Tax Life Cycle of a Medical Professional - Part 1

Speaker:

The Tax Life Cycle of a Medical Professional – Part 1

Brett BeaverAssociate PartnerGooding Partners Chartered Accountants

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FRIENDLY REMINDER:

Disclosure Statement

The information presented in this presentation is for general guidance only. It is essential to take professional advice on

specific issues and their impact on any individual or entity. No liability can be accepted for any errors or omission or for any

person acting or refraining from acting on the information provided in this presentation.

Outline of the session:

Employee tax considerations

Choosing your business structure

Recent Australian Taxation Office (ATO) Developments surrounding tax structuring of professional practices

Service Entities

Just starting out…

Employment phase

Employee tax overview

The typical profile of a new General Practitioner:

Employee for tax purposes.

All income will be derived from personal services.

Significant HELP, HECS or SFSS debts.

Individual marginal income tax rates between 4% - 8% higher due to HELP, HECS or SFSS debt repayments.

Tax minimisation and asset protection strategies should be the focus.

Employee tax strategies

Consider tax minimisation strategies such as the use of effective salary sacrifice arrangements. Options include:

Salary sacrifice exempt fringe benefits tax (FBT) benefits (work related items or otherwise deductible expenses).

Salary sacrifice superannuation contributions.

Consider asset protection strategies, including:

Separation of investment assets into a Family Trust or Superannuation Fund.

Taking the dive…

Business start up phase

Choosing your business structure

If you are considering starting your own Practice, speak to your advisors regarding your structuring options.

There are a number of options available to you all with their own tax and accounting compliance obligations.

There can be income tax, capital gains tax and duty considerations if you have to change your structure – so plan ahead!

There is no point in designing a business structure around taxation considerations alone!

Types of Structures available

The options available for structuring your medical practice include:

Sole Proprietor Company Discretionary Trust

In addition to the above, you may also wish to consider a Service Entity to compliment your medical practice (more on this later!).

ATO Rulings: structuring medical practices

No matter what legal structure is chosen, where there is no “business structure” (which may be typical of a new practice), we note that the following Tax Office Rulings must be adhered to:

Tax Office Ruling IT 25: all profits/taxable income derived from the personal services of the GP must be paid out to the GP as salary and/or super contributions.

Tax Office Ruling IT 2503: reinforces IT 25 and adds that there should be no diversion of personal services income to related parties (i.e. spouse or adult children).

ATO Rulings: structuring medical practices

Tax Office Ruling IT 2503: sound business reasons and commercial reasons should exist before incorporating.

Incorporated medical practices cannot own income-producing property or plant and equipment unless the property or equipment is connected to the medical practice.

Service entities are acceptable, provided the amount paid is reasonable.

Note: ATO Tax Rulings address the use of practice companies, but it is specifically stated that practice trusts are a valid structuring option for a medical practice.

No hard and fast rule on what is a “Business Structure”

If the practice is undertaking a “business” and generating “business income”: no requirement to comply with the rules regarding taxation of profit per Tax Ruling IT 2503.

Tax Ruling IT 2639 outlined the ATO view on whether the income of a medical practice is being derived from a “business structure”.

The general rule of Tax Ruling IT 2639: if the practice company or trust has at least as many non-principal GPs as principal GPs, the income is considered to be derived from the “business structure”.

Recent ATO developments: Allocation of Profits

“Goalposts have been moved” with regards to the allocation of profits from professional services (including medical professionals).

From as far back as 2005… all the way to September 2014, when the ATO released guidelines titled “Assessing the Risk: Allocation of Profits Within Professional Firms”, there have been inconsistent messages when compared to ATO Rulings.

Conservative approach is to maintain compliant with the ATO Rulings in relation to personal services income OR request a Private Ruling from the ATO.

Recent ATO developments: Partnership of Discretionary Trusts

If you are using or thinking of using a Partnership of Discretionary Trusts as a structuring option, be aware:

The ATO released a Taxpayer Alert (TA 2013/3) dealing with changes in practice structures involving “the purported alienation of income through discretionary trust partners”.

The Alert does not specifically say partnerships of discretionary trusts are not acceptable structures, but there must be commercial reasons and the arrangement must be legally effective.

Other general tax related structuring considerations

Effective rates of taxation

Assessable income and allowable deductions

Access to concessions

Tax losses

Financing costs

Cash flow considerations

Superannuation concessions

Anti-avoidance provisions

General structuring considerations

Exposure to liabilities

Compliance costs (keep it simple!)

Control over assets and income

Ability to obtain finance

Wealth creation

Disclosure of results

Family situation

Succession and estate planning

Ability to restructure

Structuring summary

Weighing up the types of structures available, the ATO compliance requirements and general other structuring related considerations, in most cases trusts are the most beneficial type of structure to run a medical practice.

Trusts offer reduced overall compliance costs and administrative time, whilst providing longer term flexibility.

Remember, if your medical practice is not considered a “business structure” deriving “business income”, all income must be distributed to the GP who generated it, and not distributed to any other person.

The ATO and Service Entities

ATO has always required Service Trusts to be set up for a valid commercial reason;

Tax Ruling (TR 2006/2) and Guidebook contain strict guidelines for Service Entities;

Guide sets out mark-up rates, that if applied, would leave you at a “low risk” of audit;

Guide outlines two approaches that taxpayers may choose in working out whether service fees were acceptable: comparable market prices

comparable profits (net or gross mark up on costs).

Service Entities: minimum compliance requirements

Ensure that your service trust meets the ATO minimum requirements: The service trust needs to provide the service!

Leases, employment agreements and invoices should all be in the name of the service trust.

Monthly tax invoices issued by the service trust and paid by the medical practice.

Service entity agreement is a must, with annual review.

Consider the commercial benefits of the service entity.

Maintain a set of accounts, document service entity charges and reviews for commerciality, director minutes, etc.

Service Entities: are they still relevant?

Use of service entities is in decline.

Compliance costs associated with maintaining service entities v benefits of the structure.

Changing landscape of preferred structuring strategies: Use of trust structures for medical practices (where there is a

business structure).

Superannuation contribution strategies.

Family involvement in medical practice (employment strategies).

Consider your own structure and circumstances!

Any Questions?