legal issues with the ATO regarding a Dental Service Trust?
A DST can also pose some legal risks for a dentist if it is not set up or operated correctly. Some of these risks are:
- ATO audit: The ATO may audit or review the DST arrangement to ensure that it complies with the tax laws and regulations. The ATO may challenge or disallow some or all the deductions or distributions made by the DST if it finds that they are not at arm’s length or market rates.
- Penalties and interest: The ATO may impose penalties and interest on any underpaid tax or overclaimed deductions or credits by the DST or its beneficiaries. The penalties and interest can be substantial and may exceed the tax savings achieved by using a DST.
- Arm’s length basis: One of them is that the trust must operate on an arm’s length basis, meaning that the fees charged by the trust must be reasonable and comparable to what an independent service provider would charge for similar services. If the fees are too high or too low, the Australian Taxation Office (ATO) may challenge the arrangement and deem it as a scheme to avoid tax. The ATO may then assess the dentist on his or her gross income of $1.6m and disregard the trust as a separate entity.
- Compliance: legal and regulatory requirements, such as registering for an Australian Business Number (ABN), lodging tax returns and activity statements, keeping proper records and accounts, and paying GST if applicable. The trust may also need to obtain professional indemnity insurance and public liability insurance to cover its activities. These requirements may increase the administrative and operational costs of running a dental practice.
- Professional standards: The dentist may breach their professional standards or ethical obligations if they use a DST to avoid or evade tax or to misrepresent their income or expenses. This may result in disciplinary action or sanctions by their professional body or regulator.
It is important to note that these legal implications can vary based on the specific terms of the Service Trust Agreement and the laws of the state in which the agreement is enforced.
What is the cost of setting up a Dental Service Trust?
The cost of setting up a Dental Service Trust depends on several factors, such as:
– The type of service entity chosen (family trust, unit trust or company)
– The complexity of the Dentist Service Trust Agreement
– The registration fees and stamp duty payable to the relevant authorities
– The legal and accounting fees involved in drafting and reviewing the documents
The cost may vary from case to case, but it is a one-off expense that can be offset by the long-term benefits of using a DST.
How Amalgam Advisors Pty Ltd can help with setting up a Dental Service Trust.
Amalgam Advisors Pty Ltd are experts in the dental accounting field and can help you with setting up a Dental Service Trust that complies with the tax laws and regulations and is relevant to your individual circumstances. We can assist you with:
– Choosing the best type of service entity for your situation that reflects your needs and objectives
– Establishing and registering your service trust entity with the ATO
– Assistance and instruction with implementation of Service Trust Agreements
– Incorporation for Dental Contractors
– Preparing and lodging your service trust entity’s ATO compliance documents
– Assisting you with buying and setting up a dental practice, liaison with your legal and finance representatives.
– Advising you on how to maximise your tax benefits and minimise your tax risks
– Representing you in case of an ATO audit or dispute
We offer a first, no obligation one-hour FREE consultation.
If you are interested in setting up a Dental Service Trust or want to learn more about how it can benefit your dental practice, please contact us today for a free consultation. You can reach us by:
– Phone: 1300 604 380
– Email: [email protected]
– Website: https://amalgam.com.au/contact-us/
