- On November 17, 2020
- November / December 2020
Welcome to the November edition of Financial Paracetamol.
Top tips for starting in private practice.
The things you can’t afford to get wrong!
The transition from being an employee or contractor to establishing your own private practice is a significant step in any medical practitioner’s career.
Whilst this decision and next step is exciting, it can also be challenging and at times overwhelming given the laundry list of things to consider before you even start.
We understand this dilemma and have compiled a list of our top tips and important decisions that you simply can’t afford to get wrong from the start.
Working out which structure best meets your needs is a key consideration when starting in private practice.
Not all structures are the same and its important you know the advantages and disadvantages of all the potential options.
Click on Financial Paracetamol in the NSW Doctor PDF to find a table which gives you a quick snapshot of the potential structure available and their features, remembering that there are several taxation and non-taxation implications that need to be considered when looking at the above, it is not just one size fits all approach.
Once you have decided on which structure will be most suitable for you and your speciality, another key consideration is ensuring you have the appropriate documentation and agreements to support it. If a service entity is part of your overall practice structure, correctly executed service agreements will be required.
A poorly constructed service agreement can lead to unanticipated costs for the practice.
If going into business with a third-party, additional agreements may also need to be considered.
Having the right agreements in place will go a long way to safeguard you and your practice.
Finance and Debt
Let’s be honest, no one ever really wants to be in debt, but it is important to make sure its structured correctly.
Whether its purchasing rooms, fitting out the space or financing medical equipment, the structure of your finance is important to ensure its as tax efficient as possible and to also help manage cashflow commitments, especially in the early days.
Insurance is very important for a medical practitioner and their practice.
Not only does it reduce potential financial risk, but it also helps protect your biggest income producing asset, you.
Keep in mind some insurances are simply compulsory. Workers compensation insurance for employees for example is a compulsory insurance that is required across all industries and in all states.
Being in private practice is by no means an easy task however taking some time to consider the above steps at the start will help set you on the right path.
Purchasing a medical practice? Get it right.
Purchasing a medical practice is a big investment into your financial future.
Getting it right from the beginning can be crucial in not only limiting your risk but also reducing your future tax implications.
Which entity you purchase your medical practice in is pivotal and can sometimes be overlooked by medical professionals when considering how to purchase.
Understanding how you will be receiving income, and what potential liabilities you may be exposing yourself to needs to be understood when balancing the trade-off between asset protection and tax minimisation.
While there is no one-size-fits-all solution when it comes to purchasing your practice premises, there are many factors to consider. So, let’s look at the tax implications of some of the more common structures often considered.
Individual (Medical Practitioner)
Buying in an individual name can sound the most appealing; least expensive and complex to set up, ability to access the 50% Capital Gains Tax discount (50% reduction on all capital gains held for longer than 12 months) and access to the land tax threshold. However, this may not necessarily be the case.
Buying in the medical practitioners’ name offers no asset protection, meaning you are not protecting your assets from potential litigation. Despite holding insurances which may mitigate some of these risks to a certain degree, medical practitioners should err on the side of caution when looking at holding assets personally.
If an asset is held by the medical practitioner and there is a significant capital gain on the property it will be taxed in their name at generally a higher rate of tax.
However, if the small business CGT tax concessions apply, the practitioner may be eligible for tax concessions on the capital gain.
A company is a good vehicle for protection as the medical practitioner is protected from liability up to a point. Personal assets are safe from creditors, provided directors duties are adhered to, which provides a layer of asset protection not afforded if holding the premises in their personal name.
A company is assessed for land tax purposes in the same way as an individual.
Companies do provide a capped rate of tax however do not have access to the 50% Capital Gains Tax discount which could prove to be costly if on the sale of the premises the company realises a significant capital gain.
A company may be eligible for tax concessions on the capital gain if the small business CGT tax concessions apply. However, additional basic conditions need to be satisfied first to access.
Another option is a discretionary trust structure. Trusts generally offer an effective form of asset protection as beneficiaries do not own the assets, the trustee does.
Trusts provide flexibility in the way profits can be distributed. It allows consideration of beneficiaries’ specific threshold to achieve a better tax result. Nevertheless, Trusts can’t distribute losses, therefore they are trapped until there is income in the trust to be offset.
Most discretionary trusts are considered ‘Special Trusts’ for land tax purposes in NSW.
These types of trusts do not receive the land tax threshold which means additional land tax will most likely be due if your medical practice is held in this type of structure.
An alternate option to a discretionary trust may be the utilisation of a fixed or unit trust. Unlike discretionary trusts, fixed trusts are typically eligible for the land tax threshold.
A fixed trust primarily differs to a discretionary trust as the beneficiaries and their interests are identified in the trust deed according to the proportion of ‘units’ they hold, rather than the distribution at the trustee’s discretion.
A trusts capital gain can be distributed to its beneficiaries in order to access the 50% Capital Gains Tax discount.
Again, like companies, if a trust can further satisfy the additional basic conditions, they may be eligible for tax concessions on the capital gain if the small business CGT tax concessions apply.
A Self-Managed Super Fund (SMSF) can be a tax-effective vehicle for acquiring your medical practice premises. Under the right circumstances and executed correctly this can be an efficient investment vehicle.
With a low tax rate of 15% (when in accumulation phase), or tax free (when in pension phase) a SMSF certainly provides a concessional tax environment.
A SMSF can also access a one third discount on any capital gain made on the sale of the medical practice if held for more than 12 months.
However, as the rules for purchasing property under the superannuation legislation are quite onerous, advice must be obtained before buying your premises in a SMSF.
In conclusion, strong considerations should be made before purchasing a medical practice.
It is critical to select the appropriate structure for your specific circumstances as well as understanding the income tax consequences and ability to provide asset protection prior to making any significant investment decisions.
For such an important life decision it pays to consult with an expert before you do make your decision.
If you are thinking about buying a medical practice, contact our office for a no-obligation discussion.
The new ‘limitless’ asset write-off and motor vehicles
The Federal Government has recently announced its plans to further extend its instant asset write-off scheme for eligible businesses as part of the 2020 Federal Budget.
However, it’s important to keep in mind that despite these changes, the car limit for motor vehicle purchases must still be applied. The car limit is the maximum depreciation expense you can claim for a motor vehicle.
The car limit is:
- $57,581 for the 2019–20 income tax year.
- $59,136 for the 2020–21 income tax year.
The instant asset write-off for a motor vehicle is limited to the business portion of the car limit for the relevant income tax year.
For example, the car limit is $59,136 for the 2020–21 income tax year. If a medical practitioner operating as a sole trader was to use their vehicle for 75% business purposes, they are able to claim 75% of $59,136, being $44,352 under the instant asset write-off provisions.
Importantly a logbook must be maintained in order to determine the applicable deductible business use portion for not only the cost of the motor vehicle but also the ongoing associated running costs.
As the legislation currently stands as at the date of publication, eligible businesses looking to access the instant asset write off must have used the vehicle, or had it delivered ready for use, between 12 March and 31 December 2020.
Federal budget summary for medical professionals
The Federal Budget announcements on 6 October 2020 detailed many incentives with an overall focus on securing our future, growing our economy and getting people back to work, whilst not increasing income taxes.
The previous federal budget proposed to put in to a surplus, however the underlying cash deficit is now expected to be $213.7 billion for 2020/21. This is expected to improve over the next four years.
Some of the key highlights of the budget include the increasing of the instant asset write off concession to allow eligible businesses to write off the full cost of assets purchased from 6 October 2020 to 30 June 2022, the introduction of the JobMaker program and the bringing forward of previously legislated tax cuts.
We have put together a summary of federal budget highlights for Medical Professionals which can be found on our website – cutcher.com.au.