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Podcast | Tax Structuring 101 for doctors

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Investing in anything presents risk and in the hope of accumulating some wealth, one may overlook the impact of that investment decision on their financial future. Being in a ‘high-risk’ profession, many doctors will consider tax structuring for different reasons. Asset protection is a common one where many doctors will discover – often too late- that owning investments directly may not be in their best interest. This discussion is talking the basics of tax structuring for doctors, what that means, when to look into it and why.

This podcast will provide answers to the following:

  • What does tax structuring mean?
  • What are the benefits of setting up a tax structure?
  • When should a medical professional get structuring advice?
  • What should be considered when deciding on a structure?
  • What are the costs associated with having a structure in place?
  • Are there other options besides using trusts or companies?
  • How often you should review your tax structures?

If you have more questions or wish to talk to one of our tax consultants about entering private practice, click here to book a no-obligation free initial consultation.

DPM hopes you enjoy this podcast but please remember that the information discussed here is of a general nature and is not intended to serve as personal advice as it does not consider your personal circumstances. The views and opinions expressed in this podcast are those of DPM, not PodMD.
DPM Financial Services recommends you obtain personal advice relevant to your circumstances concerning specific matters before making a decision.

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 you getting 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, Dino Miliotis from DPM. Dino is a certified practicing accountant who joined DPM in 2009. He looks after clients at all stages of their career, providing personalised tax, structuring and compliance advice, as well as assisting with overall planning and wealth creation. We do hope you enjoy this podcast but please remember that this 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, thanks for talking to us today on PodMD.

Thanks for having me Peter.

No problem at all. The topic of today’s discussion is tax structuring 101 for doctors. Dino, can you briefly explain what tax structuring means?
Great question, Peter. So in terms of tax structuring, we’re really talking about what sort of structure you have a place around the business. A very simple text structure is for example, operating as a sole trader. That’s where you yourself have an ABN, and you’re just operating in your own name. A more complex tax structure will typically involve things like trusts and companies, they would probably be more appropriate in instances where there’s a more complex business that’s being run. So for example, setting up a practice where you’re owning rooms, and you’re employing staff, that’s where a more complex structure involving other entities would be more appropriate.

Okay, so what are the benefits in, setting up a specific structure? Why would we be coming to DPM to look at a structure?

Yeah, so the benefits of setting up the structure are, there’s a couple of them. So the primary one, particularly in the medical industry, is around asset protection. So medical practitioners are operating in an industry where they do have a higher professional liability risk. But of course, being in business as well, we increase risk, because there’s an inherent risk with operating a business. So having the right tax structure offers a great way to provide asset protection, and to just split that risk. And almost compartmentalise your business risk from let’s say, your professional risk as a medical practitioner. The other great thing about setting up a structure is that it does offer a legitimate way to reduce the tax payable for your family group. The other benefits of setting up a tax structure is that it does give you the benefit of growing wealth for your family and also create a business that is sellable. So for example, if I go back to my earlier example, if someone operating as a sole trader, and operating as a medical practitioner, in particular under an ABN, well, it’s very difficult for them to actually sell their business or their practice because that would just be themselves and they can’t of course sell themselves. Whereas if they set up a structure, if they’re using a company or trust, what they are able to do is to actually create systems and processes and a business they can then sell to either another practitioner if they’re looking to transition to retirement or potentially another big group that might be looking to acquire other practices.

Okay, so listening to those points you make Dino. That sounds like a really vital step to many of the doctors that are listening, so when would a doctor need that structuring advice?

One of the biggest triggers around proceeding structuring advice would be buying into a practice or acquiring an existing practice or potentially setting up your own practice. That’s really when you would be looking to engage someone like an accountant to start having that conversation around structuring. Another trigger that some practitioners might not think about is actual ownership of assets and liabilities. So earlier I mentioned asset protection and the benefits that setting up a structure can provide around that. So potentially, let’s say if we wanted to set up a share portfolio, it might be worthwhile considering owning that in some sort of a structure, let’s say a trust or company to achieve some asset protection by not holding it in our names personally.

Do you find that with most medical professionals, that their structure at the start is quite simple, you know, just a sole trader, and then it becomes more complex?

Yes, absolutely Peter. Most medical practitioners would more often than not start-up as a sole trader, they just have an ABN in their name, they be potentially registered for GST if their turn over mandates that, and in time, as they, lets say get into private practice, either buy into or get invited to buy into an existing practice or acquire another practice, that’s really when they have to start thinking about structuring things correctly. Part of this is also determined by the law and, what you can and cannot do. The reality is that as medical practitioners, they are professionals, and they are being paid for their personal knowledge and exertion. So when it’s just them, seeing patients, they can’t really get any tax benefits out of a structure. Whereas if they starting to employ staff, or have other practitioners that they’re working with, that’s really when they can actually set up a tax structure.

Okay, so what circumstances will be considered when recommending a particular structure?

So it really comes down to what are you trying to achieve. So I mentioned asset protection, that’s definitely one of the major factors. Another one is also trying to legitimately reduce the amount of tax that you and your family’s paying. So then it comes down to looking at the types of entities, and what’s appropriate, given what we’re trying to achieve. Trusts, companies, there’s pros and cons to each of those. The other one is also whether there’s investments that are involved, property shares, managed funds, cash. So depending on the types of investments that we’re going to have, that can also determine what sort of structure we have, and what we put in place. Really, what most practitioners tend to end up with is a combination of different entities, it could be a mix of trusts, and companies as well.

Okay you mentioned trusts, for our doctors, quite simply what is a trust? And how does it benefit the doctor?

Yeah, great question. So a trust is really a legal entity, and a mechanism by which you can own assets. So the trust itself will hold the assets on behalf of the nominated beneficiaries. So the benefit of that is that you’re not holding any assets directly in your own name, you’re holding them for the benefit of typically your family group. And that’s really where asset protection comes into it, the fact that, for example, you’re not earning for the practice premises in your own name. So that means that if there are any legal issues, if you’re being sued for damages, that particular asset is not going to be available in your name, it’s being held in a separate entity.

Okay, alright, I’ve got it. So added costs are associated with having a structure?

Okay, so the reality is that if you’ve got a tax structure, that increases the complexity of your finances, and it’s going to increase your compliance. So that means that you will have additional annual tax compliance that you have to sort of meet, typically, you’ll have to do an additional tax return for each of the entities that you have set up. And there might also be some additional registration fees as well. So for example, companies have an annual ASIC fee. The other item there is also you may want to have a review every so often, to make sure that the actual structure you’ve got is still appropriate. So, there might be some legal fees every couple of years or so, if anything needs to be changed. Now, the key point here that I do want to emphasise is that by putting a tax structure in place, you’re not going to necessarily see the tax savings or the cost savings, immediately. The benefits will be more long term. So it’s important to bear that in mind, but at the same time, it’s important to ask the question of your accountants. What are the costs involved in setting this structure up? What are the costs involved in actually maintaining or running the structure from year to year? And on the flip side, What are the benefits? What are my tax savings? What are my asset protection benefits in having this structure in place?

So you mentioned trusts and companies, what’s the other sort of structures that are available.

One of the items that a lot of your listeners may not take into consideration here is also the superannuation environment. So we typically all have a super account. If we’re employees, we have to get that nine and a half percent super guarantee from your employer. So typically, you may be with one of the industry funds, there are different funds out there. But that in itself is a form of tax structure. The great benefits of superannuation is that it does offer this lower tax environment. So unlike our marginal rates of tax, which can go all the way up to 45%, plus 2% Medicare Levy, once you’re earning above $180,000, superannuation has a flat tax rate at the moment of 15%. And there are options around superannuation, so there’s industry funds all the way to self managed superannuation funds, where you yourself can choose to own specific assets, like your rooms, shares and specific companies other property, that should also be taken into consideration here as well.
A flat rate of 15%, that sounds attractive, do you found a lot of doctors go down that line?

Yeah, we do encourage all of our clients to consider superannuation. And obviously, there’s financial planning considerations around superannuation. In particular, anything you put into super is going to be locked away until you reach retirement age. So you want to be careful about that, if you’ve got any upcoming cash requirements, you don’t go putting every penny you’ve got into superannuation, but at the same time, it is worth considering maximising the concessional cap that everyone has, that’s currently $25,000 per annum that can go into superannuation, and get tax concessions at that 15% rate.

So, once I’ve actually got a structure in place, whether it be simple or complex, how often do I need to review that structure?

Ideally, you’ll be having an annual conversation around what’s going on with the structure with our accountants. Of course, the financial accounts will need to be prepared, tax returns will need to be prepared. So as part of this inherently, there should be a conversation around whether it’s still appropriate. If things have changed around the business, then there may need to be some changes around the tax structure. So for example, changes in business ownership and separation of spouses can actually also trigger a review of the structure and also changes in the legal and the tax code, of course.

You make some really good points there Dino. So in relation to tax planning, are there events during the year that I should be aware of that should trigger for the doctors to come and see you for some tax planning? Or should we just have a regular tax planning meeting once a year?

Yeah, great question, Peter. I think the reality is, ideally, you’d have that right off. So ideally, every year when you meet with your accountants, you go through your tax compliance, so do the things that need to be done every year like a tax return. And that’s really when you should be sitting down and having some conversations around tax planning. Ideally, during that meeting, you’ll be giving your accountant an update on your circumstances, changes in let’s say, your assets and liabilities, changes in terms of your work arrangements, for example, in terms of your private practice with going into private practice and that should then lead on to conversations around tax planning and let’s say structuring, if that’s appropriate.

Okay, terrific. Thanks very much Dino for your time, here on the PodMD studio to sum up for us, what would be the three take home messages for the basics of tax structuring for medical professionals.

So the first point really is it’s important for medical practitioners to be structured appropriately, given their circumstances. The second point is to discuss with your accountant when is the appropriate time to set up a structure. So again, if you’re having annual conversations around your finances, around your circumstances, around your tax, and not just on your tax return, those should come out naturally. And the third point really is to ensure that having a structure is really going to be worthwhile, and that the benefits that you’re going to get out of it are going to outweigh the costs of running and maintaining.

Terrific. Dino, thanks again for your time today and your insights that you’ve provided.

Thank you very much for having me.

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