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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
Lucy 28 year old hospital employee
Brad Recently qualified GP
Denzel The 45 year old IMG GP practice owner
Nicole The 50 year old cardiologist
Helen The 50 year old employee specialist
Mickey The tired 60 year old GP
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 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 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
Home to work travel, log books and bulky medical equipment • Ballesty v FCT (1977) 7 ATR 411 • FCT v Vogt (1975) 4 ATR 274 • AAT Case 9235 (1994) 27 ATR 127
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