Mapping a Financial Path for Doctors (GPRA) Brendan Campbell Associate Director Prosperity Health

Transcription

1 Mapping a Financial Path for Doctors (GPRA) Brendan Campbell Associate Director Prosperity Health

2 STRUCTURES Asset Protection Structure Matrix Income Tax Rate Flexibility of Distributions Capital Gains Discount Ability to use Losses Sole Trader NO Marginal tax rate NO 50% discount YES Partnerships NO at partner rate NO depends on partner YES Company YES 30% (note PSI income is tax in individual name) limited No discount carry fwd only Trusts Discretionary Trust YES with Corp T'tee beneficiary level YES beneficiary level carry fwd only PSI Trust YES with Corp T'tee beneficiary level NO beneficiary level carry fwd only Unit Trust YES with Corp T'tee beneficiary level limited beneficiary level carry fwd only Hybrid Trust YES with Corp T'tee beneficiary level YES beneficiary level carry fwd only

3 STRUCTURES Fundamental philosophy.. One structure to operate the business One structure to hold assets of the business One structure to accumulate assets

4 Step 1 : Getting the structure right Operate through a practice trust Simple to set up and run Lower cost and reduced administration Provides path for expansion Succession planning Legitimate deferral of tax Payroll tax and workers compensation savings FBT efficient Income tax efficient CGT efficient Use of trusts confirmed by ATO in rulings and cases

5 Step 1 : Getting the structure right Practice trust vs practice company Practice Company Practice Trust Tax collection system PAYG Withholding PAYG Instalments BAS simple No added PAYGW Yes Restrictions on loans to associates Yes Division 7A Distribution of net profit As salary (+on-costs) As distribution (no on-costs) Administration of break even rule Difficult to manage No Automatic

6 Understanding the nature of your income Three types of income: Property income Personal services income Business income Business income vs personal services income (PSI) Personal services income - Income that is mainly a reward for an individual's personal efforts or skills Business income - Income derived by a practice which has substantial income producing assets, or many employees, or both, is more likely to be generated from the income yielding structure of the business rather than from the rendering of personal services.

7 Understanding the nature of your income

8 Understanding the nature of your income IT2639 Rule of thumb Non-principal practitioners principal practitioners = business income Who is a practitioner? Professional and non-professional staff whose function is to derive material fees for the practice. Not administrative, clerical or support staff Includes Practice nurse generating material fees in own right Allied health professionals paying rent or management fees Salary during training Personal services income Business income

9 Types of trusts for medical practices Types of trusts Hybrid trust Multi-doctor owner practice that is a business Discretionary trust Solo practice that is a business PSI trust Practice that is not a business Unit trust Own practice premises Service trust Limited circumstances for non-business practices Beneficiaries PSI trust Must be the medical professional (cannot split) Business trust Family (resident + non-resident) Investment company

10 Doogie Howser M.D. Independent contractor Dr Doogie Howser is a nearly 50 year old GP and an independent contractor practicing through a practice company called Howser Medical Pty Ltd Doogie pays an independent service provider a management fee of 35% of billings Doogie also pays his own family trust a management fee of 15% for providing all other services needed to run his practice Doogie s gross billings are $500,000, hence an independent management fee of $175,000 and a second management fee of $75,000. Pays himself super of $25,000 and a net salary of $225,000

11 Problems Second management fee is not commercial and will not be accepted by the ATO Doogie will have a taxable income of close to $300,000 and a tax liability of $115,000 Limited other tax planning options Workers compensation insurance on salary payments Complex BAS: must pay PAYG Withholdings on salary payments to Doogie

12 Trusts benefiting Doogie Option 1 The benefits Doogie gains by moving to a PSI trust Option 2 The benefits when Doogie opens his own practice

13 Option 1 Doogie moves to a PSI trust

14 Option 1 Doogie moves to a PSI trust Solution Change Doogie s practice company to a personal services income ( PSI ) trust. Get rid of service trust = less administration. Transfer Doogie s practice from company to trust New ABN and TFN. Not much more needed Enjoy up to a 23 month tax holiday switching from PAYGW to PAYGI Decreased workers compensation insurance Possibility of using enhanced cash flow for other purposes such as paying off non-deductible debt Top 5 big benefits of a PSI trust:

15 Benefits of a PSI Trust 1. Superannuation Maximise contributions wherever possible Be conscious that anyone earning more than $300,000 must pay 30% (not 15%) tax on concessional contributions Income year Amount of general cap Cap for those 50 years old or over Treatment of Excess $30,000 $35, $30,000 $35,000 Marginal rates + charges Marginal rates + charges To be eligible for the $35,000 cap you must turn 50 (or be over 50) in that financial year. Borrowing via business loan to make contributions in preference to paying down non-deductible debt. Also an effective vehicle to acquire practice premises, using debt if required.

16 Benefits of a PSI Trust 2. Manage your non-deductible debt Make good use of the inherent tax deferral available using a practice trust Use debt within your practice trust to fund business costs Channel spare cash released by this strategy into paying off non-deductible debt Make use of offset accounts instead of paying off principal

17 Benefits of a PSI Trust 3. Motor vehicles Favourable tax treatment for the primary car What about 2 nd + cars for family? Provide 2nd + vehicles via practice trust to family members as a concessionally taxed fringe benefit (using statutory method ) Implied 80% business usage and corresponding tax deduction

18 Benefits of a PSI Trust 4. Travel & education costs Purpose determines deductibility Documentation proves purpose So make sure paper trail is supportive of deductibility Travel allowances paid by practice trust

19 Benefits of a PSI Trust 5. Payments to related parties Salaries to family members who, when and how much? Superannuation for family Distributions to family

20 Option 2 Doogie opens a practice Extended solution Doogie sets up his own practice (or buys one), winds back to 3 days, brings in associate for 3 days/wk + practice nurse takes over care plans + allied health professional paying a service fee. Shifts from PSI to business income Assuming no overall change in income (more than likely to increase): Distributes: $70,000 each to wife and adult daughter $20,000 each to his parents (living on SMSF pension, so nil tax) $40,000 to investment company to start share portfolio Balance of $80,000 to himself Saves over $51,000 pa in tax (which he uses to pay down mortgage)

21 BIG TIP Make sure you get the right advice from someone who has: business knowledge tax knowledge, and specialist knowledge for medical professionals Mistakes can cost thousands every year, or even worse can bankrupt you in worst case scenarios

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24 Tax minimisation Rates of individual tax The following rates for apply from 1 July Taxable income Tax on this income 0 $18,200 Nil $18,201 $37,000 19c for each $1 over $18,200 $37,001 $80,000 $3,572 plus 32.5c for each $1 over $37,000 $80,001 $180,000 $17,547 plus 37c for each $1 over $80,000 $180,001 and over $54,547 plus 45c for each $1 over $180,000 The above rates do not include the Medicare levy of 2%.The above rates do not include the Temporary Budget Repair Levy. The Temporary Budget Repair Levy is payable at a rate of 2% for taxable incomes over $180,000 (applies for 3 years until 30 June 2017).

25 General Deductions Computers Mobile Phones Workbag Protective Clothing Professional Memberships Insurance Motor Vehicle usage Work related Equipment Deductible Debt Donations Tax Agent Fees Conferences

26 Personal Insurance Personal Insurance Indemnity Income protection Total and Permanent Disablement (TPD) Trauma Life insurance

27 Financial stages of your career Financial Stages RMO The Young GP Middle Aged GP Older GP Retiring GP

28 Mistakes of a New GP Mistakes of new GP s SIP and PIP Medicare items Efficiency PM & Nurse - new best friends Insurance Financial v Ethical Double tax hit in May / July

29 Prosperity Advisers What Prosperity offers Business Advice Proactive planning Financial & Investment Advice Insurance & Estate Planning Benchmarks Compliance

30 Q&A Thank you Note: this presentation is to raise awareness of general opportunities but should not be relied upon as specific advice. You should seek tailored advice before implementing any of the matters raised herein.