Tax time can expose weaknesses that have been building throughout the financial year. For medical practices, the issue is not simply whether an expense appears to be business-related. Its tax treatment can depend on how the expense was incurred, who paid it, how the practice is structured and whether the expense is revenue or capital in nature.
Medical practices can also have additional complexity around GST, practitioner arrangements, employee benefits, equipment, professional development and payments to workers or contractors. However, private expenses, capital expenditure and expenses with mixed business and private use can require different treatment.
Here are some of the tax-time traps that Australian medical practices should review before finalising their accounts.
Claiming Every Medical Practice Expense as an Immediate Deduction
One common mistake is assuming that every expense paid by the practice can be deducted in full in the year it is incurred.
The tax treatment can depend on the nature of the expenditure. Routine operating expenses may be deductible, while capital expenditure may instead need to be depreciated over time or treated under another applicable tax rule. Medical practices can face this issue when purchasing equipment, technology, furniture, fit-outs and other assets used in the practice.
For example, replacing a minor component of existing equipment may have different tax treatment from purchasing an entirely new piece of equipment. The accounting treatment should therefore be reviewed rather than assuming that every purchase belongs in the same expense category.
The ATO notes that depreciating assets may generally be deductible through their decline in value, subject to the applicable rules. Before lodging the tax return, review large purchases separately from ordinary operating expenses. This makes it easier to identify items that may require depreciation or other treatment.
Missing Professional Development and Education Expenses
Doctors, nurses and other healthcare professionals often undertake continuing education, conferences, seminars and professional development. However, the fact that an expense relates to a profession does not automatically make it deductible.
For an individual employee, the ATO generally requires a sufficient connection between eligible self-education expenses and their employment activities. The expense must also satisfy the general requirements for claiming a work-related deduction. For a medical practice, the tax treatment can also depend on who incurred the expense and the nature of the arrangement. A practice should therefore distinguish between:
- Professional development paid by the practice
- Expenses incurred personally by a practitioner
- Education that maintains or improves existing professional skills
- Education that relates to a new occupation or substantially different income-earning activity
- Costs that have both professional and private elements
Keeping invoices, registration details and supporting documentation makes the purpose of the expenditure easier to establish at tax time.
Overlooking the Difference Between Business and Private Expenses
Medical practice owners may use some resources for both business and personal purposes. This can include vehicles, phones, computers, internet services, subscriptions and other equipment. A practice cannot simply claim the entire cost because the item is used partly for business.
Where an expense has both business and private elements, the deductible amount generally needs to be apportioned. The ATO’s guidance confirms that expenses with private or domestic components require the relevant business or income-producing portion to be identified. This is particularly important where a practitioner operates from home, uses equipment outside the clinic or has business subscriptions that are also used privately.
Treating GST on Healthcare Services Too Simply
GST can be particularly important for medical practices because not every health-related supply necessarily receives the same GST treatment. The ATO states that eligible medical services can be GST-free where the relevant requirements are satisfied. Other health services, products and supplies can be subject to different GST rules. The recipient of the supply and the nature of the service can also affect the treatment.
The same issue applies when claiming GST credits on practice expenses. GST credits and income-tax deductions are separate considerations, and the GST component of an expense can affect the amount treated as a deduction.
Reviewing the GST treatment of different revenue streams before tax time can help prevent classification errors from carrying into the practice’s BAS and income-tax reporting. For broader support with healthcare accounting and tax requirements, see Befree’s medical and healthcare accounting services.
Forgetting About Payroll and Worker-Related Tax Obligations
Medical practices often employ receptionists, nurses, practice managers and other staff. Some practices may also engage contractors or practitioners under different working arrangements. The tax treatment of these payments can depend on how each worker is engaged and the obligations that apply to the arrangement.
The ATO states that businesses generally need to meet their PAYG withholding and reporting obligations when paying workers. Where a business fails to withhold or report amounts when required, the deduction position can be affected, and penalties may apply.
Payroll therefore deserves attention as part of the practice’s year-end tax review. Reviewing wages, allowances, contractor payments and payroll records can help identify errors before the relevant tax obligations are finalised. For a broader look at the payroll challenges facing healthcare businesses, see our guide to why medical clinics are rethinking payroll.
Failing to Keep Evidence for Tax Deductions
A deduction is only useful if the practice can substantiate it. The ATO requires records supporting business income and expenses, and generally requires records to be retained for five years from whichever is later: the date the record was prepared or obtained, or the date the relevant transaction was completed. Medical practices should therefore retain appropriate evidence for expenses such as:
- Medical and office supplies
- Equipment purchases
- Professional memberships
- Continuing professional development
- Software and subscriptions
- Repairs and maintenance
- Practice premises costs
- Professional and business services
- Staff-related expenses
Invoices should ideally identify what was purchased and who incurred the expense. Where an expense has both business and private elements, supporting records should also show how the business portion was determined.
Reviewing the Practice Before Lodging the Return
A tax-time review should go beyond checking whether the profit figure looks reasonable. Before finalising the practice’s accounts, review:
- Large equipment and technology purchases
- Repairs, maintenance and fit-out expenditure
- Professional development and memberships
- Vehicle and travel expenses
- Mixed business and private expenses
- GST treatment of different revenue streams
- Payroll and contractor payments
- Related-party or service arrangements
- Outstanding invoices and other income records
- Supporting documentation for significant deductions
The objective is not to maximise deductions at any cost. It is to ensure the practice has claimed the deductions it is entitled to while applying the correct treatment to expenses that require apportionment, depreciation or other consideration.
Make Tax Time Easier With Better Financial Records
Many tax-time problems are created well before the tax return is prepared. When expenses are incorrectly categorised, GST treatments are inconsistent or supporting documents are missing, resolving the issues at year-end can take significantly more time.
Accurate bookkeeping gives the practice a clearer view of its income, expenses, assets and liabilities throughout the financial year. It also gives the tax adviser better-quality records to work from when preparing the practice’s tax obligations.
For practices that need additional support managing their tax records and compliance processes, tax outsourcing services can provide additional accounting support while allowing the practice team to focus on patient care and day-to-day operations.
Conclusion
Tax time is an opportunity for medical practices to identify gaps in their financial records before they become recurring problems. Reviewing deductions, GST treatment, asset purchases, worker payments and supporting documentation can help ensure the practice’s tax position is based on accurate and properly supported records.
The correct treatment will depend on the practice’s circumstances, business structure and the nature of each expense or transaction. Where an issue is unclear, obtaining professional tax advice before lodging the relevant return can help the practice apply the appropriate treatment.
If your medical practice needs help reviewing its tax records, improving bookkeeping processes or managing ongoing tax compliance, contact Befree to discuss how its accounting and tax support can fit into your practice’s financial operations.