General Advice Warning. This article contains general information only and does not consider your personal objectives, financial situation, or needs. It is not personal financial product, tax, credit, or legal advice. Examples and figures are illustrative only — individual outcomes vary. Before acting on any information, seek personal advice from a qualified adviser.
Most Australian doctors above $250,000 of practice income operate under the wrong structure. Not the worst structure — but rarely the right one. The difference between the worst and the best, for a typical specialist, is somewhere between $18,000 and $35,000 of tax every year, compounding annually for the length of a career.
The structure that gets named most often in the conversation, and most often misunderstood, is the service trust. This article explains how service trust arrangements actually work for medical professionals, when they're worth setting up, and where the ATO will close them down.
What a service trust actually is
A service trust is a discretionary trust (sometimes paired with a bucket company) that provides administrative, clerical, and operational services back to a doctor's practice. The doctor continues to derive personal income from patient consultations — Personal Services Income, or PSI — but the trust handles everything around that: rooms, reception, billing, equipment, support staff, IT, supplies.
The trust charges the practice a commercial fee for these services. That fee is a deductible expense for the practice and assessable income for the trust. The trust then distributes its surplus to family members, related entities, or a bucket company at a fixed 30 per cent corporate tax rate.
The structure exists because of a specific feature of Australian tax law: while the doctor's clinical income can't be split (PSI rules block that), the support function around the practice is genuinely a separate business with separate income.
Why this matters mathematically
Consider an illustrative example only: a specialist generating $450,000 of practice income, with $80,000 of operating expenses. Without a service trust, that doctor pays personal income tax on roughly $370,000 of profit. The effective rate including Medicare lands near 37 to 38 per cent in this scenario.
With a properly structured service trust capturing, in this example, a portion of the operating side as a service fee, with a non-working spouse receiving distribution at a lower marginal rate, the effective tax on the same total profit could potentially be reduced. The illustrative annual difference for a doctor in this position might be in the range of $15,000–$25,000 — but this depends heavily on the specific facts: practice income, expenses, spouse situation, beneficiary structure, and whether the arrangement satisfies the PSI tests below. Many doctors will not be eligible for these outcomes.
Compounded over a long career, even modest annual differences can be significant if reinvested. But these figures are illustrative only. Actual tax outcomes depend on individual circumstances and current tax law.
The Phillips trust principle
The legal foundation for service trust arrangements in Australia traces back to the Federal Court decision in FC of T v Phillips (1978). The case established that a service trust providing genuine administrative services to a professional practice, charging a commercial arm's length fee, can legitimately split that service income among beneficiaries.
The court's key requirement: the trust must perform real services and charge a commercial fee. Not a fee designed to siphon profit. Not a fee set to whatever number minimises tax. A fee a third-party service provider would actually charge for the same work.
The ATO has accepted Phillips trust arrangements ever since, with detailed guidance issued in Practical Compliance Guideline PCG 2017/D11 and Taxation Ruling TR 2006/2. The structure is legitimate. It is also strictly bounded.
The four tests the ATO applies
Before treating a service trust as legitimate, the ATO works through four practical questions.
Test one — Does the trust provide real services? If staff salaries, rent, equipment, and consumables are paid by the trust, services are genuine. If the trust exists on paper only, it doesn't qualify.
Test two — Are the fees commercial? The ATO publishes acceptable benchmark margins through PCG 2017/D11 and related guidance. For medical practices, safe-harbour mark-ups apply, and the current ATO position should be reviewed at the time the arrangement is established. Charging materially above the published safe-harbour range is treated as profit-shifting and is at risk of being disallowed.
Test three — Are the parties at arm's length? The arrangement should be documented as if the trust and the practice were unrelated. Service agreements, invoicing, written terms, evidence of payments. Not paper trail — paper system.
Test four — Is the income properly attributed? PSI rules still apply to the doctor's personal billings. The service trust cannot absorb the doctor's consulting income. It can only capture the genuine support function around it.
If all four tests pass, the structure is generally robust. If any one fails, the ATO can apply Part IVA — the general anti-avoidance provision — and potentially unwind years of tax savings retrospectively, with penalties. The arrangement must be genuine, properly documented, and consistent with the published ATO guidance throughout its life.
When a service trust is the right call
Service trust structures genuinely work when several conditions are met simultaneously:
- The doctor's practice income exceeds $250,000 — the saving has to justify the setup and ongoing cost
- A spouse, adult child, or related entity exists with significantly lower marginal income — the saving comes from the marginal rate differential
- The practice has real operating overhead — staff, rooms, equipment — not a doctor consulting alone from a hospital
- The doctor intends to operate at this scale for at least five years — the setup costs need a runway to amortise
For a registrar earning $180,000, a service trust is overkill. For a specialist with no spouse, no related beneficiaries, and a minimal practice footprint, the saving may not justify the complexity. The structure is a tool, not a default.
When it doesn't work
Service trusts fail or get unwound for predictable reasons:
The PSI rules block it. If 80 per cent or more of practice income comes from a single source (a hospital, a single contract), the income is treated as Personal Services Income regardless of structure. The "results test" and "unrelated clients test" matter. Some doctors fail these tests because of how their consulting work is contracted — and a service trust on top of that arrangement doesn't help.
The fee is wrong. A trust charging the practice a fee that exceeds the ATO's safe harbour benchmark invites a Part IVA challenge. So does a fee that doesn't reflect actual underlying costs plus a reasonable margin.
The distributions are wrong. A common error: distributing to an adult child who has minimal involvement and treating the distribution as taxed at the child's lower rate. The ATO scrutinises distributions where the beneficiary contributes nothing to the arrangement.
The paperwork doesn't exist. Service agreements not in writing, invoicing not consistent, no evidence of actual service delivery. The structure exists in spreadsheets but not in reality.
Setting one up correctly
A properly established service trust for a medical professional involves:
- A trust deed drafted specifically for service entity activity, with the right beneficiary class
- A corporate trustee (not an individual trustee) for asset protection and liability segregation
- A written service agreement between the practice and the trust, signed and dated
- Identified operational functions — rooms, staff, equipment — that the trust actually controls
- Commercial fee calculation methodology, documented and reviewable
- Compliant invoicing and payment systems on commercial terms
- Annual tax returns for the trust with proper distributions
- Regular review as practice income changes — what worked at $400k may need revisiting at $700k
Done properly, the structure is durable. Done poorly, it's a Part IVA invitation.
The most common mistake
The single most common mistake we see at MNM Group is doctors retrofitting a service trust onto an existing practice without restructuring the underlying flows. The trust gets set up, but invoicing patterns, contracts, and operational realities don't change. The structure looks right on paper. The substance underneath looks identical to what existed before.
The ATO's substance-over-form approach means the structure that doesn't change anything operationally isn't a structure — it's a Part IVA arrangement.
The right sequence is: identify what the service entity will genuinely do, restructure those flows accordingly, then formalise it through the trust deed and service agreements. Not the other way around.
What to do next
If you're a self-employed doctor earning above $250,000 and your current structure is sole trader, company-only, or anything you set up without specific medical-practice advice, a structure review is almost certainly worth the conversation.
Use MNM Group's business structure calculator for an indicative comparison of four common structures, including hybrid trust arrangements. Or book a free 15-minute consultation to discuss your specific position.
This article provides general information only and does not constitute personal tax or financial product advice. Tax outcomes depend on individual circumstances, and tax law changes. Speak with a qualified adviser before establishing or restructuring any business arrangement. MNM Group Financial Services Pty Ltd · ABN 52 934 978 906 · AFSL 503737.