The 1 November bulk-billing incentives represent a financial dilemma for a lot of medical practices. A true tenant doctor practice model might help.
GP practice owners have overpaid taxes to the tune of up to $20,000 per FTE per annum for decades, due largely to unrealistic fee structures and simply not being aware if they have implemented the right business structure or not.
Note, this includes unnecessarily paying payroll tax and super.
But by aligning service fees with commercially appropriate structures, practices can ethically and legally optimise tax outcomes while protecting personal assets from medico-legal risks.
This recent webinar on emerging financial tax traps for medical practices proposes that practice owners often unknowingly subsidise practitioners at a significant cost.
Many fail to recognise losses greater than $5 per patient per consult seen by their GPs.
To offset this deficit, practices often end up relying on service fee increases while navigating pathology rental income reductions and practice incentive payments.
Difficult doctors
Practices can implement user-pay service fees to address challenges, like practitioners who consistently run late. Conversely, they can incentivise practitioners by offering discounted fees for increasing their sessions to eight or more per day or offering them a share of the medical consumable fee.
This dual approach establishes a balanced incentive system, promoting equitable contributions from all practitioners sharing a facility.
By aligning costs with usage and rewarding productivity, you can optimise support services for co-located practitioners, enhancing operational efficiency and collaboration.
The way forward
Medical and healthcare practices in Australia face mounting financial pressures, particularly under the newly proposed 1 November 2025 Medicare bulk-billing incentives. Implementing legitimate asset protection and tax strategies is critical for practice owners to ensure financial sustainability while maintaining compliance with tax regulations.
A key approach involves leveraging service trusts, often called a “tenant doctor” arrangement with commercially justified service fees.
This “tenant doctor” structure is an attractive reason to own and not join a corporate practice.
Own Goal
Notably, many practices inadvertently operate under such arrangements and do not realise it. This is sometimes when a minor tragedy of misunderstandings begins.
Inadequate professional guidance and/or flawed implementation strategies can often fail to recognise this crucial point of opportunity when it is available.
For some, this lost opportunity has led to an expensive and risky reliance on payroll tax exemptions and a lot of additional red tape tax for compliance. For more information on these legally and ethically avoidable systemic issues, see The Medical Republic article Payroll Tax, the Musical.
Traditional service entity arrangements
Before the corporatisation of medical and general practices, it was standard for practitioners to allocate around 40% of their gross billings toward shared operational costs.
These collaborative arrangements—known as “service entity” structures—covered essential expenses like premises, equipment, and support staff through cost-sharing agreements among professionals.
Since 1992, the entry of “single branded” corporate entities has complicated this model. Patients first identify with the branded clinic and not the practitioner. The clinics often advertise in their branded name and control workflows of the doctors working in their centres.
In doing this they have interposed themselves into the once-sacrosanct doctor-patient relationship by fundamentally repurposing and altering the nature and structure of the service trust relationship.
Contrary to traditional practices, they have transformed an “administration (percentage of cost sharing) business” into an entirely different “medical (percentage of revenue sharing) business” model.
To use the Westfield analogy, it looks like Westfield is selling tomatoes, and not their tenant Coles.
This shift has given rise to an “employee-like contractor-based” revenue-sharing framework, where “medical commission percentages” have replaced and misclassified traditional service fee percentages and practitioner payments arrangements.
Consequently, corporate entities have triggered disputes over payroll and income tax obligations and income tax deductions, creating ongoing regulatory challenges.
Healius (formerly Primary Health Care Limited) became a significant legal precedent of this transformation in 2021.
It is no surprise the healthcare industry has faced significant tax repercussions following the landmark decision in FCT v Healius [2020] FCAFC 173. This ruling effectively dismantled the GP medical corporate model reliant on lump-sum payments to acquire doctors’ practices.
Many practices that adopted or emulated this model now confront potentially crippling payroll and income tax liabilities stemming from the fallout of this case. These models have directly exposed their practitioners to income tax audits. (Source: ATO Lump sum payments received by healthcare practitioners).
The rise and rise of service trusts
For discerning doctors and practice owners, service trusts have consistently proven to be a reliable tax option. However, the widely popular corporate-like model fostered a false sense of security among tax advisers and clients who were unaware of or ignored its shortcomings.
Service trusts are administrative entities providing critical operational and team support (office space, staffing, administrative services, and equipment) to medical practices (sole trader doctors/practitioners).
It not right to say that this set-up will fragment care. Team care across one of these structures can be practiced effectively so long as an owner follows appropriate protocols.
These trusts operate as “administrative businesses”, charging user-pay fees that practices claim as tax-deductible business expenses under standard service agreements.
The benefits of this structure include:
- Asset protection: High-risk assets like equipment or leases can be transferred to the trust, shielding them from litigation risks. Critically, the dominant reason for this arrangement is that it protects any co-located practitioners from medico-legal risks, such as negligence and PSR claims. Why do you think each practitioner needs their own individual professional website and why do they need to declare this AHPRA arrangement annually? All this significantly improves the value of the business while reducing tax risk.
- Legitimate income splitting: Income earned by the trust can be distributed to beneficiaries (e.g., family members) at lower marginal tax rates or corporate beneficiaries taxed at 25%, reducing the overall tax burden up to $20,000 per annum per FTE GP.
- Flexibility: Selling assets to the trust releases working capital for reinvestment into patient care or practice expansion and succession planning.
Why commercially justified service fees matter
Historically, many medical practices have undercharged service fees—often within the Australian Taxation Office’s “safe harbour” range of 40–45% of gross income. This has led to unnecessary tax burdens and financial instability. However, commercially justified service fees of up to 60% of gross income are viable and sometimes critical for bulk-billing practices to remain financially sustainable.
Recent court decisions supporting service trusts
Two key court cases guide the use of service trusts:
S.N.A Group Pty Ltd v Commissioner of Taxation (2025):
- The Federal Court ruled that inter-entity payments within family groups are deductible under section 8-1 of the Income Tax Assessment Act 1997 if they reflect commercial realities.
- Justice Logan emphasised that informal arrangements common in small businesses should not disqualify deductions if they are commercially justified.
- This landmark case established that payments to service trusts are deductible if they align with market rates and serve legitimate commercial purposes.
- The court recognised that transferring assets to a trust protects them from litigation risks while enabling tax-efficient income redistribution.
- Since 2007, ATO (GP) Service Entity Arrangements are approved by the Australian Tax Office (Source: Your service entity arrangements , IT 276 – Payments to service companies : splitting of professional income (27 September 1978) Taxation Ruling Income tax: deductibility of service fees paid to associated service entities: Phillips arrangements)
These rulings highlight the importance of charging realistic service fees and maintaining documentation to demonstrate that payments are incurred for producing assessable income.
Strategic benefits of higher service fees
Charging higher but commercially justified service fees through a service trust can offer several advantages:
- Tax deductibility: Payments made to the trust reduce taxable income for the practice/practitioner.
- Income splitting: Trust profits can be distributed at lower tax rates among beneficiaries, including a “bucket company” taxed at 25%.
- Asset protection: Transferring ownership of assets like intellectual property, medical equipment shields them from malpractice and commercial legal risks.
- Succession planning sustainability: a service entity can unlock working capital, enabling reinvestment into supported patient care, business expansion. For succession planning, a secure and low-risk Mezzanine Equity model can be incorporated to enable commercial and tax-efficient share ownership transition.
Notwithstanding, ensuring fees align with market rates to avoid ATO scrutiny is crucial. Excessive or non-commercial fees may lead to disallowed deductions.
New GP financial benchmarks
We’ve published national GP benchmark rates to help practices set realistic service fees aligned with operational costs and inflation and protect themselves from an audit. These benchmark fee structures address systemic undercharging that leaves many practices financially vulnerable.
To protect GP practices in the event of a tax audit, we have also published GP practice national financial benchmarks showing how service trusts can lose money on the service fees they charge their tenant doctors.
Practices should think about recalibrating service fees using better benchmarks while ensuring that documentation reflects true commerciality. This protects both tax positions and practices sustainability.
ATO safe harbour range
Many practices remain trapped in the outdated ATO “safe harbour” range of 40-45%, failing to account for:
- Inflationary pressures (clinical/administrative cost increases)
- Bulk-billing impacts (reduced patient contributions)
- Medico-legal risks (personal asset exposure from undercapitalised service entities)
The financial consequences of staying in this paradigm can include:
- Excessive taxation: Owners often overpay $20,000+ annually per GP due to non-commercial fee structures
- Insolvency risks: Service entities frequently operate at losses (see our financial benchmarks report)
- Missed opportunities: Tax-effective income splitting requires robust commercial justification
Challenges under 2025 Medicare bulk-billing incentives
The 2025 Medicare reforms introduce significant financial challenges for practices:
- Increased costs: Subcontractor models face rising overheads due to payroll tax obligations and employee-like liabilities (e.g., superannuation and GST).
- Reduced profit margins: Bulk-billing requirements eliminate gap fees, leading to unsustainable profit margins. To break even, subcontractor models require five times more patients than tenant doctor models.
- Practitioner burnout: Doctors may need to work longer hours under subcontractor arrangements, risking burnout and reduced care quality.
The tenant doctor model is a sustainable alternative
The tenant doctor model is a solution where practitioners operate independently within a shared facility while renting space and services. Key benefits include:
- Service trust arrangements are Federal Court, ATO and AHPRA-approved arrangements
- Freedom to set fees and manage clinical practices independently.
- Reduced regulatory risks associated with payroll tax audits.
- Automated accounting systems for streamlined operations and compliance.
- Enhanced profitability through fairer consumption-based service facility fees.
This model mitigates financial risks while still supporting high-quality and team-based patient care.
Conclusion
For medical practices navigating complex financial landscapes under Medicare reforms, leveraging service trusts with commercially justified fees offers a robust solution for reducing taxes and protecting assets.
Recent court rulings affirm that realistic service arrangements grounded in commercial reality are legally compliant and financially advantageous. These strategies and sustainable business models like Tenant Doctor™ arrangements ensure long-term viability while safeguarding practitioner autonomy and patient care quality.
David Dahm is the principal of medical practice advisory firm HealthAndLife. This is an edited version of an article originally published by HealthAndLife HERE
