We have all heard the saying, if it sounds too good to be true, it usually is. In a tax setting, this becomes very important as the consequences are significant if you get it wrong.
One of the most common questions we are asked is “how can I structure my affairs to reduce tax”? When considering a restructure in order to reduce your tax it is important that you carefully consider how the restructure will be viewed by the ATO.
So what are the common myths and issues to consider?
|I can set up a company and pay tax at 30% on all of my income||This is not permitted in accordance with ATO rulings, which state that all of the profit of a medical practitioner’s company must be paid to the doctor by way of wages or super|
|I can set up a trust and split the profits with my spouse||The ATO would consider this to be tax avoidance and would attract the anti-avoidance penalty provisions of the Income Tax Assessment Act.|
|I can pay myself a reduced salary and give the rest to my family||This is also considered to be income splitting, as the practitioner is not paying themselves on commercial terms|
A simple method to assess whether your arrangement may be at risk is to consider the level of yourpersonal remuneration, the income you record in your personal tax return. Ask yourself, “If I was working for someone else, would I be working for them for this level of remuneration?” If the answer is no, then you could be at risk.
Over the years, a number of tax rulings have been issued by the ATO, providing guidance in relation to the legislation and various case judgments on the issue of income splitting. When considering the application of tax laws to a particular circumstance, we believe consideration should be given to all available ATO rulings, court decisions and other interpretative advice rather than relying on one particular ruling.
These tax rulings can be summarised into the following important points:
- Where a practice can afford it, equity principals (i.e. owners that derive income of the practice) should be remunerated with a market rate salary regardless of the business structure in place.
- Where a practitioner is paid a salary which is significantly lower than market rate and the overall result of the tax payable for the group is significantly less than would otherwise be payable if the structure did not exist, then the implementation of that structure may be viewed as being undertaken for the purposes of avoiding tax.
We also note the following factors that the ATO will consider when determining whether a business is undertaking income splitting activities:
- Are the salaries paid to the equity principals commensurate with skills exercised or services provided to the practice?
- What is the reason for implementing the structure in the first place?
- Are the business profits being paid to lower taxed family members or related entities, and not the equity principals that provided the services?
- Are the profits of the business entities or related interposed entities being accumulated for distribution to individuals other than those who generated the income?
- Has there been a change in activities performed by the individual prior to incorporation/restructure?
The application of overly aggressive structures can lead to substantial penalties and interest for underpaid tax. In addition, the costs of defending a particular position, such legal fees, may be substantial.
William Buck have experience in restructuring for medical practitioners and ensuring that the structure is tailored to suit their specific needs and is compliant with ATO rules.
If you have concerns in relation to the effectiveness of your practice’s structure with regard to the above issues, you should speak to your accountant or contact our office.