Incorporating a Medical Practice: Commercial Substance, Remuneration and IRAS Reviews

Source, purpose and scope

This article follows the twenty-seven-page guide published on 9 September 2024. It replaced the November 2019 circular, which had been edited on 1 March 2024. IRAS uses medical-practice audits to explain arrangements that can attract section 33 of the Income Tax Act 1947. The examples are illustrative: an arrangement omitted from the guide is not automatically acceptable or outside section 33. Incorporation remains a business-structure choice, assessed against the actual facts.

Planning, avoidance and evasion are different

Legitimate planning meets both the legal requirements and the purpose of the tax law. The guide’s example replaces cash support for a retired mother with an eligible S$8,000 CPF top-up, consistent with retirement-support policy. Eligibility for that relief must still be met. Avoidance instead uses artificial or commercially insubstantial arrangements to obtain unintended benefits; evasion involves unlawful steps or false information, such as invented expenses or omitted income.

Section 33 allows adjustments counteracting avoidance. From YA 2023, section 33A adds a surcharge equal to 50% of tax or additional tax resulting from a section 33 adjustment. The guide separately identifies sections 95 and 96 for under-declaration, with penalties up to four times underpaid tax and potentially fines or imprisonment. These consequences belong to different legal provisions, rather than one automatic penalty for every incorporation.

Why medical incorporation attracts scrutiny

Income often depends mainly on a practitioner’s own skills. The guide contrasts the 17% company tax rate with the highest individual marginal rate of 22% from YA 2017 and 24% from YA 2024. Start-up exemptions, partial exemptions and occasional company rebates can create further advantages. Splitting one operation among companies, or recreating it every three years to restart the first-three-YA exemption, can therefore attract scrutiny. A genuine operating company can still underpay its doctor and over-attribute profits to itself.

The Court of Appeal’s three-step approach

IRAS follows CIT v AQQ [2014] SGCA 15. First, ask whether the arrangement alters the incidence of tax, relieves a tax or return obligation, or reduces or avoids a liability under section 33(1). IRAS compares it with the previous or a simpler arrangement. Second, examine the section 33(7) exception: there must be genuine commercial reasons and tax avoidance or reduction must not be one of the main purposes. Both conditions are required. Third, if that exception fails, consider whether the benefit nevertheless falls within the intended scope and purpose of the particular tax provision, in legal form and economic reality across the whole arrangement.

Commercial reasons: five areas of factual enquiry

IRAS asks why the company was incorporated; what functions it actually performs and through whom; whether it has suitable capital and substantial operating assets; what contractual, workplace or employment risks it bears; and whether the doctor receives arm’s-length remuneration. Functions can include staffing, premises and contract management. Objective evidence must support the reasons. If tax savings are substantial compared with commercial benefits, savings may be a main purpose rather than an incidental result.

Illustrations 1.1–1.3: a general practice develops substance

In illustration 1.1, a sole practitioner operating since 2010 incorporates in 2020 without changing operations or employing staff, reducing total tax: the first-stage advantage test is met. In 1.2, genuine growth creates the need for one or two employees, and the company takes employment and workplace responsibilities while the doctor receives market remuneration and director fees. Those facts may satisfy both commercial-reason and main-purpose conditions.

Illustration 1.3 explains Parliament’s enterprise-growth purpose: the doctor retains earnings to open or acquire other clinics and pays employed doctors market rates. The guide notes that this third stage was unnecessary once stage two succeeded, but uses it to illustrate how reinvestment and genuine growth fit the company-tax provisions. It is not a blanket exemption for every claim of expansion.

Illustration 2: locum income put through a shell

A locum transfers S$400,000 annual personal-service receipts into a company, draws nominal salary, and has no operating premises or employees and only one computer. He argues incorporation protects him from malpractice suits. The guide rejects that reason because a patient can still pursue the practitioner personally. The company supplies no additional entrepreneurial function.

IRAS therefore disregards the structure, assesses the locum fees on the individual, revises earlier company assessments to zero and credits company tax paid against the individual’s additional liability. The guide’s description of exemptions in this example must not be read as a current universal S$200,000 tax-free allowance; eligibility, YA and the actual exemption computation remain separate.

Case study 1: anaesthetic services and a shared office

An anaesthetist incorporates in 2021, but still personally provides all sedation, networking and marketing. There are no other employees, only ancillary equipment and a shared administrative room in an unrelated clinic; patients are treated elsewhere. Sharing the host clinic’s staff and utility costs does not establish that his company independently operates the clinical business. The guide attributes the service income to the practitioner and disregards the company for tax purposes.

Case study 2: a dentist’s contractual profit share

A dental group funds equipment, renovation, staff and accounting, engaging an anchor dentist for basic salary plus a substantial operating-profit share. The dentist later creates a company with no premises or assets solely to receive that share. The services and contractual responsibility remain personal. Both basic salary and the profit share are assessed on the dentist; routing the payment through a company does not change its underlying character.

Case study 3: consultation, medicine and surgery split apart

A specialist records consultation in one company, medicine sales in a second and hospital surgery in a third. The same doctor performs the services and the nurse and receptionist are shared. IRAS views these linked activities as one operating stream, consolidates income under one company and separately checks arm’s-length allocation between company and doctor. Where no genuine company support functions exist and income is wholly personal, the general approach can instead assess the key individual.

Case study 4: genuinely independent clinics

One company runs the owner-doctor’s clinic; another at a different location employs locums. The clinics do not share premises, receptionists, office or medical equipment and can operate independently. The owner and locums receive market remuneration. In those circumstances, distinct functions, assets and risks support separate companies. Multiple companies are therefore not automatically artificial; the independence must be real.

Case study 5: recreating the same business for exemptions

Company 1 enjoys start-up exemption for YA 2018–2020. The owner strikes it off in YA 2021 and forms Company 2 to continue the unchanged practice and seek another first-three-YA benefit for YA 2021–2023. IRAS disregards the artificial restart and disallows Company 2’s start-up exemption, while the original qualifying exemption for Company 1 remains. A new legal registration does not by itself create a new business for this purpose.

Related parties and market salary benchmarking

Companies and owners are separate taxable persons, and related-party remuneration must reflect their respective contributions. Related parties include direct or indirect control by one over the other or common control. A doctor-owner may provide clinical expertise, directorship, marketing, networking and reputation: remuneration should cover all these roles. Market benchmarking considers specialisation, experience, duties and comparable services and salaries, not merely a nominal medical salary.

Cost-plus allocation and the suggested margins

Where a controlled company provides support services to its owner-doctor, cost-plus can estimate the company’s reward for management, technical, administrative and customer support. Apply an appropriate mark-up to the company cost base and allocate the residual reward to the doctor for personal contributions. The general guide suggests 10% for specialist services and 15% for dentistry or general practice.

Specialist income typically depends more on the owner’s skill and reputation; a dental or GP company may add more value through inventory, clinic premises and assets. These are recommended industry-based margins, not immutable rates. IRAS accepts other justified margins or allocation bases, and suitable comparables may support the alternative salary-benchmarking method.

Case study 6: complete S$685,000 remuneration calculation

A specialist clinic earns S$1,000,000 revenue, incurs S$300,000 cost including the doctor’s S$15,000 salary, and declares S$400,000 exempt dividend. At a 10% cost-plus margin, company profit is S$30,000. Additional remuneration is S$1,000,000 − S$300,000 − S$30,000 = S$670,000. Add the salary already declared, S$15,000, to obtain S$685,000 personal remuneration. The company receives a corresponding S$670,000 deduction.

The S$400,000 dividend does not replace the arm’s-length service remuneration. The cost base already includes original salary, which explains why salary is added back only when determining the doctor’s total remuneration rather than added twice to operating costs.

What an IRAS review involves and its possible outcomes

IRAS requests information through letters, calls or interviews and applies the three-step test to objective facts. Depending on the case, it can disregard the company and assess the individual; consolidate artificially split income under one company; or adjust the doctor’s remuneration with a corresponding company deduction. More than one response may apply. From YA 2023 the section 33A 50% surcharge can follow tax or additional tax from the adjustment.

Consolidation can change GST-registration obligations, which IRAS will identify where relevant. Grants may also be reviewed if qualifying conditions were not met. At completion, the Small Business and/or Corporate Tax Division issues a review-completion letter. A review is not concluded merely because information has been sent.

Keeping the company and applying for a filing waiver

Whether to dissolve or strike off a tax-disregarded company remains the owner’s choice. If retained, statutory ACRA obligations continue. The medical income can be declared as trade income in personal Form B. To ease company-tax filing, request the waiver form from the auditor after review.

A waiver to submit Form C/C-S may be available if the company’s only income is medical income declared personally and it has no investment assets producing dividends, rent or interest, such as shares, property or fixed deposits. Retaining the company for supplier contracts does not itself remove statutory or tax obligations; filing relief requires the appropriate application.

All nine FAQs: practical qualifications

The first three FAQs explain that incorporation does not transfer personal malpractice responsibility, an anaesthetist may choose incorporation but remains subject to section 33 review, and dividends cannot replace remuneration for contributions. FAQs four and five distinguish genuine early losses and cash shortages from a tax-saving nominal salary: support the cash-flow reason and move to market remuneration once stable; expansion plans alone do not justify underpayment.

FAQ six says each person, and each director for the company, remains responsible for evaluating professional advice; IRAS may act against an agent who abets avoidance. FAQ seven allows existing filing practice during review but warns that later section 33 adjustments may carry the surcharge. FAQ eight covers retaining the company, personal Form B and the conditional filing waiver. FAQ nine says incorporation before SUTE/PTE, such as in 1999, does not decide the issue: all facts and section 33 principles still apply.

Annex A calculator and enquiries

Annex A contains a link to the Excel Arm’s Length Remuneration calculator, rather than a separate printed formula worksheet. It is retained as a reference attachment and supports the cost-plus calculation explained above. Keep evidence of functions, assets, risks, incorporation reasons, actual duties, remuneration policy and the chosen benchmark or justified mark-up. The guide directs corporate and individual questions to the relevant IRAS Contact Us enquiry routes. The original PDF and calculator are both linked.