Company or Sole Trader: What structure is best for you?

Historically, VMOs faced two major tax complications when operating as a sole trader.

Prior to 1 July 2007, there were complications with claiming a dollar for dollar tax deduction for superannuation contributions made by medical practitioners (including VMOS) who operated via sole trader structures.

A former section 82AAT of the Income Tax Assessment Act 1936 allowed a taxpayer to claim a deduction for personal superannuation contributions if they met certain conditions. However, they were not entitled to a dollar for dollar deduction for those contributions. Instead they received a reduced tax deduction.

The second complication for VMOs operating as a sole trader was the former “10% rule”.

Prior to 1 July 2017, a VMO (operating as a sole trader) was only able to claim a deduction for personal superannuation contributions if their earnings as an employee were less than the maximum allowed (ie. the 10% rule), in addition to meeting other conditions such as age restrictions and making appropriate notifications.

If a VMO made personal contributions to their superannuation fund, they could not claim a deduction for the contribution if, during the income year, they obtained 10% or more of the total of the following as an employee:

• assessable income
• reportable fringe benefits
• total reportable employer superannuation contributions

Medical practitioners could avoid these complications by operating via a company structure of which they were an employee. Their company employer would make superannuation contributions on their behalf, without facing these superannuation rules.

Both Section 82AAT and the 10% rule have been changed, and the obstacles to claiming full tax deductions for superannuation contributions via a sole trader structure no longer exist.

OTHER ISSUES WITH COMPANY STRUCTURES

There are several other issues that affect VMOs operating under a company structure that don’t apply to VMOs operating as sole traders.

While the Commissioner of Taxation accepts that medical professionals (such as sole doctor arrangements) may operate via a company, there are some restrictions.

The Commissioner provides that a medical professional operating via a company must operate as if it is a ‘look-through’ entity. At the end of each income year it should have no taxable income.

The company must distribute all profits yearly by paying wages (and applicable super) to the medical professional. Where there is some small taxable income remaining and the company has made a ‘bona fide’ attempt to break even, the taxable income must then be distributed via a franked dividend the following year.

For tax purposes then, a medical practitioner operating under a company structure is treated the same as a sole trader. The income flows through the company, minus superannuation contributions, to the medical professional. As such, any benefit of the lower company tax rate is negated. The medical professional will either receive a salary or a dividend on which they pay their marginal tax rate or top up tax paid on dividends received.

VMOs operating under a company structure should also consider rules that deem certain payments to be dividends. There are particularly complex rules that can trigger an adverse tax liability for the VMO. For example, should a medical practitioner borrow money from the company and not put the loan under a compliant loan agreement, the loan amount could constitute a deemed dividend, with the VMO subject to tax on the entire amount.

A company structure could also trigger a payroll tax liability. The payroll tax threshold for the 2019 income year is $850,000 with a rate of 5.45%. Medical professionals operating via a sole trader structure cannot pay themselves a wage, and as such, reduce the risk of exceeding the threshold.

In addition, there are several additional costs that arise for company structures.

The cost to establish an off-the-shelf company can start at around $500, plus GST.

As well, accounting and income tax return preparation costs are generally more expensive for company structures than sole traders. A company must maintain more formal financial statements in addition to an income tax return. The VMO will also need to have their own personal income tax return prepared. Costs can start from $2000, plus GST and upwards depending on the complexity.

In addition, VMOs operating under a company structure must pay an annual company statement fee (currently $263) to the Australian Securities and Investments Commission (ASIC). If using an accountant there will be additional fees to prepare the document.

Other costs for accounting or bookkeeper services will have to be met for payment and recording of wages for the practitioner and ensuring all income is paid as a wage by the end of the financial year. The company must also ensure it complies with its monthly withholding of tax from the wage paid to the VMO.

A company that has employees is required to have a valid workers compensation policy, unless the taxable wages are less than $7,500 per annum. Under a company structure the VMO must pay themselves a wage and this wage shall be included for workers compensation purposes. These costs could exceed $1,000 annually.

Overall, the costs, administrative burden, and compliance complexity for VMOs operating under a company structure are greater than for those operating under a sole trader structure. There may be specific circumstances where it is more advantageous for a VMO to operate under a company structure, for example where it is possible to pay the doctor a reasonable travel allowance in accordance with tax rules, but these do not (generally) apply to NSW Health VMOs.

FFS VS SESSIONAL VMOS

The issues outlined above apply for both Fee-For-Service VMOs and Sessional VMOs. Practitioners should be aware that there is one difference between FFS VMOs and Sessional VMOs that relates to superannuation.

Sessional VMOs must be paid superannuation into their nominating fund, whereas FFS VMOs or VMOs who choose to contract via a company structure no superannuation is paid.

This article was prepared with advice from Cutcher&Neale, and the information given is general in nature. If you have additional questions related to your specific situation, please contact our membership team on 02 9439 8822 to arrange a consultation with Cutcher&Neale.