Introduction
The financial journey of a doctor is unique and complex. DPM Financial Services is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals.
DPM Financial Services is all about getting you the right advice that suits your personal and professional needs and making sure you have confidence in your financial future.
Today I’d like to welcome to the PodMD studio Eyal Judah and Dino Miliotis from DPM. Eyal is one of DPM’s lending consultants and Dino is a DPM Principal and tax consultant, both with many years of expertise in providing financial services to doctors in Australia.
We do hope you enjoy this podcast but please remember that the information discussed here is of a general nature and is not intended to serve as advice. The views and opinions expressed in this podcast are those of DPM, not PodMD. DPM Financial Services recommends you obtain advice concerning specific matters before making a decision.
Dino and Eyal, thanks for talking with us on PodMD today.
Question 1
Eyal, many medical practitioners dream of owning their private medical practice and there are things to consider when deciding on whether to set up a new private practice versus buying an established practice.
Answer 1
Yeah, that’s correct. The process of setting up a medical practice can be quite daunting. It does bring some challenges along the way, but it can be very exciting to start your own practice from scratch. It allows you control every little detail, including the design, the culture and the positioning. So, for practitioners not yet ready to start their own practice from scratch due to concerns about possible cash flow issues or their business skills and admin, an alternative is to buy into an existing medical practice. So, there are many advantages of buying established private practice. This can include potentially being more financially suited to your current situation. You’ve got an existing set up with equipment and fit outs already in place. You’ll have experienced staff and existing client or patient list and possibly will not require as much planning. And not as much spend on marketing to build up your customer base compared to setting up a brand new practice. So ideally you’d have a predictable cash flow from the very beginning with everything you need to run the practice already in place, including staff who know the business, which is critical, as to how to do their job. In fact, depending on the type of practice, GP or dentist may inherit a full list of patients who return for regular treatment, whereas it may not be the same if you set up a new private practice from scratch.
Question 2
Eyal, as most doctors will require bank finance to fund their private practice can you shed some light on what lenders will look at when considering both options?
Answer 2
Yeah, there’s a few things to consider before deciding to take the plunge into owning a medical practice, and whilst banks will look at this, doctors should also consider these before going to setting up a private practice. So one is having a business objective, what does your success look like and how will you achieve your goals? Are you an entrepreneurial mind who will enjoy the whole process of building your own practice and getting into the details? Or would you rather just focus on your medical activity and reap the benefits of an existing practice? The other considerations are geography and demographics. So metropolitan areas are usually more expensive to lease or buy into compared to say, regional or country areas and will probably bring in more clients depending on your competition. You need to use your network in your field to stay informed about the competition and the demographics of your prospective clients. So location is key. So what zone are you in? How accessible is your practice to patients? The level of access and parking for staff and clients is obviously quite crucial. Is the property located on the main road? Does it have foot traffic? Is it close to hospitals and pharmacies or shopping centres? And also, is it properly commercially built or is it a converted residential premise? All these can affect the terms of the commercial loan that a bank will lend you. Another consideration is the asset value. So is the existing equipment owned or is it leased? And what is your realistic asset life before an upgrade is acquired? This is obviously critical to your cash flow, some older practices have outdated computer systems or inefficient billing systems or software. So you have to work out what the cost is of purchasing or leasing equipment or fit-outs. One other thing to consider is also the human resources. These are your frontline staff. So existing employees may need to be taken through a change of management process or be required time to take training, if you are bringing in new systems and policies. Whereas new staff ideally can be more flexible in some ways, but they are untested. So are you going to employ family for your admin roles and what does that mean for their onboarding? Another consideration is liabilities and cash flow. So if you’re buying to an existing price. Because you have to obviously dig deeper to find out what are the business liabilities, is a business up to that with payments such as tax and superannuation and long service leave. If you’re setting up a new practice, you need to prepare a cash flow forecast to account for your expenses and allow for some variances. You can expect the cash flow might be tight during the early stages of a new practice, or even in particular months for an existing practice. So taxation, employment and compliance needs to be accounted for as you make the transition from being a doctor to a doctor who is also a small business owner. You’ll need to also consider whether there’ll be advertising costs associated with your branding or your rebranding.
Question 3
Dino, as an experienced DPM tax consultant can you please share what is involved as far as choosing the right legal structure for a new private practice set-up
Answer 3
That’s a great question. So things to consider include asset protection, tax efficiency and also future expansion and flexibility. So it’s really important that all these are taken into account in terms of determining how you structure things from the beginning. It makes it easier and less costly if things are done right from the start. As far as asset protection is concerned, we want to make sure that key assets are in the right legal entity so that we are containing any liability and risk. Being in business and running your own private practice poses some new challenges as far as liability is concerned. So for example, employing staff adds a layer of liability. For example, you can have employee disputes, it’s important to create some segregation there. In terms of tax efficiency, it’s important to have the right structure so that you can get some tax benefits. So for example, if you’re gonna be running your own private practice, you are able to for example have a service fee agreement or pay rent to an entity that you set up that runs the clinic. And then any profit after the staff, rent and clinic expenses have been paid, any profit can then be distributed to your family group or any other associated entities, which can actually provide a better tax outcome. When it comes to flexibility and future expansion, again it’s important to take that into account if you envision that it will only ever be a single practitioner practice, that’s totally fine. It means you can have a simple structure with perhaps just one entity that’s set up. But if there is the remote possibility that you might be inviting others to join in the private practice or if you have plans that in the future someone may join you in the private practice, then that means you might have to have a more complex structure in place with multiple entities from the get-go. Because again, that will make it much easier and less costly to expand and have other practitioners join in.
Question 4
Dino, at what stage should doctors proceed with incorporating the company and trust structures when looking at setting up a private practice and what initial and ongoing costs should they expect to incur?
Answer 4
So we find that a lot of medical practitioners might dip their toe in, I suppose, “private practice with some surgical assisting” or locum work under an ABN. That in itself doesn’t justify setting up a structure. The main reason for that is you’re not really in business if that’s the activity that you’re undertaking. And in fact, the ATO doesn’t view that as running a separate business. So you haven’t got the opportunity to set up a separate business. So you have to have a commercial reality in place and that is employing staff and paying rent and having significant assets. Those are really the trigger points for setting up separate legal entities, such as, let’s say a trust and or a company. So I guess trigger points or the time that you would look to set up a separate structure is where you are, let’s say taking out a lease and looking to employ a practice manager or a secretary, that’s when you would look to set up the entities. You can set up those entities after the fact or after you’ve already taken out the lease, let’s say in your own name and hire staff in your own name. In that situation you would be transferring the lease, transferring any assets or any employees over to the new entity. But again, that just adds an additional complexity and additional legal fees. So it is better to have the structure set up before you actually employ staff and take out a lease if possible. These days, the turnaround time for setting up a company and setting up a trust is quite quick. So within a couple of business days you can have the structure set up. You can liaise with your lawyer or your accountant to help you do that. So it’s just important to give them the heads up if that’s what you’re thinking of doing employing staff, taking out a lease or buying significant equipment, that would be the trigger point to have a discussion with your financial advisor, your accountant, or your legal practitioner. Now in terms of the costs. Initial setup costs again will vary depending on the complexity of the structure and how many entities you are setting up. For a very simple structure, let’s say you know discretionary trust in a company, you might be looking at $2000-$3000 in in sort of legal and advice fees to set that up. For a more complex structure, let’s say if there’s multiple practitioners, we’re setting up more complex entities, like let’s say, a unit trust and also a family trust and couple of companies, it might be more like double that. Also the more practitioners are involved, the more agreements that need to be in place. Things like service fee agreements, associateship agreements and again that will sort of add to the legal costs. In terms of ongoing costs, well, once you set up a structure and you’ve got additional entities, that means you have an additional compliance cost. So you have to do a tax return for each entity. And you also have to prepare a set of financial accounts and that will add to your yearly accounting and compliance fees.
Question 5
Eyal, what are the financing options for doctors looking to set up or purchase a private practice and how much can they expect to borrow?
Answer 5
So look, a deep understanding of the industry is important when you’re applying for finance. So that’s where specialist lenders like DPM can help. In general context, medicos can borrow up to 100% of the property value, over a 20 or a 30 year loan term with a lot of lenders. Or they can borrow up to 100% of the business value as their leasehold including things like fit-out and equipment, but the term will be shorter. So 10 or a 15 year loan term. The repayments can be structured on principal interest and/or interest only, with some lenders, so the lower repayments can be tailored in line with the business’s projected cash flow. And look, interest rates discounts vary from lender to lender and it will depend then on the strength of the application and how much cash injection you’re putting into the deal. You may be asked to provide a business plan, particularly for a new practice, including some business forecasting. Key criteria that lenders will look at are your previous experience and your qualifications to be able to obtain loan approval. So choosing the right lender and showing your strength as a borrower is crucial. And security for the practice can be either or some or all of the following, depending on the loan structure and the purchase price that you’re seeking. So one is a mortgage over the actual freehold, or a leasehold with a specific charge over the business assets. You can use your home if required as security over your business loan. Most lenders will also take a registered fixed or floating charge over the practice and the director’s guarantee. Lastly, it’s important to know that arranging finance for practice takes between about 6 to 10 weeks depending on the complexity of the purchase and your individual financial circumstances and availability of documentation and cash flow forecasts, etc. So we encourage you to liaise with your accountant and your finance consultants early, to ensure that the settlement terms can be met.
Question 6
Dino, there has been a lot of talk about being able to fund the freehold purchase of the practice within a self-managed super fund. Can you provide an example of how that can work for doctors and what the potential benefits are in buying the commercial property for your practice via your SMSF?
Answer 6
Yeah. So we do have a lot of clients who inquire about buying property within their SMSF or self managed superannuation fund. That is a great way to hold the property that your practice is based out of. Essentially, what that means is that you’re getting rent paid into your super, which is tax effective. Great way to get more money into super. There’s also an element of asset protection. Again, the property is owned by a separate entity, so it means it is safeguarded from any potential liability or risk that may be present with the practice or with yourself as a medical practitioner. There are some challenges, however, in terms of buying property within the SMSF. You can’t borrow as much, and this is probably Eyal’s area of expertise to comment on that. But it does mean you need to have a substantial amount already within your superannuation fund, as the banks or the financial institutions won’t lend as much. So you need a bigger deposit to be able to purchase the property. There are also a couple of ways to own property within your SMSF, so you can either own the property directly, so it’s directly owned by your SMSF. Or you can have a unit trust that owns the property and then you can own the unit in that unit trust with your SMSF and that second scenario is particularly preferable where you have multiple unrelated practitioners that are owners in the practice because it’s only natural that you’ll have your own SMSF. So you know your colleague that you’re in practice with, they’ll have their own SMSF, so it just makes it a bit more flexible to do it that way and have the property owned by unit trust.
Question 7
Eyal, if clients wanted to buy a commercial property for their private practice through their SMSF can you please advise what are some of the parameters lenders would look at ?
Answer 7
As Dino mentioned. The appetite, I guess for lending within SMSF varies. There’s not a lot of lenders that are in the market for SMSF loans. In saying that, there are a few that do facilitate these products, particularly for commercial investment purchase or for medical practice operation. Most lenders that are still in the market will lend anywhere between 60% to 80% or sometimes 90% of the commercial property value. But there are some qualifying criteria. So, most of these lenders will require corporate trustee, not an individual trustee for your superannuation. And they will have minimum liquidity ratios. So funds held within your SMFS before will consider lending to the SMSF. And some do have a net asset position that’s required overall post purchase as well.
Outro
Eyal and Dino, thank you very much for your time here today in the PodMD studio.
