This article considers some of the considerations individuals working in the medical profession may take when looking at year end tax planning, in particular the minimising of income and maximising of expenses.
Any calculation of tax payable in this paper has been made using the published marginal tax rates for the year ending 30 June 2016.
The information contained in this paper is general in nature only and should not be relied upon as professional advice. Anyone wishing to rely on this information should consult with their tax advisor or our firm so as to ensure the information is appropriate for your circumstances.
Most hospital employers allow an employee Doctors to enter into salary sacrifice arrangements. A salary sacrifice arrangement is where an employee forgoes part of their remuneration and instead directs their employer to pay an expense or expenses on their behalf. That is, instead of receiving a salary of say $150,000, the Doctor may receive say $120,000 as a salary and direct the employer to pay $30,000 of expenses.
As hospitals have access to generous Fringe Benefits Tax exemptions, employees working within a public hospital, are able to package $8,172 of their gross income to be paid on personal expenses – such as their personal home mortgage. Benefits paid up to this level are free of fringe benefits tax to the employer and employee. Therefore, as an example, where an individual is on a marginal tax rate of 47%, this offers a potential tax saving of $3,840 per annum.
For those individuals not employed by a public hospital. They still may be able to have a benefit through salary packaging such items as:
Where an employer pays for the above items on behalf of an employee, they will be received tax free by the employee and the employer will not be subject to Fringe Benefits Tax under the otherwise deductible rules.
Previously the amount of meal entertainment benefits that could be salary packaged without incurring FBT was unlimited. However, effective from 1 April 2016, the ATO have announced a $5,000 limit on this expenditure. If you exceed the limit, in certain circumstances it could mean that the excess amount is subject to FBT and have the effect of lowering your take home pay. Please consider the change in relation to your salary packaging arrangements.
The most common form of other income, after salary and wages income, received by Medical Practitioners is investment income.
Investment income includes interest, dividends, rental & capital gains.
Interest Income on Savings and Investment Accounts
Interest income is assessable to the person in whose name the account is held and interest is paid to.
A tax planning opportunity would be to;
- hold the account in joint names (so as to split the income with the other account holder
- have the account in the name of a lower income earning spouse (so as to fully attribute all income to your spouse and reduce your taxable income); or
- invest using an investment trust where the profit can be allocated to family members on lower income levels.
From an asset protection perspective, the use of an investment discretionary trust with a corporate trustee would provide a high level of asset protection and significant tax planning opportunities.
Generally there are no associated deductions with interest income so any actions taking to restructure the receipt of interest income should not impact on potential tax deductions. Any income earned in your name will be taxed at your marginal tax rate.
Dividend Income & Distributions from Investment Trusts
Dividends are income payments derived by an investor holding shares in a public or private company. Many dividends paid to individuals will have associated tax credits, called imputation credits. The tax credits will only ever be to a maximum amount of 30%. Therefore, where the Doctor’s marginal tax rate is say 47%, they will still be faced with having to pay a catch-up payment of tax on the dividend of 17%.
For example, where a Doctor on a marginal tax rate of 475% receives a dividend of $7,000, the additional tax payable by them on this receipt is $1,700. However, if the shares attracting the dividend were owned by an individual with a marginal tax rate of say 34.5%, the same dividend paid to them would have tax payable of only $450.
A tax planning opportunity would be to:
- hold the shares in joint names (so as to split the income with the other account holder)
- have the shares in the name of a lower income earning spouse (so as to fully attribute all income to your spouse and reduce your taxable income); or
- nvest using an investment trust and allocate the income to family members on lower income levels.
Unlike cash investments, any changes to the holding of a share investment could have capital gains tax consequences.
From an asset protection perspective, the use of an investment discretionary trust with a corporate trustee would provide a high level of asset protection and significant tax planning opportunities. However, if there is any interest bearing debt associated with the shares, the individual investor would no longer be able to claim this interest as a deduction in their personal return. Rather, the interest would be a deduction to the trust.
Rental Property Income
Income derived from a rental property is taxable to the owners of the property.
A tax planning opportunity would be ensure that:
- Keep a record of all rental property expenses – including rates, insurance, body corporate, repairs, travel for inspections, land tax, advertising, borrowing costs etc
- Obtain a Quantity Surveyors Deprecation Report made on the property – this details the depreciation allowance on all chattels associated with the property, the construction cost of the property and, if the property is in a unit complex, should outline your entitlement to deductions on the common area plant and equipment
- Any loans associated with the property are interest only where you may have other private non-deductible debt.
- Consider the prepayment of interest before the end of the financial year. Interest prepayments should be limited to 12 months to ensure a full deduction and the property must be owned by an individual.
Where a property has been acquired with the intention of using it as a rental property, but no actual income has been derived, the interest on any loans relating to the holding of the property may still be deductible. An example of this would be where land has been acquired with the intention of building a rental property. The interest incurred after settlement and during the time of construction could be deductible even though no rental income had yet been received.
Capital Gains Tax Income
A capital gain arises when a taxable capital asset is sold at a profit. For an individual medical practitioner, this most commonly relates to the sale of;
- Shares held as investments
- Investment property
- Distributions of capital gains from units held in investment unit trust
Many individuals have realised property this year to make a contribution to superannuation. These sales could have resulted in a capital gain on the sale of the asset.
Review your asset portfolio before year end for any unrealised losses. These are most likely going to be shares held. Then consider a sale and buy-back or outright sale of the asset before 30 June. The loss on the disposal of shares can be used to offset any gain made say on the sale of an investment property.
Many Doctors operate their practice through a private company. In Taxation Ruling IT2503 the Commissioner for Taxation expressed his acceptance that medical practices can be incorporated.
Under a company structure, the individual Doctor is an employee of the company and the company receives income. The Tax Office accepts that while income received by the company needs to be distributed to the Doctor, come the end of a financial year, not all of that income may have been paid out. Therefore the company may be assessable on a small amount of income.
Income retained in the company is taxable at a rate of 30% and must be paid as a fully franked dividend the following year.
You should ensure any company tax owing is paid by 30 June. Should the company have income from the prior year that needs to be paid out, it will need to ensure that any applicable company tax has been paid as otherwise the dividends will be paid unfranked – essentially making the income double taxed.
Ensure all service fees – if applicable – have been paid and ensure that they have not been over claimed otherwise there is an increased risk of a tax audit.
Superannuation contributions for both employees and owners must be paid (received & processed) before 30 June to obtain a tax deduction in the same income year. The contribution caps for the year ended 30 June 2016 & 2017 are below:
Under 50 years of age$30,000
50 years + $35,000
From 1 July 2017 these are scheduled to be reduced to $25,000.
If you are claiming personal deductions and working as an employee you need to ensure you satisfy the 10% test (employment income of < 10% total assessable income).
Small Business Asset Write off
For the 2016 and 2017 financial years the Small Business Asset Write Off allows those businesses that are classified as small (under $2m turnover) to claim up to $20,000 in an immediate tax deduction for the purchase of assets.