financial planning for younger doctors november 2007
TRANSCRIPT
FINANCIAL PLANNING FOR YOUNGER DOCTORS
NOVEMBER 2007
Our message to you
1 Use trust based structures to own your own practice as soon as possible, developing the practice as a business if possible, and paying particular attention to:– owning your car tax efficiently;– owning your home tax efficiently;– using all other available tax planning options.
2 Do not trust anyone with your money
3 Do not invest in anything that pays anyone a commission
4 Do not work too hard
Sources of Information
• www.mcmasters.com.au• Username: “mcmclient” password: “welcome”• Financial Planning for Foreign Trained Doctors• The Doctors’ Guide to Starting a Practice• The Doctors’ Guide to Financial Planning• No charge for consultations with registrars: allow two
hours to cover the ground
Should you start your own practice?
• Net income is higher
• Tax planning is better
• If your practice is a business, tax planning is even better; but
• Some say hospital appointments provide better quality clinical work and less administration work
• Its not all about money
Practice options
• 1 An employee
• 2 An independent contractor
• 3 A locum
• 4 an owner of a PSI practice
• 5 on owner of a business practice
Five options for legal structure
• 1 Own name
• 2 Company, with no profit retention
• 3 Company, with profit retention
• 4 PSI practice trust
• 5 Family trust
TABLE OF OPTIONS
Engagement type
IndividuaL Practice Trust
Practice company
Independent contractor
Yes, provided it is a PSI practice trust
Yes, provided no retention of profit
Locum Yes, provided it is a PSI practice trust
Yes, provided no retention of profit
Owner, practice is not a business
Yes Yes, provided it is a PSI practice trust
Yes, provided no retention of profit
Owner. Practice is a business
Yes Yes. Can be a family trust deed
Yes. Profits can be retained
Employee Yes No No
In summary
• We recommend young specialists start their own practice as soon as possible and develop it to be a business for tax purposes and use a practice trust based ownership structure
• At least start a part time practice• Why do we recommend this?• Because the tax planning is better, particular for
cars and home ownership, which leads to a better material quality of life
Tax planning issues
• Car deductions
• Cash flow management techniques to:– create space for a deposit on a home or for
significant repayment of non-deductible debt– generally reduce after tax cost of debt
• Income splitting to spouses
• Better superannuation including superannuating an employee spouse
Owning a car or cars
• See Part 4, Financial Planning for Foreign Trained Doctors for more detail
• Main points:– home to work is business travel due to carriage of
bulky medical equipment and/or potentially offensive or embarassing items
– no limit on number of company cars– second car taken as a fringe benefit under statutory
method– GST on cost of car if bought by a GST registered
entity
Cash flow management
• See Part 5 of Financial Planning for Foreign Trained Doctors for detailed explanation
• In summary:– the change from being an employee to being self-employed via a PT
creates a significant tax deferral of up to 22 months,
– enhanced cash flow is used to create a deposit and/or pay off a non-deductible home loan asap,
– when the tax bill comes in, borrow to pay it. ATO accepts interest on amount borrowed is deductible,
– generally borrow to pay tax deductible outgoings, and preserve your cash to pay off the non-deductible home loan.
Diagram: Cash flow managementT
Soontobe Medical Pty Ltd as the trustee for the Soontobe Medical Trust. Derives all practice income, pays all costs using tax deductible debt, and then distributes cash and net income to doctor owner
Derives all cash/practice income
Pays all practice costs plus salary to spouse with debt
Pays tax for doctor with debt
Pays super for Soontobee and spouse
Distributes cash and net income to Soontobe and then to spouse.
Provides car fringe benefits
Borrows from bank to pay all outgoings
Spouse uses cash to pay off non-deductible debts and pay living costs
Other tax planning options
• overseas and extended domestic travel;• employing spouses and other family members;• superannuation contributions for the doctor;• superannuation contributions for related persons;• super co-contributions for children and other relatives;• ownership of related businesses;• double deduction for lap top computers, PDAs and brief cases; and• various other minor tax planning devices including:
– dedicated credit card interest and charges,– laundry costs,– protective shoes,– mobile phone,– home internet connection,– home office depreciation of plant and equipment, and– newspapers and magazines
• Intergenerational financial planning issues, including tax efficient support for older parents and other family members
Superannuation planning
• Pay maximum superannuation contributions each year, using deductible debt if necessary
• $50,000 a year every year• Superannuate your spouse as well• Hesta and Health Super are good funds• Self-managed funds are probably better, investing in:
– small number of Australian shares; and/or– Vanguard Index Australian Shares Fund
• See www.mcmasters.com.au client only section for more details