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April 6th, 2016
As a medical professional in Australia you are generally considered a high-income earner, and as such the rate of tax applied is also high. This can be extremely frustrating, but even more so if you are a business owner as well. In this instance, you are not eligible for the 30% tax rate on ‘personal services’, which leaves you with a marginal tax rate of up to 46.5% to contend with.
With almost half of your income going to tax, surely you would want to try and save as much money as you can? Fortunately, there are many options you can choose to make sure your income is protected, all of which are legal and easy to attain. All you need to do is decide which is the right one for your lifestyle, needs, employment and/or business.
So here are the three easiest and most effective ways to cut down on your tax as a medical professional or business owner:
Income Tax can be broken down into two parts: Assessable Income and Allowable Deductions.
Assessable income is the receipt of earnings for services a person or business provides, whilst
Allowable Deductions are the expenses incurred in producing income.
In Australia once Allowable Deductions have been applied what is left is called ‘taxable income’. So this means that if you maximise your allowable deductions you save on tax. Basically if the cost was paid in the medical practice of your profession, you can make a tax deduction claim.
Medical Practitioners Deductions include but are not limited to the following:
TIP: Maintain an orderly record keeping system that clearly indicates your expenses for the year. This will make reviewing your expenses easier and reduce ambiguous connections between what is and what is not tax deductible. For example, an expense that is not always clear is the home office. Many doctors have a desk or office at home where work may be conducted and therefore expenses incurred. But because this is a private space your accountant will have to determine how much is deductible, which is where having a thorough record can work in your favour.
If you are a doctor over the age of 60 you can also consider beginning the process of transitioning into retirement in the form of a pension that uses money from your super fund.
The Transition to Retirement (TTR) pension allows you to draw up to 10% of your super account each year that you are still working.
TTR pensions involve ‘salary sacrifice’ which means:
A TTR pension can be accessed once you have hit preservation age, which is generally 55 years old for most people. From this age you can begin withdrawing a pension from your super even if you are still working as a medical professional. However, even if you are not the required age to start undergoing this process it is something that you can consider employing in the future to save money as your career and lifestyle changes.
IMPORTANT: TTR pensions are only available to members of accumulation super funds and only if your super fund offers the pension option. However, if your fund doesn’t have this available, a potential solution is to open a new super fund that offers this service.
Although there has been contention around the legitimacy of these types of structures in the medical field, they are still legal as long as you thoroughly follow the rules, regulations and guidelines. If you are thinking of undertaking one of these business structures consider contacting a financial firm such as MEDIQ Financial Services as we specialise in the medical sector and understand its unique landscape.
This arrangement allows doctors to distribute some of their income to family members who work within the practice. For example, a partner who maintains the books or manages administration within the business. As they have a lower marginal tax rate, they can be paid a moderate salary.
This business structure is set up so that medical professionals don’t have to buy their assets in their
own name. They can also distribute income and capital to beneficiaries such as a partner on a low or income. Beneficiaries can also be companies, of which operate to store the income generated from the medical practitioner’s. However this income excludes personal services income earned specifically by the doctor.
The reason why a company is a viable option for many doctors is that it will only be taxed at 30%
instead of the 46.5% that the doctor would personally incur.
NOTE: These structures are completely legal as long as they are developed correctly. However, as they can be dubious at times you need to make sure:
a) Your motives are in line with the Australian Tax Office’s legalities
b) You aren’t leaving your business vulnerable
To make sure that you have the best structure in place to legally minimise tax and grow your wealth, we highly recommend you get legal and financial counsel before putting them in place.