Income splitting for medical professionals

If you are a medical professional, the income you earn is deemed as personal services income. PSI is classified as income derived by an individual as the result of your personal exertion.  The professional services that you may provide can be carried out by the individual as a sole trader or sometimes through a trust, partnership or company structure.

We need to understand that the tax treatment of income from personal exertion falls under the Personal Services Income (PSI) attribution regime.  This legislation treats individuals earning PSI as an employee.  The ATO can look through any structures, such as a medical company or trust, which may be in place to attribute the income generated back to the individual who earned that income.

For example, if Dr Showers is earning $350,000 in personal income from his work as a Osteopath after business expenses, this income must, under law, be included in Dr Showers personal income tax return in the year that it has been earned. He does NOT have the option to;

• leave significant amounts of income in a medical company to be taxed at the company tax rate; or

• split the income with other family members to reduce his tax.

If Dr Showers were to redirect some of this income away from himself, this would be considered tax avoidance and would incur substantial penalties from the Australian Tax Office (ATO).

When considering PSI, we need to be clear that the type of income earned is only personally generated income, it does not include income generated by a medical practice from service fees or income from investments which may be held in another structure, such as a trust. The ATO have recently advised there will be a particular focus on this activity in the coming financial year.  Below we discuss further the ins and outs of PSI

A frequent question I get is “Can I split income as a doctor because I have a company or trust?

In short No,   

As stated previously ATO has the ability to look through any structure and review how the income is earned. This is the key reason why the PSI legislation.  If income is derived by the medical practitioner as a result of their personal work or exertion, this income is PSI and must be recognized by the individual performing the work.

Don’t assume that if you meet the requirements to be classified as a Personal Services Business, you can split your income between yourself and your family members. This is not true. Where personal exertion income is split incorrectly with associates, the ATO is likely to consider this tax avoidance and ignore any tax benefits obtained.

If I work at a number of practices and so 80% of my income does not come from one source, so I can split my income?

Incorrect – The income is derived as a result of your own personal work. This income must be attributed to the person who earned it.  

 If you would like any further advice please get in touch with the office. Laz