A service trust lets a medical practice engage a separate entity to provide administrative, staffing, and infrastructure services for a fee, enabling profits to be distributed to lower-taxed beneficiaries. Arrangements must comply with TR 2006/2 and withstand scrutiny under Part IVA of the ITAA 1936. The ATO finalised PCG 2025/5 in November 2025, formalising its compliance approach to income-splitting and profit-retention. Doctors with existing service trusts should review their structure and documentation as a priority.
Many Melbourne GPs and specialists running a service trust set up their arrangement years ago and have not revisited the documentation since. In November 2025, the ATO finalised Practical Compliance Guideline PCG 2025/5, formalising the Commissioner’s approach to income-splitting and profit-retention in personal services arrangements. For medical practices with a service trust structure, this development is a clear signal to review.
These arrangements, when properly implemented, remain lawful and widely used. But the compliance environment is more demanding than a decade ago. Fees must be commercially justified, documentation must be contemporaneous, and distributions must reflect genuine commercial intent rather than a primary purpose of reducing the practitioner’s personal tax.
(ATO Taxation Statistics 2022–23)
(ATO Taxation Statistics 2022–23)
ATO Taxation Statistics 2022–23 | Figures include all income sources. Do not reflect working hours or career stage.
What Is a Service Trust in a Medical Practice?
A service trust is a separate legal entity — typically a discretionary trust or company — that provides non-clinical services to a medical practitioner’s practice in exchange for a fee. Services commonly include administration, reception staff, medical equipment, premises, IT, and bookkeeping. The practitioner’s practice entity pays the service fee, which is potentially deductible under section 8-1 of the ITAA 1997, and the service entity distributes its profits to beneficiaries who may be taxed at a lower marginal rate.
The structure originates from the Federal Court decision in FCT v Phillips [1978] FCA 28. Provided the arrangement is commercially genuine, and fees are not grossly excessive, the Phillips model has been accepted as legitimate, subject to the detailed guidance in Taxation Ruling TR 2006/2 and the ATO’s companion document “Your Service Entity Arrangements” (NAT 13086).
The service entity must function as a genuine commercial enterprise. Our team works with medical practices across Melbourne to ensure this distinction is clearly maintained in both structure and documentation.
How Are Service Trust Fees Calculated Under ATO Guidelines?
For a general medical practice where the service entity provides a comprehensive suite of services — staffing, premises, equipment, administration, and marketing — the ATO will not generally scrutinise fees up to 40% of gross practice billings. Rural and sole practitioners have a higher threshold of 45%. Fees are calculated as a mark-up on the costs incurred by the service entity. The net mark-up on those costs must not exceed 10%, and the service entity must absorb at least 18% of its gross mark-up in operating costs.
ATO — Service entity arrangements (NAT 13086) & TR 2006/2
The table below shows a hypothetical GP practice billing $800,000 per year under two scenarios:
| Item | Compliant (37%) | Higher-Risk (47.5%) |
|---|---|---|
| Gross billings | $800,000 | $800,000 |
| Service fee | $296,000 | $380,000 |
| Base costs | $240,000 | $240,000 |
| Gross mark-up | 23.3% | 58.3% |
| Operating costs absorbed | 20% of mark-up | 9% of mark-up |
| Net mark-up | 4.8% — within ceiling | 21% — exceeds ceiling |
| ATO risk | Low | Higher |
For a tailored analysis of your practice structure, see our tax planning services.
What TR 2006/2 Actually Requires
Taxation Ruling TR 2006/2 sets out the Commissioner’s position on the deductibility of service fees paid to associated entities under section 8-1 of the ITAA 1997, and the potential application of Part IVA of the ITAA 1936. The ruling makes clear that a service fee will be deductible where there is an objective commercial explanation for the whole of the expenditure.
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The administrative burden of providing services has genuinely passed to the service entity, not merely on paper.
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The fees charged reflect a commercial rate for the services actually provided.
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The arrangement is properly documented with a written service agreement specifying services, fee basis, and obligations of each party.
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The parties have actually complied with the terms over time — evidence of real service delivery, not just a signed contract filed away.
TR 2006/2 identifies two primary risk factors: fees that are disproportionate or grossly excessive relative to the services provided, and arrangements that guarantee the service entity a profit outcome without reasonable commercial explanation. Our medical accounting team regularly assists practices in updating agreements and documenting the operational substance of their arrangements.
Does PCG 2025/5 Change How Service Trusts Work?
PCG 2025/5, finalised by the ATO on 28 November 2025, does not change the underlying law. It formalises the Commissioner’s compliance approach to personal services income (PSI) arrangements involving personal services entities (PSEs) that qualify as a personal services business (PSB). The guideline confirms that passing the PSB tests does not provide immunity from Part IVA. Where the dominant purpose of an income-splitting or profit-retention arrangement is to obtain a tax benefit, the ATO will apply Part IVA to cancel that benefit, even where the PSI rules in Division 86 of the ITAA 1997 do not apply. A transition period for low-risk self-assessment runs to 30 June 2027.
The guideline supplements Taxation Ruling TR 2022/3, which revised the Commissioner’s view on the PSI and PSB rules. For a plain-English explanation of the PSI basics applicable to doctors, see our PSI guide for medical practitioners.
What Makes a Service Trust Arrangement Higher Risk?
Under PCG 2025/5, an arrangement is considered higher risk where there is a significant disconnect between the income generated by the practitioner and the amount distributed to them personally; where large distributions flow to adult children or a spouse without genuine commercial justification; where profits are retained in the service entity at a lower tax rate without a documented commercial reason; or where distributions received by associates are disproportionate to services genuinely contributed by those individuals.
| Low-Risk Structure | Higher-Risk Structure |
|---|---|
| GP earns $650,000. Service trust charges $240,000 (37%). Profit distributed to spouse who manages administration full-time at market salary. Minimal retention in trust. | GP earns $650,000. Service trust charges $320,000 (49%). Profits split among the GP, a non-working spouse, and two adult children in low-tax brackets. No documentation of services by family members. |
| Fee within ATO benchmarks. Distributions tied to genuine work. Commercially explicable. | Fee above threshold. Income diverted with no commercial basis. The dominant purpose is tax reduction. |
Identifying where your arrangement sits requires a structured review of the service agreement, fee methodology, beneficiary distributions, and supporting documentation. Our accounting team can assist.
Reviewing an Existing Service Trust: A Practical Checklist
For practitioners with an existing service trust, a structured review against the following criteria is a sound starting point.
- Service agreement: Is it current and signed, and does it clearly specify the services, fee basis, and obligations of each party?
- Fee methodology: Are fees calculated based on actual costs, with gross and net mark-ups within ATO indicative benchmarks?
- Evidence of service delivery: Does the service entity employ staff, hold equipment, and bear operating costs? Evidenced in payroll records, lease agreements, and financial statements?
- Beneficiary distributions: Are distributions proportionate to genuine services rendered, with contemporaneous documentation supporting each decision?
- PSI assessment: Has PSI status been assessed under Division 86 of the ITAA 1997? Has PSB status been formally considered?
- PCG 2025/5 risk zone: Does the arrangement exhibit higher-risk indicators, including value mismatch, income splitting without a commercial basis, or indefinite profit retention?
- Review frequency: If more than three years have passed since the last qualified review, a review is overdue.
In our experience working with Melbourne medical clients, the most common compliance gap is not the structure itself but the documentation. A well-designed service trust with an agreement that has never been updated will face difficulty withstanding ATO scrutiny, regardless of whether the fees are within the indicative benchmarks.
Can a Service Trust Still Be Used Lawfully in 2026?
Yes. A service trust remains a lawful and commercially recognised structure for medical practices in 2026. The ATO’s compliance focus under PCG 2025/5 targets arrangements where income-splitting or profit-retention is primarily motivated by tax reduction rather than genuine commercial purpose. Arrangements that comply with TR 2006/2, maintain fees within ATO benchmarks, document genuine service delivery, and distribute profits in a manner consistent with commercial reality are at low risk of ATO challenge.
The shift since 2006 is not that service trusts are prohibited; it is that the ATO now has a detailed framework for identifying when they are being misused. Practitioners who maintain compliant, well-documented arrangements have nothing to fear from the current compliance environment.
The appropriate response to PCG 2025/5 is a structured review, not a restructure. For most practices with genuinely operating service entities, the required adjustments will be documentary rather than structural.
AIHW — General practice, allied health and other primary care services (2025) | Medicare Benefits Scheme data
ATO individual income tax rates 2024–25 | Excludes Medicare levy (2%), offsets, and deductions. Not specific tax advice.
Summary
| Key point | Detail |
|---|---|
| ATO fee benchmark | Up to 40% of gross billings for general practices; up to 45% for rural or sole practitioners (NAT 13086) |
| Net mark-up ceiling | 10% of service entity costs (ATO indicative ceiling) |
| PCG 2025/5 (Nov 2025) | Part IVA can apply even where PSB tests are passed if the dominant purpose is tax reduction |
| Transition period | Low-risk self-assessment available to 30 June 2027 |
| Highest compliance risk | Documentation — not the structure itself |
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42 Advisory provides specialist accounting and tax advisory services to medical practices across Melbourne’s south-east, including Chadstone and Bentleigh. Discuss your service trust arrangement with our CPA team.
Schedule a meeting →Disclaimer: The information provided in this article is general in nature and does not constitute specific tax, legal, or financial advice. Service trust arrangements are complex and fact-specific. We recommend seeking professional advice tailored to your individual circumstances before making any structural decisions. 42 Advisory is a CPA firm and Registered Tax Agent.
Frequently Asked Questions
What is the difference between a service trust and a PSI structure for doctors?
A service trust is a separate entity providing non-clinical services to a medical practice for a commercial fee. The PSI rules in Division 86 of the ITAA 1997 govern whether income derived mainly from a practitioner’s personal efforts is attributed back to that individual. The two frameworks can interact: TR 2006/2 governs deductibility of service fees; PCG 2025/5 governs Part IVA risk where a personal services entity retains or splits PSI.
How often should a medical service trust be reviewed?
We recommend a formal review at least every two to three years, or upon any material change in practice structure, billing levels, staff arrangements, or beneficiary circumstances. An annual review of fee calculations against ATO benchmarks is also prudent where billing levels fluctuate.
What records does the ATO require for a service trust arrangement?
PCG 2025/5 identifies a non-exhaustive list of required records: the service agreement and schedules; contracts between the practitioner and service entity; financial statements including profit and loss, balance sheet, and tax returns; contemporaneous notes of meetings and distribution decisions; and documentation supporting any fee calculations or elections made.
Can a GP contractor use a service trust if they pass the PSB tests?
Passing one of the four PSB tests in Division 87 of the ITAA 1997 means the PSI attribution rules do not apply. However, PCG 2025/5 confirms that PSB status does not provide immunity from Part IVA. A contractor whose structure distributes income primarily to reduce personal tax may still face a Part IVA challenge.
What happens if my service trust fees are found to be excessive by the ATO?
Excess service fees may be disallowed as a deduction under section 8-1 of the ITAA 1997, with interest and penalties applying to amended assessments. Where Part IVA applies, the ATO can cancel the entire tax benefit, potentially making the full service fee non-deductible.