Starting A Medical Practice in South Africa: Business Considerations From Chartered Accountants
Are you a healthcare professional looking at starting a medical practice in South Africa?
CFO360 is a leading provider of accounting services for healthcare professionals. We offer everything from payroll, tax, accounting to reporting. Our goal is to make your life easier so you can focus on what matters most – providing quality care to your patients.
With our help, you can focus on what matters most – providing high-quality care to patients while building your dream career as a healthcare professional. You’ll have access to valuable information that you need about opening a practice in South Africa and setting up accounting systems.
Below is the outline of the topics we have covered in this article. Click on any of the links below to take you to the section you would like to read.
- Medical practice important business terminology
- Process for starting a medical practice in South Africa
- Medical practice business structure (Legal entity types)
- Sole proprietor vs Incorporation
- Accounting software for medical practices
- Medical practice billing software
- Tax considerations for doctors
- Tax structures for doctors
- Accounting method for medical practices
- Other business considerations
- How to Start a Medical Practice Checklist
Starting a medical practice in South Africa – Doctors, Dentists, and other medical practitioners
CFO360 services several doctors, dentists, physicians, and other healthcare professionals such as psychologists. Within this industry, there is a set of terminology and things to know.
Terminology and basic know how :
HPCSA – Health Professions Council of South Africa. The main governing body for doctors and most healthcare professionals.
AHPCSA – Allied Health Professions Council of South Africa. For allied practitioners such as homeopathy and Chinese medicine.
SANC – South African Nursing Council. Regulation of Nurses. Most nurses are employed, but some run their own practices.
Council for Medical Schemes – Parliamentary body created to regulate medical aids.
BHF – Board for Healthcare Funders. Board set up by Medical Schemes within the Southern African community to ensure a common pathway of registration.
Practice – Medical practitioners refer to a practice as opposed to a business. This is normally a sole proprietorship, limited liability company (Inc), or a partnership.
Billing – This is a practice’s revenue. It’s commonly referred to as billing rather than sales or revenue.
Practices can either be a :
- Cash practice, where all billing is cash upfront. This is normally when the medical aids don’t cover the health services you provide.
- Medical scheme practice – Where you bill the medical aid.
Most medical practices run a combination of the above two. The most common is an upfront cash payment for an initial consultation and then subsequent billings can be done via medical aid.
Admin Person/Office Manager – Most medical practitioners have a person based in the office that deals with the billing, helping patients pay. This person is usually very helpful to submit supplier documents, billing reports monthly, and answering any other queries. Being a doctor is a busy profession and so this person is normally the go-to person to assist with capturing receipts, bills etc.
Process for starting a new practice :
- Decide on a legal entity type.
- Register that entity and if applicable all the other registrations necessary (VAT, payroll).
- Make sure that you register with their professional body (usually already done).
- Ensure that you register with BHF.
- Put accounting and other systems in place to ensure that you remain compliant and know how your practice is performing.
Legal entity types :
What are the options best suited for your medical practice business structure?
The HPCSA and the other professional bodies prescribe certain business principles. Most of our clients are registered either with the HPCSA or the SANC.
Two principal things stand out for their respective rules :
- Personal liability. Doctors, nurses, etc all need to take personal liability for the services they perform.
- Except for nurses, anyone else other than the Government can not employ them, other entities approved by the HPCSA, or a practitioner doing the same thing (GP’s can employ GP’s, etc). Other than with GP’s this is uncommon.
These two requirements restrict the legal medical practice business structure to :
- Sole Proprietorships.
- Partnerships, Groups, Organisations.
- Associations.
- Personal Liability Companies.
- Franchises (These are Optometrists generally).
These entities all meet the requirements of the Practitioner(s) taking personal liability and not being separately employed. Even if a doctor, specialist, or dentist trades at a hospital they are still a service provider and run their own practice.
The last thing to know is that different practitioners can’t share profits or work within the same legal entity. For instance, General Practitioners cannot practice with Orthopaedic surgeons, etc. The only exception to this is :
- Radiologist practicing with a nuclear physician or radiographer.
- Pathologist’s practicing with a medical technologist.
Which medical practice business structure should you use :
If you are an Optometrist, franchises are good because they have name recognition and you get customers immediately. They also help you set up the practice and run it (Where to buy equipment, what billing software to use, etc). The business considerations for other medical practitioners differ so widely we generally only advise on the tax and legal implications of the particular practice types.
For other practitioners, generally, when they are starting out a Sole Proprietorship it is the simplest and most cost-effective seeing as they will take personal responsibility in any event. Other benefits include being able to potentially expense portions of personal expenses (being used for business – vehicles, internet, phones, etc) without going through the hassle of changing the legal entity. This is assuming of course that these expenses meet the income tax requirements to be expensed.
Partnerships are best avoided when practicing together . We suggest setting up an incorporated entity with shareholders to avoid sharing in all potential debts of the other business partner and only those debts relating to the practice. Alternatively, a formal partnership agreement detailing this can be set up by an attorney though this is more expensive than simply setting up a limited liability company.
Incorporated Entities are suggested for larger practices that employ staff and have higher revenues and profits. These practices can take advantage of the tax considerations noted below (Small business corporations and the tax arbitrage opportunity regarding dividends). Depending on the expectation of revenue and profits.
While the above medical practice business structures might seem complicated to choose from, we can absolutely help you through the decision-making process of deciding how to start your medical practice so you can utilise any available tax structures for doctors. Should you be interested in getting your legal registrations in place visit our company registration services page for more information.
Cloud-Based Accounting Software for Medical Practices
Cloud-based accounting software for medical practices such as Xero and Dext/Hubdoc make accounting relatively simple for practitioners. Further, it is also important to ensure that billing is captured monthly, if applicable.
Clients often ask why they need to pay for accounting software if they already have billing software. Billing software only takes care of the billing and medical aid claims. The accounting software takes care of everything else – expenses, financials, VAT capturing and the keeping of electronic records. Sometimes billing software offers accounting, but this is usually rudimentary (No bank feeds, not cloud based). In these cases it is usually still worth it to pay for the cloud based software as you can then get accounting done remotely.
Looking for accounting software but not quite sure which one to choose? We did a comparison between all the leading accounting software providers to make your decision easier Xero vs Quickbooks vs Sage vs FNB. Between the four of these cloud-based software providers, you would be certain to find the perfect accounting software for your medical practice.
Medical Practice Billing Software
Given the complexity with billing medical aids, there are many thousands of codes and it is usually a complex process. Medical practitioners need billing software for each medical aid. There is no software that integrates with Xero or QBO and the billing needs to be brought in afterwards. These medical practice billing software programs all take a portion or percentage of the billing by the practice for this. The most popular system is Healthbridge, but there are several players in this area. These days even some cloud based and paperless options are available.
Tax Considerations : Tax for Doctors
Although not applicable to all legal tax entities for medical practitioners majority would require the below tax submissions and services:
- Individual Income Tax Returns
- VAT Return Services
- Employees Tax Return Services
- Provisional Tax Return Services
- Companies Tax Return Services
Claiming all allowable business expenses
The income tax act allows claiming all expenses that are expended in the production of income. Medical practitioners, along with many other small business owners, do not always claim all allowable expenses. For medical practitioners, most often this means claiming :
- Phone and internet costs.
- Transport and vehicle costs (within allowable limits).
- Personal residence (Depending on the practitioner and how they practice, etc).
- Reasonable salaries for all people that work in the practice (Often, medical practices have family members or spouses that work on/for the practice. You can pay them a market-related wage for this).
- Any other costs related to the practice.
Small business corporations tax
As a small business owner, complying with your tax duties has become a lot easier in recent years and with some good advice and guidance this shouldn’t be a hassle.
Medical practitioners can utilise this benefit if they meet the following Small Business Requirements:
- You employ 3 or more, full-time, unconnected staff (not family).
- They are a legal entity (Incorporated).
- If you or any other shareholder does not own shares in other companies directly.
- Turnover does not exceed R20m (Not a general concern).
This benefit is worth roughly R100 000 per year, so it is worth optimising for. However, it is only really useful if the taxable profit is at least at the highest SBC bracket (R550k taxable profit per annum). The benefit diminishes from there.
“Connected”, in general, includes any family member, up to the third degree (Including aunts, uncles, etc). You can employ family but they do not count toward the 3 or more staff requirement.
Incorporated – Often, if they meet the other requirements, it may be advisable to incorporate as the tax benefits far outweigh the cost.
Shares in other private companies. This only counts if these companies own more than R5k in assets (Dormant entities do not count). Often, if there is a good second business it may be advisable to set up a non-automatic vesting trust to own all other interest or to own the shares in a different way. This will allow you to still use the benefit.
Dividend arbitrage on high-end earners
Some practitioners earn more than the highest individual tax bracket (Currently R1 656 601 – Feb 2022). From this bracket upwards the personal income tax rate is 45% and the highest corporate tax rate is an effective 42.4% (41.6% 2023 onwards). This is roughly 3% lower than the individual tax rate. For practitioners earning more than the highest bracket, it may be advisable to incorporate to get this benefit.
You can use this in addition to the SBC if you also met those requirements.
Below is a screenshot image of our tax structures for doctors calculator.
Estimating Provisional Taxes for doctors
Medical practitioners often pay a large proportion of their taxes in 6-monthly intervals as provisional taxpayers. We estimate on a monthly/bi-monthly basis how much in tax you must have aside to prepare you for the large payments that need to be made twice per year. This helps with planning cash flow for you as an individual and as a medical practice owner.
VAT (Value Added Tax) for Doctors
Practitioners whose annual billing is more than R1m per annum have to register and pay VAT (and meet the SARS VAT Invoice Requirements). This can generally be done as this threshold is crossed given the uncertainty with new practices and whether you can maintain projected revenue.
The R1m revenue threshold is also a good time to start to consider incorporating due to :
- Potentially using the SBC benefit.
- Keeping your personal tax situation simpler (No personal VAT, PAYE, WCA, UIF registrations, etc).
- Planning secondary dividends tax bill (See next heading).
Dividends tax delaying
This only applies to incorporated entities.
You only pay dividends tax when you declare a dividend. Practitioners can’t run debit loan accounts without a tax consequence either (Deemed dividend on uncharged interest). In some cases, it may be advisable for practitioners that don’t draw all the profits to their personal account to only declare the dividend when the funds are used (and only pay the dividends tax then).
The later you can pay taxes, the better (Good cash management).
S42 – Asset for share transaction/closing
Medical practitioners can sell their Sole Proprietorship/Partnership into an incorporated entity without tax consequences.
Tax evasion vs avoidance
Every person is legally allowed to plan and consequently minimise their tax liability within the legal framework. Outside of this framework, they consider this evasion which is illegal. Tax views and plans that skirt the margins are considered tax risk.
At CFO30 we take a conservative view on taxes and avoid tax risk all the time making sure our medical clients use any legal advantage they can without placing them at undue risk.
Tax structures for doctors: Trust and Other Structures within practices
Medical practitioners take personal risk on any health care services. Because of this, we generally suggest that other business interests, where they are significant, are held in a separate trust. This has the following benefits :
- Asset Protection – Assets held here cannot be taken if the practitioner of their practice were to liquidate/be sequestrated. This can sometimes happen if they get sued.
- Helps ensure practitioners that have 3 or more unconnected staff can use SBC tax if they hold interest in other entities (Indirectly via a trust).
- Assets held within trust do not form part of their estate.
- Other entities owned by trust can, for instance, provide administration, rental and other services to the practice. For instance, the building within which the practitioner operates can be owned by the trust to protect this asset and remove it from the estate. Or the shared staff between a group of practitioners.
- In tenuous situations, practitioners can donate assets to the trust to protect these assets.
We can help medical clients identify if it makes sense for them, help them set up these structures, and then help them run these tax structures. As a medical professional you need accountants that understand and deliver tax services specifically for doctors to ensure that your practice runs smoothly.
Accounting Considerations : Accounting Method for Medical Practices
Revenue
In a cash practice, the revenue consists of cash takings, credit card receipts and eft’s. The only item that likely needs to be captured is cash takings if it is not deposited. This can be done with a summary at a regular interval (Daily, weekly, monthly).
If a non-cash/medical aids practice revenue is made up of the above and medical aid receipts. Depending on whether the practitioner pursues unpaid bills submitted via the billing software or not the revenue can be recognised on accrual or receipt. Some practitioners do not pursue amounts not paid by the medical aid and it could be reasonable to only recognise revenue on receipt (Assuming the timing of that receipt still meets the accrual requirement of the VAT act and the various other pieces of legislation). If not, then revenue can be recognised from a monthly report with a reasonable bad debt adjustment being made on age of debt in the same journal.
Expenses
Medical practitioners have the same expenses as almost any other service business. What is important is to make it easy to submit expenses, thereby ensuring they claim more and do not forget or lose slips. It is also important to ensure that all personally paid expenses that are for business purposes be captured in the accounting records (Telephone, internet, vehicles where used mostly for business, etc).
The accounting method used for medical practices is usually the accrual accounting method for taxes and for your accounting records. We always ensure that our tax accountants take this into account for your medical practice and advise you accordingly.
Other Business Considerations
Bank Accounts
Regardless of the legal entity type the practitioner uses, we always suggest having a separate bank account. This helps the practitioner separate personal and business and removes the grey areas of separating business and personal costs.
Asset and Administration Companies
For shared practices or for larger practices, it often makes sense to separate the practice and its offices to a company owned by a trust. This helps protect these assets, share costs fairly amongst practitioners, and helps the individual practitioners get some amount of funds into a trust structure without donations tax (Keeping min mind that charging rates guidance from the HPCSA rules such as no percentage fees, etc and all charges at arm’s length).
Personal Liability Insurance
All practitioners need personal liability insurance. This is especially important for high-risk practitioners such as Neurosurgeons, Orthopaedic surgeons that do back work also Paediatricians (especially Neonatal Paediatricians and Obstetricians. In these cases, this is often a very significant cost to be factored into the practitioner’s monthly budget. It is also important that their practitioners ensure they bill out enough to recover these costs. One thing to note is that the cheapest insurance isn’t always the best. This is a function of the coverage compared to alternate quotes and the excess payable in the event of a claim.
Liquidation/Sequestration
Health practitioners can be sequestrated/liquidated and still continue trading. This is always a last resort. In these cases Trusts, etc can be useful for asset protection if they were set up correctly.
Investing via a practice
Practitioners can invest via their Inc entity and perform other businesses within the same legal entity. If these other businesses are risky, we do not suggest this as it adds more risk to a legal structure within which the practitioner already takes personal risk. Sometimes for smaller side businesses and if the practitioners want to invest with funds before the dividends, this is a good option. This is uncommon and should generally be avoided. A small tax benefit rarely outweighs the potential risk taken on.
To Summarise:
How to Start a Medical Practice Checklist
- Decide on a legal entity type.
- Register that entity and if applicable all the other registrations necessary (VAT, payroll).
- Open bank accounts etc.
- Get Insurance
- Get medical equipment and medical practice equipment
- Make sure that you register with your professional body
- Ensure that you register with BHF.
- Get Your Medical Practice Billing Software in Place
- Define employee roles
- Appoint staff members and office administrators
- Network your medical practice with colleagues
- Make use of marketing services for doctors to attract new patients
- Put accounting and other systems in place to ensure that you remain compliant and know how your practice is performing.
- Get Tax Accountants for doctors to ensure you stay compliant and all tax returns are submitted on time
Risks and rewards are often at play when it comes to starting a new medical practice in South Africa and it may feel somewhat overwhelming at first, but with the sound advice and guidance from our highly qualified team, you can rest assured you are in expert hands. We hope that you have found all the information on tax for doctors insightful and are confident that it will add great value to your medical practice.
