Download Mapping a Financial Path for Doctors (GPRA)

Mapping a Financial
Path for Doctors
(GPRA)
Brendan Campbell
Associate Director Prosperity Health
STRUCTURES
Structure Matrix
Sole Trader
Asset Protection
Income Tax Rate
NO
Marginal tax rate
Flexibility of Capital Gains
Distributions
Discount
Ability to use
Losses
NO
50% discount
YES
YES
NO
at partner rate
NO
depends on
partner
YES
30% (note PSI income is
tax in individual name)
limited
No discount
carry fwd only
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
Partnerships
Company
Trusts
STRUCTURES
Fundamental philosophy…..
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One structure to operate the business
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One structure to hold assets of the business
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One structure to accumulate assets
Step 1 : Getting the structure right
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Operate through a practice trust
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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
Step 1 : Getting the structure right
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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
No
Distribution of net profit
As salary (+on-costs)
As distribution (no on-costs)
Administration of break
even rule
Difficult to manage
Automatic
Understanding the nature of your income
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Three types of income:
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Property income
Personal services income
Business income
Business income vs personal services income (PSI)
Personal services income
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Income that is mainly a reward for an individual's personal efforts or skills
Business income
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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.
Understanding the nature of your income
Understanding the nature of your income
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IT2639 – Rule of thumb
Non-principal practitioners ≥ principal practitioners = business income
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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
Types of trusts for medical practices
Types of trusts
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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
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PSI trust
Must be the medical professional (cannot split)
Business trust
Family (resident + non-resident)
Investment company
Doogie Howser M.D.
Independent contractor
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Dr Doogie Howser is a nearly 50 year old GP
and an independent contractor practicing
through a practice company called Howser
Medical Pty Ltd
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Doogie pays an independent service provider a
management fee of 35% of billings
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Doogie also pays his own family trust a management fee of 15% for
providing all other services needed to run his practice
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Doogie’s gross billings are $500,000, hence an independent
management fee of $175,000 and a second management fee of
$75,000.
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Pays himself super of $25,000 and a net salary of $225,000
Problems
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Second management fee is not commercial and will not be
accepted by the ATO
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Doogie will have a taxable income of close to $300,000 and a tax
liability of $115,000
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Limited other tax planning options
Workers compensation insurance on salary payments
Complex BAS: must pay PAYG Withholdings on salary payments to
Doogie
Trusts benefiting Doogie
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Option 1 – The benefits Doogie gains by moving to a PSI trust
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Option 2 – The benefits when Doogie opens his own practice
Option 1 – Doogie moves to a PSI trust
Option 1 – Doogie moves to a PSI trust
Solution
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Change Doogie’s practice company to a personal services income
(“PSI”) trust. Get rid of service trust = less administration.
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Transfer Doogie’s practice from company to trust
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Top 5 big benefits of a PSI 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
Benefits of a PSI Trust
1. Superannuation
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Maximise contributions wherever possible
Be conscious that anyone earning more than $300,000 must pay 30% (not 15%)
tax on concessional contributions
Amount of
general cap
Cap for those 50
years old or over
Treatment of
Excess
2015-16
$30,000
$35,000
Marginal rates +
charges
2016-17
$30,000
$35,000
Marginal rates +
charges
Income year
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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.
Benefits of a PSI Trust
2. Manage your non-deductible debt
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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
Benefits of a PSI Trust
3. Motor vehicles
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Favourable tax treatment for the primary car
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What about 2nd + 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
Benefits of a PSI Trust
4. Travel & education costs
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Purpose determines deductibility
Documentation proves purpose
So make sure paper trail is supportive of deductibility
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Travel allowances paid by practice trust
Benefits of a PSI Trust
5. Payments to related parties
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Salaries to family members – who, when and how much?
Superannuation for family
Distributions to family
Option 2 – Doogie opens a practice
Extended solution
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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.
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Shifts from PSI to business income
Assuming no overall change in income (more than likely to increase):
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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)
BIG TIP
Make sure you get the right advice from
someone who has:
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business knowledge
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Mistakes can cost thousands every year, or even worse can
bankrupt you in worst case scenarios
tax knowledge, and
specialist knowledge for medical professionals
Tax minimisation
Rates of individual tax
The following rates for 2015-16 apply from 1 July 2015.
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).
General Deductions
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Computers
Mobile Phones
Workbag
Protective Clothing
Professional Memberships
Insurance
Motor Vehicle usage
Work related Equipment
Deductible Debt
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Donations
Tax Agent Fees
Conferences
Personal Insurance
Personal Insurance
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Indemnity
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Trauma
Income protection
Total and Permanent
Disablement (TPD)
Life insurance
Financial stages of your career
Financial Stages
• RMO
• The Young GP
• Middle Aged GP
• Older GP
• Retiring GP
Mistakes of a New GP
Mistakes of new GP’s
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SIP and PIP
Medicare items
Efficiency
PM & Nurse - new best friends
Insurance
Financial v Ethical
Double tax hit in May / July
Prosperity Advisers
What Prosperity offers
– Business Advice
– Proactive planning
– Financial & Investment Advice
– Insurance & Estate Planning
– Benchmarks
– Compliance
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.