Effective Tax Structures for Allied Health Businesses

Understanding Personal Services Income and Personal Services Business

As an allied health business owner, it's essential to understand how to structure your taxes efficiently to ensure you're meeting your tax obligations while maximising your tax benefits. One of the key considerations when deciding on an effective structure is the issue of personal services income (PSI) and personal services business (PSB) vs income generated through a genuine business structure.

Personal Services Income

PSI refers to income that is mainly a result of your skills or expertise, such as income from consulting and contracting. According to the Australian Taxation Office (ATO), if more than 50% of your income comes from providing your skills or expertise, it may be considered PSI. An example of this could be a sole clinician that services patients directly through their own business with no other staff. PSI income cannot be retained within a company or split to another entity or individual and must be borne by the person who earnt it. Deductions relating to PSI are also limited compared to a PSB or entity operating genuine business structure.

Personal Services Business

On the other hand, if you operate a PSB, you can access a range of tax concessions that are not available to individuals who earn PSI. To qualify as a PSB, you must either meet the results test or another PSB test and ass the 80% rule:

1. Results Test: This test looks at whether the individual is being paid to achieve a specific result, rather than being paid for their time or expertise. If the individual is paid to achieve a specific result, they are more likely to pass the Results Test.

2. Unrelated Clients Test: This test looks at whether the individual is providing services to a variety of clients, rather than just one or a small group of related clients. If the individual has a range of unrelated clients, they are more likely to pass the Unrelated Clients Test.

3. Employment Test: This test looks at whether the individual is operating independently, or whether they are working in an employment-like relationship with their clients. If the individual has a high degree of control over the work they do and how they do it, they are more likely to pass the Employment Test.

4. Business Premises Test: This test looks at whether the individual has their own business premises, rather than working from their clients' premises. If the individual has their own premises from which they operate their business, they are more likely to pass the Business Premises Test.

5. If you are self-assessing using the unrelated clients, employment or business premises test, then you will also need to meet the 80% rule for that income year. The purpose of the 80% rule is to look at how much of your income comes from one client and their associates. If 80% or more of your PSI comes from one client and their associates, you do not meet the 80% rule. The PSI rules will apply. If less than 80% of your PSI comes from one client and their associates you do meet the 80% rule.

Genuine Business Structure

Operating through a genuine Business structure applies to businesses that have substantial income-producing assets and/or several arm's length employees and generate income from the profit-yielding structure of the business. In these cases, the income is more likely to be generated by the profit-yielding structure of the business rather than from the rendering of personal services by the principals of the business. In the case of allied health businesses this is most likely achieved through having several arm’s length employees or contractors earning income within the business. In this scenario the PSI/PSB rules do not apply and more effective tax vehicles such as companies and trust can be fully utilised.

Retaining and Splitting Income

Retaining and splitting income is a strategy that can help you manage your tax liability and maximise your tax benefits. By splitting your income with family members or other entities (bucket company), you can reduce your tax liability and take advantage of the lower tax rates that apply to them.

However, it's essential to ensure that any income splitting arrangements are legitimate and meet the ATO's requirements. The ATO has strict rules around income splitting, and any arrangements that are not genuine or are primarily designed to minimize tax liability may be subject to tax avoidance provisions.

To ensure that your income splitting arrangements are legitimate, you should consider the following:

• Ensure that any income splitting arrangements are consistent with your business structure and operations.

• Ensure that any income splitting arrangements are documented in writing and are based on commercial terms.

• Ensure that any income splitting arrangements are supported by evidence that demonstrates that the parties involved are genuinely providing services to your business.

Effective Tax Structures for Allied Health Businesses

To structure your taxes effectively as an allied health business in Australia, it's important to seek professional advice. It's always a good idea to seek professional advice from a tax specialist or accountant who understands the unique tax issues facing allied health businesses. They can help you structure your taxes effectively and ensure that you're meeting your tax obligations while maximising your tax benefits.

In conclusion, effective tax structures for allied health businesses require an understanding of personal services income and personal services business. By operating as a PSB or meeting the requirements of operating through a genuine business structure you can potentially retain or split income, which can reduce your tax liability and maximize your tax benefits. However, it's important to ensure that any income splitting arrangements are legitimate and meet the ATO's requirements. Seek professional advice to help you structure your taxes effectively and meet your tax obligations.

Please feel free to contact us at Veritax for a free consult to discuss tax effective structures for your business.