This is the Commissioner of Taxation Mr Michael D’Ascenzo
A case study based presentation –Practice structures –Tax planning –Superannuation planning –Debt management –Investing –Risk insurances –Improving practice profits –Estate planning –Summary of tax benefits –Retirement planning and why its not always about the money
Advantages of Trust Based Structures Simple to set up and run Lower accounting fees Less administration time Legitimate deferral of tax Payroll tax and Workcover savings FBT efficient Income tax efficient CGT efficient
Don’t just take our word for it Eminent tax QC’s opinion IT Tax ruling IT 2503 dated November 1998 IT tax ruling IT 2639 dated June 1991 Mark Northeast, Picher Partners, LIV 2007 ATO Fact Sheet dated 2008 Numerous legal opinions And the ATO has never said otherwise or rejected/questioned a tax return Allied Health Care Professionals: Issues in Tax Planning by Prafula Fernandez, Curtin University of Technology
TYPES OF TRUSTS FOR MEDICAL PRACTICES Hybrid trust to run a multi-doctor owner practice that is a business Simple discretionary (family) trust to run a solo practice that is a business PSI trust used for practices that are not businesses Unit trust used to own practice premises
Dr Mickey’s Costley and Kumbersum Practice Four doctors practice in an associateship Each doctor uses a practice company The practice companies pay each doctor a salary Each practice company pays a management fee to a service trust The service trust distributes its net income to the doctors’ family trusts The family trusts distribute net income to low tax rate related persons The Practice engages a total of 4 equivalent full time material fee earners
Problems with Dr Mickey’s Costly and Kumbersum Structure –Complexity – 5 BAS’s, many inter-practice transactions –Expensive to maintain: 9 sets of accounts, 9 bank statements –Tax benefits very limited, ie only profit on services shifted to low tax rate related parties –Payroll tax and Workcover on doctors’ salaries (?) –Compliance with service entity ruling –45% tax rate on doctor’s earnings, ie very limited tax planning compared to alternatives –Doctors’ rewards are taxed very inefficiently, ie as salaries –CGT inefficient with use of practice companies –Practice manager stressed out
What are the advantages of the new structure? –Simple just one BAS and no inter-practice transactions –Cheap to maintain: 1 sets of accounts, 1 bank statement –Tax benefits : income shifted to low tax rate related parties –Payroll tax and Workcover on doctors’ salaries eliminated –Compliance with service entity ruling not necessary –30% tax rate on doctor’s earnings, ie strong tax planning compared to alternatives –Doctors’ rewards taxed very efficiently, –CGT efficient –FBT efficient –Practice manager smiling ( and now working on important matters!)
What are the legal issues? Consider CGT, but normally not an issue Liaison with practice manager critical Legal costs should be no more than $2,000 an amending deed to convert the old unit trust deed to a new hybrid trust deed deed of termination of associateship may be needed re-cycle the old associate companies as new investment companies change of name for the old trust a new unitholders’ agreement various minutes of meetings and similar documents.
Summary of Denzel’s tax savings: Phase 1 BeforeAfter Denzel$500,000$199,850$357,500$135,500 Katie$22,750$2,512 Denzel’s Mum$22,750$2,512 Denzel’s Dad$22,750$2,512 Katie’s Mum$22,750$2,512 Katie’s Dad$22,750$2,512 Disabled daughter $22,750$2,512 Other 2 children$6,000Nil $500,000$199,850 or 40%$500,000$150,572 or 30% The tax savings are $49,278 a year, every year, as displayed here: And there are timing benefits: tax is paid up to 23 months later than otherwise. And there is a Medicare Levy saving.
What is business income? Three types of income: –Property income –Personal services income –Business income Business income is better than personal services income Business income can be derived by other persons and usually faces less tax
Summary of Denzel’s Tax Savings: Phase 2 Original StructurePSI PT and Service TrustFamily Trust once practice is a business Denzel$500,000$199,850$357,500$135,500$70,571$15,214 Katie$22,750$2,512$70,571$15,214 Denzel’s Mum $22,750$2,512$70,571$15,214 Denzel’s Dad $22,750$2,512$70,571$15,214 Katie’s Mum $22,750$2,512$70,571$15,214 Katie’s Dad$22,750$2,512$70,571$15,214 Disabled daughter $22,750$2,512$70,571$15,214 Other 2 children $6,000Nil$6,000Nil $500,000$199,850 or 40% $500,000$150,572 or 30% $105,149 or 21% The tax savings are $49,278 a year, every year, as displayed here: And there are timing benefits: tax is paid up to 23 months later than otherwise. And there is a Medicare Levy saving.
RULES FOR SERVICE TRUSTS All payments must be arms length ie commercial –For GPs, 40% unless solo or rural, 45% –No Guidelines for other specialities Services must be genuinely provided Service entity must tax invoice the professional Professional must pay the tax invoice
When will a service trust work? Not needed when a practice is a business When a practice is not a business consider if: there is an abnormally high income level; there is an abnormally low level of costs; and particularly in rural areas or solo situations, where a GP can use the higher 45% benchmark
50% investment allowance and cars 50% one off deduction on the cost of a new car Luxury car rule limit applies Must be ordered before 31 December 2010 Turnover less than $2,000,000 per annum GST credits apply too A persuasive case for bringing forward planned car up-grades Up to about 60% of the cost of a new car is in effect paid for by tax benefits
Deductible overseas travel What are the rules? Must be for the purpose of maintaining or advancing an existing body of knowledge used to produce assessable income Purpose determines deductibility Paper proves purpose Document, document, document Before, after and during the trip Dual purpose trips = part deductions
Dr Nicole’s 2009 Orlando Trip Dr Nicole’s 2009 Orlando Florida Itinerary Day 1Travel from Sydney to Orlando Day 2Rest and recovery Day 3Cape Canaveral Hospital and University of Florida Day 4Disneyland Day 5Preparation for seminar Day 6 and 7 Weekend Day 8 to 12 Seminar Day 13 and 14 Weekend: drive down to Miami Day 15Miami Cardiac Assessment Centre Day 16Everglades Cardiac Assessment Centre Day 17Rest Day 18Travel from Miami to Sydney
What Dr Nicole told us An extended intensive trip to Italy and France with a like minded cardiologist. A particular emphasis on the relationship between fine dining and regional wines on matters of the heart Appropriate follow up including detailed reports, photos and feedback to interested colleagues in Australia.
Correct use of family trust Distributions to u/18 relatives not just your children Distributions to overseas beneficiaries Distributions to disabled children u/18 Distributions to pensioner parents Distributions to non-pensioner non-resident parents Distributions to non-pensioner resident parents Distributions to companies
Relative advantages of super fund and investment companies Super FundInvestment company Tax rate before pension paid15%30%, but may be less than 15% once franking credit protocols triggered Tax rate once a pension starts but before doctor stops working Nil%30%, but may be less than 15% once franking credit protocols triggered Tax rate once a pension starts and doctor stops working Nil%Nil % up to $34,000 per annum per principal (normally two principals for a couple). Ie tax free up to $68,000 a year. Subject to conditions Limit$25,000 per member per year No limit BorrowingYes, but tax inefficientTax efficient borrowing possible AuditYesNo Restrictions on choice of investments YesNo Access under age 55No (minor exceptions)Yes Limits on membersYes (SMSFs) 4No Legislative riskYesNo
Advantages of superannuation Three main tax driven advantages 1Tax deductible contributions 2Low or no tax on investment earnings (particularly once pension starts) 3Low or no tax on benefits (particularly once pension starts)
Current issues in superannuation Super or debt reduction Borrowing to pay deductible employer contributions AuDenzelation Planning strategies –Large deductible spouse contributions –Large deductible parent contributions –Large deductible child contributions –Advanced gearing strategies –Spouse benefit transfers –Non-concessional contribution/co-contribution strategies –Pension at age 60 but keep working
Why are SMSFs so good? Control Better investment performance Coordination with other aspects of your financial plan Cost are very low –No commission investment strategies –No wraps or other investment platforms –Simple investment strategies
Tax planning now super has been cut back Start super early Be aware of non-concessional concessional contributions Consider superannuating relatives Maximise superannuation returns Consider company retirement strategies Consider gearing strategies Increased emphasis on other tax planning strategies
Debt management for doctors Pay off non-deductible debt as fast as possible Completely avoid consumer debt Insist on the lowest possible interest rate Never pay mortgage insurance Avoid personal finance contracts Develop a relationship with an individual Review annually: get quotes Pay maximum super before paying off debt
The Doctors’ Guide to Investing available at: www.mcmasters.com.au
McMasters’ Investment Maxims Never invest in anything that pays anyone a commission Never let anyone else control your money The best investment is your practice Invest through a tax efficient structure Being average is good (most aren’t) Dollar cost averaging is good Do not use wraps or other expensive platforms
Sensible investments for doctors Cash deposits and fixed interest securities Residential property Surgery premises Other commercial property Index funds and similar vehicles Direct share investments Other businesses
- No commissions - Low operating costs - No wasted time - Average performance guaranteed - Research shows most professional advisors cannot beat the average: costs and commissions drag them down - Do you really think your advisor is that good?
Share investing Use a low cost broker Do not own more than 15 shares Hold the shares directly Do not use a wrap service Do not trade Do not hold values less than $20,000 Do not pay commissions
The ground rules for risk insurances Rebate all commissions Do not over insure Make sure insurances are tax effective Do not bother with trauma/crisis cover Be prepared to cut back $ as you get older Industry super funds are the cheapest Multiple universal no-medical cover?
Will for a doctor with young children Simple and natural approach Special role for siblings Testamentary trust –tax efficient –Protect against spendthrift beneficiary –Protect against the Family Law Court –Protect against the trustee in Bankruptcy
Lucy’s strategy 1. Buy a rental property. Stepping stone. $400,000. Live in it to qualify for home buyer’s assistance. Rent from boarders is tax free. Rent it out after 6 months. 2. Claim a deduction for rent paid for home office component on a floor space basis. She has high rent: she lives in a luxury apartment in Melbourne. 3. Claim deduction for car costs on a log book basis showing home to work travel as deductible travel due to need to carry bulky medical equipment. 4. Salary sacrifice $25,000 a year into Health Super. Paid $1000 non-concessional contribution 5. Take exempt fringe benefits salary sacrifice. $8,000. Considered a part time position with a second or even third hospital, and take multiple exempt fringe benefits 6. Arrange extra units of life insurance with Health Super. Possibly join other industry super funds to access multiple medical check free life low cost commission free life insurance 7. Arrange commission free income continuance insurance: first year commission rebate will be greater than the first year premium 8. Deductible overseas travel 9. Lodge PAYGW variation to get benefit of lower tax amounts straight away
Lucy’s tax savings BeforeAfter Net salary including overtime $91,000$22,030 Net salary including overtime $32,000 $3,900 Superannuation$9,000$1,350Superannuation$25,000 $3,750 Car costs $10,000 Nil Negative gearing loss $10,000 Nil Exempt fringe benefits $8,000 Nil Deductible overseas travel $10,000 Nil Meal allowance $5,000 Nil $100,000$23,380 or 23% $100,000 $7,650 or 8%
Brad’s strategy 1. Accept offer to sell practice for $500,000 despite complex CGT technical issues 2. Set up a practice trust to run Brad’s practice. PSI deed, with distributions to just Brad for now. 3.Employ Jennifer to help run the practice $15,000. 4. Pay maximum superannuation $25,000 for each of Brad and Jennifer, using debt, to a new SMSF Roll over existing Health Super except for $10,000 each to keep the cheap low cost life insurance and income continuance insurance going in the Health Super Fund. 5. Pay two lots of $1,000 non-concessional contributions. 6. Two tax deductible cars. Up-grade in name of PT to get GST credit and 50% investment allowance. $114,000 total
BeforeAfter Brad’s net profit from private practice $250,000$93,150$73,000$15,900 Superannuation for Brad and Jennifer $50,000$7,500 Deductible car costs including depreciation $25,000Nil Investment allowance$57,000Nil Salary to Jennifer$15,000$1,350 Deductible interest$25,000Nil Travel costs: third world medical clinic $5,000Nil Total$250,000$93,150 or 37.3% $250,000$24,750 or 10% Brad’s tax savings
Denzel’s Strategy 1. Set up a family trust to run Denzel’s practice. FT deed, with distributions to Denzel, Kate, Denzel’s parents, Kate’s parents, Denzel’s grandma, their disabled daughter (taxed as an adult) and the other two children ($3000 each) 2. Pay maximum super $25,000 for each of Denzel and Kate, using debt, to a new SMSF. 3. Pay maximum super $50,000 for each of Denzel’s dad and Kate’s dad, using debt, the new SMSG 4. Pay five lots of $1,000 non-concessional contributions to the new SMSF. 5. Set up a LOC in the trust’s name and use it to pay costs where the ATO accepts the interest is deductible. 6. Four deductible cars. Up-grade in name of FT to get GST credit and 50% investment allowance. $100,000 total 7. Flying lessons are deductible against aviation practice income 8. Negatively geared rental property losses on two Gold Coast units leased to parents on commercial leases 9. Living away from home allowance for Denzel $60,000
BeforeAfter Distribution: Denzel$500,000$93,150$26,057$3,008 Distribution: Kate$26,057$3,008 Distribution: Denzel’s father$26,057$3,008 Distribution: Denzel’s mother$26,057$3,008 Distribution: Kate’s father$26,057$3,008 Distribution: Kate’s mother$26,057$3,008 Distribution: disabled daughter$26,057$3,008 Distribution: other two children$6,000Nil Distribution: Harare grandmother$20,000$5,800 Living away from home allowance$60,000Nil Deductible interest$25,000Nil Superannuation: Denzel$25,000$3,250 Superannuation: Kate$25,000$3,250 Superannuation: Denzel’s dad$50,000$7,500 Superannuation: Kate’s dad$50,000$7,500 Flying lessons$30,000Nil Gold Coast negative gearing$40,000Nil Govt co-contributions (mothers)($2,000) Meal allowances$2,000Nil Small irregular fringe benefits$1,000Nil Investment allowance$50,000Nil Total$500,000$93,150 or 37.3% $500,000$46,356 or 9% Denzel’s tax savings
Nicole’s strategies Convert practice to a family trust and expand to become a business for tax purposes. Spend $200,000 on a new scanning machine Invest in the business to maximise future tax free capital gains Maximise investment allowance claims on new equipment ordered before 31.12.9 installed before 31.12.10 Employ mother and daughter part time to help run the practice $15,000. Pay maximum super contributions for each of Helen ($50,000) mother ($50,000) and daughter ($25,000) Pay two lots of $1,000 non-concessional contributions Deductible travel: Orlanda (Cancelled the French Connection) Distribute $34,000 to Nicole’s mother tax free and generally distribute net income to wider family group Distribute net income to Nicole Investments Pty Ltd Pre-pay deductible interest Pay daughter’s education costs (business management course)
BeforeAfter Distribution to Nicole$1,000,000$425,700$20,500$2,175 Distribution to mother$34,000Nil Distribution to daughter$20,500$2,175 Superannuation for Nicole $50,000$7,500 Distribution Nicole Investments $650,000$195,700 Superannuation for daughter $25,000$3,250 Superannuation for mother $50,000$7,500 Daughters’ training costs $10,000 Deductible car costs$25,000Nil Investment allowance$100,000Nil Travel costs: Orlando$15,000Nil Total$1,000,000$425,700 or 42.5% $1,000,000$218,300 or 22% Nicole’s tax savings
Helen’s strategy 1. Helen salary sacrificed $25,000 a year into HESTA 2.Helen salary sacrificed $9,000 pa of exempt fringe benefits 3.Helen salary sacrificed $20,000 pa of tax free entertainment allowances 4. Helen salary sacrificed a company car (used by Achilles) 5.Helen claimed deductions for her own use of her own car 6. Helen paid Achilles a salary of $34,000 pa for her admin, her research, her paper preparation and her share portfolio 7.Helen superannuated Achilles $50,000 8. Helen transferred her super to Achilles 9. Achilles started a transition to retirement pension at age 60 10. Helen negatively geared a property, and borrowed to pay deductible employment, practice and investment costs 11. Helen travelled overseas to better connect with her international peers 12. Arranged a second public hospital appointment to better connect with peers and get a second exempt fringe benefits 13. Helen varied her pay as you go instalments
BeforeAfter Helen’s salary, net of deductions$250,000$87,350$52,000$9,450 Exempt fringe benefits: main employer$9,000Nil Exempt fringe benefits: second employer$9,000Nil Exempt entertainment fringe benefits$20,000Nil Salary to Achilles$35,000$4,350 Superannuation for Achilles$50,000$7,500 Superannuation for Helen$25,000$3,750 Car fringe benefit: Helen$10,000Nil Deductible car costs: Helen$10,000Nil Deductible travel costs$15,000Nil Negative gearing loss$15,000Nil Total$250,000$87,350 or 35%$250,000$25,050 or 10% Helen’s tax savings
Retirement Planning: The Problem Burn out is a real issue for older doctors, particularly males At age 40 most doctors have completed a normal working life –Ie [(40-15)*1.3*1.3] or 42 years work At age 60 most doctors have completed two normal working lives –Ie [60-15)*1.3*1.3] or 76 years work High pressure# Heath problems# High morbidity# Marital and other relationship stresses# #Source: Emotional Health. The Conspiracy of Silence Among Medical Practitioners. A review of the literature for the RACGP by Dr Danielle Clode University of Melbourne 2004 (accessible on www.mcmasters.com.au)
Client’s current projected work pattern Our preferred projected work pattern Work intensity Start early and never stop Retirement Planning: The solution
Start early and never stop Live longer Have more fun Do more good Make more money Pay less tax And if you die, even better Retirement Planning: The solution
BEP Facilitating gradual retirement Hard for solo doctors or others with fixed costs. Profit falls more than proportionately to hours Ten sessions a week generates profit of $225,000 pa Seven sessions a week generates profit of $90,000 pa
Retirement Planning Solution for solo doctors? Sell your practice Amalgamate your practice and negotiate a lower management fee on own patients and reducing hours ensure continuity of care CGT exemptions on surgery If all else fails, abandon your practice and go somewhere else
The Good News Serious shortage of GPs right around Australia Most practices are desperate for assistance Age is not an issue if you are a GP You are interviewing them, they are not interviewing you, and will be flexible on working hours and related issues No reason why any doctor in good health cannot start to retire at age 55 and finish at age 75, earning a very high income in a very tax efficient form each year