Professional Firm Profits: What Doctors Need to Know

If you're a doctor operating through a company, trust, or partnership within a group practice, ATO guidance around profit allocation may directly impact how you're taxed. These rules target Individual Professional Practitioners (IPPs), doctors, lawyers, accountants, and other professionals who generate income primarily through their personal effort but use business structures to manage that income. 

Important note: These rules do not apply if you're working independently and simply paying a service fee to a clinic. If you invoice a practice and retain all earnings personally, this guidance likely does not affect you. 

The ATO's Practical Compliance Guideline (PCG 2021/4), in effect since 1 July 2022, outlines how the ATO assesses risk in relation to profit allocations within professional firms. With tax planning season underway, this guidance is crucial for ensuring compliance with your structure. 

Step One: Passing the Two Gateways 

1. Commercial Rationale – Your business structure must have a clear and genuine commercial purpose.  Thinking Point: Why do you use your current structure? Is it to allow for growth, support succession or exit planning, protect personal assets, or provide operational flexibility? If the only real benefit is tax reduction, this may raise concerns. 

2. No High-Risk Features – Your arrangement must not include any features the ATO considers inherently high-risk. Thinking Point: Are you distributing income to family members who don't contribute to the practice? Is there a circular flow of funds or use of tax-exempt entities? These are all red flags that may attract audit attention. 

Step Two: The ATO's Risk Assessment Framework 

Once your arrangement passes the gateways, the ATO evaluates its risk level using a points-based system across three criteria: 

1. Proportion of Profit Returned to the IPP – How much of the profit from your share in the practice is reported in your personal tax return? 

2. Effective Tax Rate – What is the actual tax rate being paid on the income generated from your services? 

3. Remuneration Benchmarking – Are you being paid a commercially reasonable salary that aligns with what a doctor in a similar role would expect? 

Each factor contributes to a total score that places you into one of three zones: 

• Green Zone: Low risk – unlikely to attract ATO review. 

• Amber Zone: Moderate risk – may be subject to closer examination.

• Red Zone: High risk – more likely to trigger an ATO audit. 

Checklist: Do These Rules Apply to You? 

• Are you a doctor earning income via a trust, company, or partnership? 

• Is a significant portion of that income not included in your personal tax return? 

• Is your effective tax rate unusually low for your income level? 

• Have you reviewed your remuneration against industry standards? 

• Does your structure have a genuine commercial purpose beyond tax? 

• Are you confident your arrangement avoids high-risk features? 

If some of these questions raise uncertainty around profit reporting, effective tax rates, or remuneration benchmarking, it may be time to review your structure. Conversely, if you're confident your arrangement is commercially grounded and compliant, you're already on the right track. 

At GrowthMD, we specialise in helping doctors structure their practices effectively while remaining compliant with ATO expectations. Contact us for a confidential review of your arrangement and tailored advice for your medical business.