“I have heard that now that I am in private practice I should use a company or trust structure to reduce my medical income – is this right?”
Let’s face it; nobody wants to pay any more tax than they absolutely have to. Occasionally however, in the quest to minimise tax, an individual becomes confused about the different types of income they are receiving, how this income has to be taxed and the strategies that are available to minimise their tax bill.
The main type of income that you will receive is known as personal services income – income from your personal work and exertion. In relation to this type of income, the easiest way to consider it is that if you do the work, you pay the tax. Despite what you may have heard in hospital corridors or dinner parties, there are no tax structures available to legitimately distribute this income to other family members. The Tax Office has even gone to the trouble of legislating provisions dealing with exactly this issue under the “Personal Services Income Tax Provisions.”
If you are currently using a structure (such as a trust or a company) to receive your professional income, you will almost certainly be subject to the “personal services income” rules within the tax law that operate to ensure that despite the structure, any personal services income is taxable to the individual who is performing the work. If you have been distributing this income more widely to family members, you should seek confirmation from an advisor on the legitimacy of this in relation to anti-avoidance provisions of the tax legislation.
“I need a service entity, what is it and what does it do?”
A “service entity” is an entity established by doctors usually setting up their own rooms or a general medical practice. The service entity is the entity under which all equipment is owned, non-medical staff are employed and all business expenses are incurred.
The primary reason for using a service entity is for asset protection. A service entity is a trading business and as such has risks associated with it. Establishing an appropriate structure to help minimize these risks and isolate them away from an individual is just prudent business planning.
The income of the service entity comes from the doctor/s to which the business provides the services. The fee paid by the doctor is a tax deduction to them and income to the service entity. As a business, the service trust is entitled to make a profit, so the fee charged to the doctor will usually be in excess of the costs incurred.
For example, a service entity may have costs of $200,000 during a year but charge the doctor $240,000 in service fees. The service entity would then have made a profit of $40,000. This profit is not covered under personal services income tax as it is a separate business to the doctor’s medical practice. The income is derived through the operation of a business and as such can be distributed or allocated to other parties. Usually these are associates of the doctor.
If the income levels of the recipients of the income from the service trust are lower than the doctor’s income, there can be tax benefits under this arrangement as well as asset protection benefits.
“I like the tax benefits of the service trust – I should charge all of my income across to this and pay no tax!!”
A great idea but the ATO has again looked into this. Service fees need to be based on commercial rates and terms. Excessive service fees can be seen as tax avoidance and attract substantial penalties.
“Who should I speak to first?”
When starting practice you will almost certainly need to speak with a number of professional advisors. They include:
An accountant – the accountant can advise on structures and tax registrations. Ideally an accountant with industry knowledge to help guide you. Benefit from their experience.
A lawyer – the lawyer can assist with leases and reviewing agreements. Agreements are a necessary evil as they set out your rights and entitlements. If they are not properly prepared you can find yourself at a disadvantage.
A financier – industry specialist lenders can make the process of financing your new practice much easier. Speak with the AMA on who they consider best in your area.
A financial planner – moving away from salaried employment and changing your financial circumstances can be daunting. Having your income protection, life and trauma insurances reviewed at this time is a good idea.
Proper planning and working with experienced advisors will assist in making this potentially stressful change much less harder than you think.