A service trust lets a medical practice centralise its non-clinical functions — administration, staffing, premises, equipment and IT — in a separate entity that charges the practice a commercial fee. Used properly, it supports operational efficiency, asset protection and succession planning; any tax outcome must follow from genuine commercial substance, reasonable pricing and contemporaneous documentation. Arrangements must satisfy TR 2006/2 and section 8-1 of the ITAA 1997, and withstand Part IVA of the ITAA 1936. The ATO finalised PCG 2025/5 on 28 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. These structures, 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.
Sources: ATO Taxation Statistics 2022–23 and 2023–24; AIHW, General practice and primary care services. Figures include all income sources and 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 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 FC of T v Phillips (1978) 78 ATC 4361 [confirm medium-neutral citation before publishing]. Provided the arrangement is commercially genuine and fees are not grossly excessive, the Phillips model has been accepted as legitimate, subject to 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.
Source: ATO NAT 13086 & TR 2006/2 — indicative compliance risk indicators, not legally binding safe harbours.
Important: The ATO benchmarks are compliance risk indicators, not legal safe harbours. Staying within them does not guarantee deductibility. A service fee is deductible only to the extent it is incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for that purpose (ITAA 1997 s 8-1). Divergence from market rates increases risk, and fees that are excessive may be partly or wholly non-deductible.
The table below shows a hypothetical GP practice billing $800,000 per year under two scenarios.
| Item | Compliant | Higher-risk |
|---|---|---|
| Gross billings | $800,000 | $800,000 |
| Service fee | $296,000 | $380,000 |
| Fee as % of gross billings | 37% | 47.5% |
| GP-practice benchmark | ≤40% | ≤40% |
| Position vs benchmark | Within | Exceeds |
| Service entity share of combined net profit | ≤30% (within indicator) | >30% (explanation required) |
| ATO risk | Low | Higher |
The 40% and 45% benchmarks assume the GP-style business model described in the ATO guide, where the service entity runs the practice and provides a complete suite of services for a set percentage of gross practice fees. Medical specialists generally cannot rely on these rates and should support fees with comparable independent (third-party) market evidence under the comparable market prices or comparable profits approaches.
For a tailored analysis of your practice structure, see our tax planning services.
The 30% Combined Net Profit Test
The 40% gross-fee indicator does not stand alone. The ATO’s service entity guidance also points to a combined net profit measure: where the service entity earns more than 30% of the combined net profits of the practice and the service entity, the Commissioner may seek a commercial explanation. A service fee can therefore look acceptable against gross billings yet still create audit risk if the service entity retains a disproportionate share of combined profit. A practice should test both the gross-fee benchmark and the combined-net-profit outcome before treating an arrangement as low risk.
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. A service fee will be deductible where there is an objective commercial explanation for the whole of the expenditure:
- The administrative burden of providing services has genuinely passed to the service entity, not merely on paper.
- The fees charged reflect a commercial rate for the services actually provided.
- The arrangement is properly documented with a written service agreement specifying services, fee basis, and the obligations of each party.
- 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.
How PCG 2025/5 Fits With the Service Entity Rules
PCG 2025/5 is not a service trust ruling and does not replace TR 2006/2. It sets out the ATO’s compliance approach to personal services income (PSI) derived through a personal services entity that conducts a personal services business (PSB), particularly where profits are split with associates or retained in the entity in a way that may attract Part IVA. Passing a PSB test does not provide immunity from Part IVA. A transition period for low-risk self-assessment runs to 30 June 2027.
For a medical practice, three distinct questions must be kept separate:
- Service fee deductibility — TR 2006/2, Phillips, ITAA 1997 s 8-1.
- PSI / PSB / income splitting — ITAA 1997 Div 84–87 and PCG 2025/5.
- General anti-avoidance — Part IVA of the ITAA 1936.
For a plain-English explanation of the PSI basics applicable to doctors, see our PSI guide for medical practitioners. PCG 2025/5 supplements Taxation Ruling TR 2022/3, which revised the Commissioner’s view on the PSI and PSB rules.
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 to associates are disproportionate to the services those individuals genuinely contribute.
| Low-risk structure | Higher-risk structure |
|---|---|
| GP earns $650,000. Service trust charges $240,000 (37%). Profit distributed to a spouse who manages administration full-time at a market salary. Minimal retention in the 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. Dominant purpose is tax reduction. |
Distributing trust income to a spouse, adult children or a related company is not simply a tax-rate optimisation tool. Section 100A of the ITAA 1936 can cancel the tax benefit of a distribution where a beneficiary’s entitlement arises under a reimbursement agreement and the funds are effectively enjoyed by someone else. Division 7A of the ITAA 1936 applies where profits are retained, loaned or otherwise made available to shareholders or their associates, including unpaid present entitlements owed to a company beneficiary. In each case, the beneficiary should receive the actual economic benefit of the distribution, supported by contemporaneous documentation.
Our accounting team can assess where your arrangement sits.
2026 Case Update: Service Fees Must Be Legally Supportable
In Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 (a Queensland services-group dispute decided in February 2026), the Full Federal Court allowed the Commissioner’s appeal and denied service-fee deductions. The taxpayers had continued paying “service fees” to related trustees after the written agreements expired, supported by accounting entries and assumed terms. The Court held this did not objectively demonstrate mutual assent to a real contractual obligation — arm’s-length pricing and bookkeeping entries are not enough to prove a liability was incurred under s 8-1.
The lesson for medical practices is direct: a deduction depends on objective evidence of a genuine, current arrangement. That means current written service agreements, actual provision of the services, regular invoicing and payment, board or trustee approvals, and contemporaneous records — not expired agreements, informal understandings or journal entries alone.
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 on actual costs, with both the gross-fee benchmark and the 30% combined-net-profit indicator satisfied?
- 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, and free of s 100A and Division 7A exposure?
- PSI assessment: Has PSI status been assessed under Division 86, and PSB status formally considered under Division 87?
- PCG 2025/5 risk zone: Does the arrangement exhibit higher-risk indicators — 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.
Beyond income tax. This article addresses income tax and service-entity deductibility only. Medical practices should separately review state payroll tax, the relevant-contract provisions, tenant-doctor arrangements, and any applicable GP payroll tax concessions. In Victoria, from 1 July 2025, wages paid to employee and contractor GPs may be exempt to the extent they relate to fully-funded (bulk-billed) GP work — but relevant-contract rules remain significant for medical centres, specialists and allied health arrangements.
Source: ATO individual income tax rates 2024–25. Excludes Medicare levy (2%), offsets, and deductions. Not specific tax advice.
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, keep fees within ATO benchmarks, document genuine service delivery, and distribute profits consistently 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 are at low risk under the current compliance environment — provided pricing, substance and documentation are reviewed and kept current. For most practices with genuinely operating service entities, the appropriate response to PCG 2025/5 is a structured review, not a restructure; the required adjustments will usually be documentary rather than structural.
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) |
| Combined net profit test | Service entity earning >30% of combined net profit may require a commercial explanation |
| PCG 2025/5 (Nov 2025) | Part IVA can apply even where PSB tests are passed, if the dominant purpose is tax reduction |
| S.N.A Group [2026] FCAFC 10 | Deductions require objective evidence of a real contractual obligation — not expired agreements or journal entries |
| Transition period | Low-risk self-assessment available to 30 June 2027 |
| Highest compliance risk | Documentation — not the structure itself |
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 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: 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.
Does a service trust solve payroll tax for a medical centre?
No. A service trust addresses income tax and deductibility; it does not resolve state payroll tax. Medical centres must separately consider the relevant-contract provisions and, in Victoria, the GP payroll tax exemption for fully-funded (bulk-billed) work that applies from 1 July 2025.