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THE ULTIMATE TAX GUIDE FOR DOCTORS 1

THE ULTIMATE TAX GUIDEFOR DOCTORS

By Mitchell Walmsley CA®

Principal Affluence Chartered Accountants

and Yves Schoof CFP®

Principal Affluence Private Wealth


DISCLAIMER

Yves Schoof and Affluence Private Wealth are Authorised Representatives of Synchron, AFS Licence

No. 243313 – for financial planning services only.

Tax compliance and advisory services are provided by Mitchell Walmsley CA and Affluence Char-

tered Accountants.

This advice may not be suitable to you because it contains general advice that has not been tai

lored to your personal circumstances. Please seek personal financial and tax and/or legal advice

prior to acting on this information.

Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS)

relating to that product and consider the contents of the PDS before making a decision about

whether to acquire the product.

The material contained in this document is based on information received in good faith from

sources within the market, and on our understanding of legislation and Government press releases

at the date of publication, which are believed to be reliable and accurate.

Opinions constitute our judgement at the time of issue and are subject to change. Neither, the

Licensee, nor its employees or directors give any warranty of accuracy, nor accept any responsibility

for errors or omissions in this document.


TABLE OF CONTENTS

DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

OUR TAX SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

TAX AND DOCTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

PRIVATE PRACTICE STRUCTURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

GP’S AND TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

SALARY PACKAGING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

CAPITAL GIANS TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

TAX ON SHARES AND PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

OTHER TAX PLANNING STRATEGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

OUR APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36


INTRODUCTION

If you were to ask 10 medical professionals what their biggest financial issue and/or frustration is, 9 of them would tell you that it is paying too much tax.

Unfortunately, there is a lot of misconception in relation to the tax planning options available to doctors, in particular concerning income tax.

Often we see doctors who have been incorrectly advised by their accountants, because they are ‘generalists’ and don’t specialise in this area. This may lead you to paying too much tax, but in some cases it may expose you to significant penalties due to the use of inappropriate strategies.

In this guide we will look at how doctors’ employment and business income is taxed, and explain some of the important income tax principles underpinning this.

In addition, we will explore various tax planning strategies and entities, as well other tax concepts for doctors.

Finally, we will provide you some insight into our particular approach for medical professionals.


OUR TAX SYSTEM

SELF ASSESSMENT

Australia’s tax system is based on self-assessment. Under the self-assessment system, the ATO accepts the claims you make on your tax return, usually without adjustment, and issues a notice of assessment.

Even though the ATO may initially accept details on your tax return, it may still be subject to further review.

You must keep all the records you used to prepare your tax return. If you are claiming deductions, you must keep written evidence to prove claims for those deductions. Keep your records for 5 years from when you lodge your tax return.

WHAT IS AN INCOME YEAR?

An income year (financial year) is a period of 12 months that commences on 1 July and ends on 30 June. At the end of the income year you have until 31 October to lodge your income tax return, unless your tax return is prepared by a registered tax agent, in which case you have more time to lodge your return (usually March or May of the following year).

PERSONAL TAX RATES

Following are the resident marginal tax rates applying for the 2018-19 financial year (i.e. from 1 July 2018 – 30 June 2019):

Income level Tax payable$0 - $18,200 Nil$18,201 - $37,000 19% for every $1 over $18,200$37,001 - $90,000 $3,572 + 32.5% for every $1 over $37,000$90,001 - $180,000 $20,797 + 37% for every $1 over $90,000$180,001 + $54,097 + 45% for every $1 over $180,000

The above rates do not include a 2% Medicare Levy (or the Medicare Levy surcharge).


MEDICARE LEVY

To help fund the Medicare scheme, most taxpayers pay a Medicare levy of 2% of their taxable income.

You have to pay the Medicare levy surcharge (MLS) if your income for Medicare levy surcharge purposes is above a certain threshold and you (or any of your dependants) don’t have appropriate private patient hospital cover. The surcharge is in addition to the Medicare levy.

If your income for MLS purposes is above the base income threshold the ATO will apply the rate of MLS that corresponds with your income for MLS purposes. If you have a spouse (married or de facto) your combined income for MLS purposes will be used.

Income thresholds

Base Tier Tier 1 Tier 2 Tier 3

Singles $90,000or less

$90,001 -$105,000

$105,001 - $140,000

$140,001 or more

Families $180,000or less

$180,001 -$210,000

$210,001 - $280,000

$280,001 or more

Medicare levy surcharge rate 0% 1% 1.25% 1.5%

The MLS rate is applied to:

• your taxable income;

• your total reportable fringe benefits, and

• any amount on which family trust distribution tax has been paid.

Example: — Peter and Diana have family income of $230,000 p.a. Peter also has reportable fringe benefits of $10,000.

— They are thus in Tier 2 and will incur the Medicare levy surcharge of 1.25% unless they have appropriate private health insurance.

— The surcharge would amount to $3,000.


TAX AND DOCTORS

TAX DEDUCTIONS FOR DOCTORS

Medical professionals typically have a high level of work-related tax expenses, so it is important to keep accurate records throughout the year, to ensure you can claim all your allowable deductions when lodging your tax return.

In order for an expense to qualify as a deduction, there must be a causal nexus between the outgoing or loss and expected assessable income – i.e. there must be a connection with the income that you earn, whether that be exertion or investment income.

There are some exceptions to this rule, such as for example when you make donations to charities.

Next we have listed some of the typical expenses for medical professionals.

WORK-RELATED SELF-EDUCATION

Education expenses refer to a wide range of expenses such as textbooks, course fees, depreciation on computer equipment or home office furniture required for study.

This type of expenses should not be confused with attending medical seminars or conferences, which fall under the category of ‘Other work-related expenses’.

WORK-RELATED CLOTHING

This relates to work-related uniforms or protective clothing, including the dry cleaning of these items.


MOTOR VEHICLE EXPENSES

You may be working at different places, and the travel between these (not between home and your primary workplace) may be claimed as a tax deduction.There are several ways this type of expense may be claimed:

— You may keep a logbook for a period of 12 continuous weeks, detailing all your trav-el. The split between work-related and personal travel in that time (it should be rep-resentative of your normal travel pattern), will determine what percentage of your motor vehicle expenses constitute a tax deduction.

— Alternatively, if you do not keep a logbook, you may claim up to 5,000 kilometres, which will attract a certain dollar rate per kilometer. You will still need to keep a re-cord of your work-related travel though.

TRAVEL EXPENSES

You may do locums in remote or regional areas, or you may travel to conferences or other work-related functions.

You should keep a diary and receipts where possible, although some types of travel-related expenses may be claimed within certain daily limits.

OTHER WORK-RELATED EXPENSES

In general, any type of expense that is incurred in the process of earning assessable income (e.g. private fees, employment), may be tax deductible.

Some examples include: — Work tools such as stethoscopes, briefcases;

— Telephone expenses: you may make work-related phone calls from your private (mo-bile) phone – you should maintain a diary to determine the split between work and private calls;

— Computers and software, tablets, etc.;

— Seminar and conference fees, including travel and accommodation;

— Membership fees for professional bodies;

— Books, journals, magazine subscriptions;


— Insurances, such as medical indemnity, income protection;

— Medical registrations, such as RACS, RACGP, RACP, etc.

INCOME SPLITTING FOR DOCTORS

A very common question for medical specialists in private practice is whether they can split their income with their spouse.

Income splitting is a strategy used by high-income-earners to reduce their taxable income and the amount of tax they pay. It works by redirecting income to a spouse or dependant who has a lower income, to bring the taxable income down to a level where the marginal rate is lower than that of the doctor (typically 47%).

However, caution is warranted as tax rules are very strict, and many accountants still recommend illegal income splitting strategies to medical professionals.

PASSIVE OR ACTIVE INCOME

There are two types of income you may be able to split: passive or active.

Passive income is the income earned from investments such as shares or an investment property. Splitting this income with your spouse is generally acceptable from the ATO’s point of view.

Passive income splitting is typically achieved by holding investment assets through discretionary family trusts where income can be distributed to low-earning taxpayers, in the name of low-earning taxpayers, or even a company, which is taxed at a flat 30% rate.

Active income is income you have earned from your own exertion, and splitting this type of income is subject to strict tax rules. It is more commonly referred to as Personal Services Income or PSI.

PSI is defined under s84-5 ITAA97 as ordinary or statutory income that is gained mainly as a reward for the personal efforts and skills of an individual. The ATO takes a simple approach to their assessment of ‘mainly’: if the income you earn is more than 50% for your effort and skill then you classify this income as PSI. Whether this income as earned as a sole trader or via a trust or company structure is often irrelevant.


The basic rule is that you cannot split the income that you earn from your own personal exertion. The tax office considers that you earned the income, therefore you pay the tax on it.

Hence, the opportunities to direct income away from the medical professional and split it with other individuals or entities are very limited, and generally speaking, all income earned by you must be included in your individual income tax return.

However, there are certain cases where doctors may be running a ‘business’, and profits from this business will not considered to be PSI.

Let’s consider the example where a GP runs a clinic where other GPs and/or allied health professionals are employed. Whilst the GP would be individually taxed on their own fees, the profits derived from employing other health professionals would not be PSI and could be directed towards other tax entities/beneficiaries on lower tax rates.

We will further discuss this particular strategy in more detail in this document.

Let’s have a look now how passive and active income may be split.

Passive income splitting via discretionary family trusts

The most common ways to split passive income are by way of having assets in the name of the lower income earning spouse or even more effective, through entities such as a family trust.

A trust is a separate legal entity and the trust, not the beneficiaries, owns the assets. If you are a beneficiary of a family trust, the trust assets do not form part of your estate and you cannot leave them in your Will. However, you can enjoy the benefit of the income and/or capital from the trust.

Income splitting via a family trust works as follows:

Let’s assume the Sullivan Family trust owns a rental property, a share portfolio and some term deposits. Total income from the investments that can be distributed is $50,000 p.a.

Note: Family trusts need to distribute the available income (after expenses) every year, as otherwise it will be taxed at the highest marginal tax rate.


The following beneficiaries are available:

• Dr Sullivan, who is on the highest marginal tax rate:

• Mrs Sullivan, who earns $90,000 p.a.

• Henry, their son, aged 18, who is still studying, and is not working.

• Elisabeth Sullivan, who is 16.

• Sullivan Pty Ltd, their investment company.

Prior to 30 June, the Trustee of the Sullivan Family Trust needs to allocate the income to the beneficiaries.

In the above example, the beneficiaries would be taxed as follows: — Dr Sullivan: He will be taxed at the highest marginal tax rate (47% incl. Medicare), so there is no benefit in allocating any income to him.

— Mrs Sullivan: She will be taxed at 39% incl Medicare.

— Henry: He will benefit from the tax-free threshold, and will be taxed at lower margin-al tax rates, up to 34.5% incl Medicare.

— Elisabeth: She will be taxed at penalty tax rates over a minimum threshold, as she is still a minor.

— Sullivan Pty Ltd: a company is taxed at a flat rate of 30%.

The Sullivan’s should seek advice from their accountant before preparing their trust distribution minutes, and in this example they may look at splitting income between Henry and Sullivan Pty Ltd, depending on their cash flow requirements, as these beneficiaries offer the lowest tax rates.

Note: The benefit of a family company is the potential access to franking credits down the track, which when accessed at the right time, can lead to a refund of tax paid many years before! Funds in the company can be invested during that time.

Active income splitting via a service entity

We already highlighted that there are strict rules around splitting active income or PSI. However, there is one particular tax planning opportunity that may be applicable for medical specialists in private practice.


It may be beneficial to run your practice through a service entity, which is usually a trust or company that employs all the administration staff (non-practitioners), purchases and operates all the equipment, leases the premises and so on.

The medical specialist is then charged a fee (including a mark-up) by the service entity for the use of those services. Often, this will result in a small profit being earned by the service entity, which can then be split with related parties (e.g. Spouse) and related entities (i.e. Trusts and Companies).

Please refer to our notes on Private Practice Structures for further details.

Please note, the Australian Taxation Office has released strict guidelines on what level of profit is considered reasonable and this strategy should only be considered on the advice of a tax accountant with experience in this area. In addition, this set up needs to have a commercial purpose rather than just be for tax minimisation purposes.


PRIVATE PRACTICE STRUCTURES

SOLE TRADER OR COMPANY?

We have already explained the concept of ‘Personal Services Income’ or ‘PSI’. The main type of income you will receive from a private practice is personal exertion income, i.e. income that you derive from seeing and treating patients.

Despite what you may have heard in hospital corridors or at dinner parties, there are no tax structures available to legitimately distribute this income to other family members, unless you are a specialist or GP employing other doctors or healthcare practitioners who generate income for you.

The PSI provisions operate to ensure that despite any structure you may use, any personal exertion income is taxable to the individual who is performing the work.

As such, there is no immediate tax benefit in using a company over a sole trader structure to run your private practice. Companies may even have some serious tax disadvantages, in that you may be subject to payroll tax depending on your fees.

Hence, you should seek specialist tax advice, as this is a very complicated area of the tax legislation.

SERVICE ENTITY

However, there is one potential tax planning opportunity for specialists and surgeons in Private Practice, by utilising a service entity in the running of the practice.

A service entity is a structure (for example a trust) established by medical professionals in private practice, which owns all the equipment, employs non-medical support staff and incurs all business expenses (e.g. rent, general insurances).


The service entity provides administration services to the medical professional and invoices for this. There should be a commercial agreement in place that details the services and the cost. The rationale is that this ‘business’ enables the medical professional to spend more time looking after patients and thus enhance their income-earning capacity.

The service fee paid by the medical professional is a tax deduction to them, and re-directs income (from a high marginal tax rate) to the service entity, where lower tax rates can potentially be achieved on the profit margin.

As a business, the service trust is entitled to make a profit, so the fee charged to the medical professional will generally include a mark-up in addition to the actual costs incurred. However, service fees need to be based on commercial rates and terms. Excessive service fees can be seen as tax avoidance and attract substantial penalties.

For example, a service entity may have costs of $400,000 during a year but charge the doctor $440,000 in service fees. The service entity would then have made a profit of $40,000. This profit is not caught under personal services income tax rules, as it is a separate business to the medical practice.

The income is derived through the operation of a business and as such can be distributed or allocated to other parties – usually associates of the medical professional.

If the income levels of the recipients of the income from the service entity are lower than the doctor’s income, there can be both tax and asset-protection benefits under this arrangement.


See the following illustration.

Note: The family trust owns the service entity, or it can also be the service entity itself, in which case you require one structure less.

This type of structure also suits multiple medical professionals collaborating and using a shared administration service. In that scenario, each of the practitioners would own shares or units in the service entity.


GPS AND TAX

Most GP’s are not employees in Australia, rather they work as contractors.

There is a notable exception for GP Registrars (Trainee doctors), as the relationship between the Registrar and the practice is such that in most cases they will be considered to be an employee/employer relationship at law.

Whether you are an employee or a contractor has various implications. As an employee for example, the employer would need to provide:

• salary and superannuation;

• paid leave entitlements;

• worker’s compensation insurance;

• indemnity insurance.

Employers may offset these practice costs by reducing the percentage of billings that is paid over and above minimum entitlements to GP Registrars.

Contracts and work arrangements for GP’s can be complex and restrictive, so the AMA and other organisations recommend to their members that they seek professional advice before signing a contract. The AMA also offers support services to its members in this regard. Restraint of trade clauses require particular attention when reviewing these contracts.


WHAT DOES BEING A CONTRACTOR MEAN?

If you work as a GP contractor, you would typically be liable for all your own expenses including your insurance (medical indemnity, public liability, and potentially worker’s compensation and other insurance covers, such as for equipment).

As a minimum you would need to register for an ABN and GST. You can do this yourself or seek the advice from an accountant.

Most practices will collect patient billings on your behalf, deduct their management fee (plus GST), and pay the remainder to you. The management fee typically ranges between 30% and 45%, depending on the arrangement and services provided.Technically speaking in this type of contractor arrangement, the GP is paying the practice for services, and this has repercussions in that any negligence claim is likely to stay with the doctor.

It is also important to note that the practice will not deduct any tax from the payments made to GP contractors, unlike with employees, which means that GP’s need to allow for future tax liabilities themselves. It is important to understand that being a contractor does not really allow for income splitting with your spouse for example, as doctors providing their services are caught under the Personal Service Income (PSI) provisions. This is a complex set of taxation legislation.

This means that the GP includes all billings in their tax return, claims a deduction for the management fee to the practice as well as any other relevant work expenses. You would also need to lodge a quarterly Business Activity Statement (BAS) to claim the GST credit of the management fee. You should seek specialist advice to understand your tax planning options.

Once you have lodged your first tax return as a contractor, you will be issued with quarterly tax instalments (paid towards that year’s tax), so you pay some or all of your income tax during the financial year. Additional tax or possibly even a refund may arise if your income was different to that of the previous financial year.

There are many other implications of being a contractor, which should be discussed with your accountant or financial planner prior to entering into any such arrangement.


A TYPICAL GP PRACTICE BUSINESS STRUCTURE

Please find below an example of a typical practice business structure. In this scenario, there is one GP owner, and other employees or GP contractors may interact with the service entity that employs or engages them.

It is the same type of structure as other medical specialists in private practice would use.

Every situation is different, so you should always seek personal taxation advice.


SALARY PACKAGING

Salary packaging (also referred to as ‘salary sacrifice’) is an arrangement between an employee and an employer where you pay for some items or services from your pre-tax salary and can be a way to reduce your taxable income.

Your employer pays fringe benefits tax (FBT) on the benefits provided to you. Some of these benefits will be listed on your payment summary and are used to assess your Medicare levy surcharge, tax offsets, child support payments and other government benefits.

You must enter into a salary packaging arrangement before you earn the income; it can never be retrospective.

SALARY PACKAGING FOR PUBLIC HOSPITAL EMPLOYEES

Salary packaging can be a very effective way to minimise your tax. This is particularly relevant for public hospital employees, because you are exempt from Fringe Benefits Tax to certain limits ($17,000 grossed up).

Many hospital employees salary package mortgage repayments, rent, or living expenses (credit card payments), you should seek advice as to what is best for you.

WHO CAN SALARY PACKAGE?

You can salary package as long as your employer is willing to offer these benefits. Most employers will offer salary sacrificing into superannuation to all employees, but may restrict who can package other benefits.

However, salary packaging is usually more effective for people in mid to high income tax brackets (which doctors would almost always fall into), so it is important to seek advice before you implement any salary packaging strategy.


WHAT CAN BE PACKAGED?

There is no restriction on what can be packaged, but the type of benefits fall into three categories: fringe benefits, exempt benefits and superannuation contributions.

Fringe benefitsFringe benefits can include:

• Motor vehicles;

• Health insurance;

• Loans (usually for a motor vehicle);

• etc;

The value of the benefits you receive each financial year will be shown on the payment summary you receive from your employer at tax time. You will not have to pay tax or Medicare levy on this amount.

Exempt benefitsExempt fringe benefits are benefits you receive that will not be included in your payment summary, and your employer will not have to pay fringe benefits tax on these. Exempt benefits are work-related items and typically include:

• Portable electronic devices (e.g. laptop, tablet, smart phone);

• Computer software;

• Protective clothing;

• Tools of trade;

• Briefcases.

The exemption is limited to:

• items primarily for work-related use;

• one item only per FBT year (starting 1 April), for items that have a substantially identical function, unless the item is a replacement item.


SALARY PACKAGING MOTOR VEHICLES (NOVATED LEASE)

Under your salary packaging arrangement, your employer will deduct money from your salary to pay for the finance and other car-related costs. This may lead to tax savings for you, as your taxable income will be lower.If you leave your employer, you will have to take responsibility for these costs yourself.

Why enter into a novated lease?Other than the potential tax savings, you may also decide to enter into a novated lease because of the convenience: your regular deductions to pay for your car’s running costs include not only the finance component, but also fuel (you generally get a fuel card), maintenance, registration and insurance.Typically you would consider a novated lease if you have very little work-related travel you can claim.

Benefits of a Novated LeaseNovated leases offer employees:

• potential tax savings through salary sacrifice arrangements, as the lease payments are taken out of your pre-tax wages;

• freedom to choose the vehicle you want (including second-hand);

• the use of the vehicle for both work and private purposes; and

• the option to own the vehicle outright at the end of the lease term.

If you leave your current employment before paying off the lease agreement, you have the option to take the vehicle with you to your new employer, or you can arrange lease payments yourself.

What is a residual value?The residual value is the pre-determined value of the car at the end of the lease contract (you decide the term of the lease, which is typically between 3-5 years). Minimum residual values are set by the ATO.

Once the term of the lease has expired, you have a contractual obligation to pay the residual value. You also have the option to re-finance the lease for a further term.


Your residual value options are:

• Trade-in your car, pay the residual and novate another car.

• Re-finance the residual value over a new term that suits you.

• Sell the car privately or to a dealer and pay the residual value.

• Make an offer to buy the car for the residual value, thereby acquiring ownership of the car and running it privately.

If you are interested in salary packaging a particular vehicle, you should either contact your payroll department, who will direct you to your salary packaging provider, or get a quote online with one of the many providers (Google ‘novated lease’).

Before entering into any salary packaging arrangement, you should seek tax and financial advice, and it should never be entered into purely for tax purposes; you are still incurring finance costs and some of the packaged services or products (insurance, etc.) may be more expensive than when sourced privately.


CAPITAL GAINS TAX

Capital gains tax (CGT) is a component of income tax that applies when a CGT event occurs.

The most common event occurs when certain types of assets that you own are bought and sold for a profit (this does not generally include your primary residence).

CGT affects your income tax liability because your assessable income includes any net capital gain you made in the income year.

Example:You earned $320,000 for the year. You also made a net capital gain of $50,000 after having sold a property for a profit. Your assessable income will be $370,000.

Any capital loss for this year is either offset against current year or future capital gains. There is also a CGT discount for any assets held for more than 12 months.

Example:You earned $320,000 for the year. You also made a capital loss of $50,000 after having sold a property for a loss. Your assessable income will still be $320,000 as you cannot offset a capital loss against assessable income. You will need to carry forward the loss or offset it against any gains you made in the same financial year.

Note that capital gains or losses as a general rule can be disregarded for CGT purposes when assets were acquired before 20 September 1985 (pre CGT).

HOW DO YOU CALCULATE CGT?

There are three ways of calculating a capital gain:

1) By applying indexation, which applies only to assets acquired between 20 September 1985 and 21 September 1999. This allows you to apply the CPI factor (up to September 1999 only) to the cost base of the asset.

You then subtract the result from the capital proceeds to arrive at the capital gain. You may use this method if assets were held for 12 months or more, and it produces a better result than the discount method.


2) By applying a 50% discount after first deducting any (carried forward) capital losses. You may use this method if assets were held for 12 months or more and it produces a better result than the indexation method. Alternatively, the indexation method may not apply, as the assets were acquired after 21 September 1999.

3) If assets were not held for 12 months, you simply subtract the cost base from the capital proceeds and apply any (carried forward) capital losses.

Examples:

1. John bought some blue chip Australian shares for $100,000 and sells them for $220,000. He has held the shares for more than 10 years.

In those 10 years, he also sold an investment property at a loss of $50,000, which he has carried forward.

He calculates his capital gain as follows:

$220,000 - $100,000 = $120,000 is the capital gain on the shares.

He then offsets his capital loss:$120,000 - $50,000 = $70,000 is the resulting gain

He then applies the 50% CGT discount as he has held the shares for more than 12 months:

$70,000 / 2 = $35,000 is the assessable capital gain he needs to add to his taxable income

If John pays tax at the highest marginal tax rate (incl. Medicare Levy), his tax will be:$35,000 @ 47% = $16,450 tax payable

2. John owns a number of shares that he purchased in July 1995 and has held for over 12 months. The shares have a cost base of $50,000, an indexed cost base of $52,466 (indexed up to 30 September 1999) and a current value of $80,000. When selling the shares, John has two options to work out his capital gain/loss for the shares:


Indexation($)

Indexation method Discount method

Sale Proceeds $80,000 $80,000

Less cost base $52,466 $50,000

Gross capital gain $27,534 $30,000

Less c/fwd capital loss $0 $0

Less CGT discount $0 $15,000

Net capital gain $27,534 $15,000

($)In this case it is clearly better for John to use the discount method.

Capital gains tax is a complex area and you should seek further advice before you effect a capital gains tax event, including the sale or transfer of an asset.


TAX ON SHARES AND PROPERTY

SHARES

FRANKING

Australia’s system of franking, also known as dividend imputation, is a very important concept for investors to understand.

Imputation is designed to avoid ‘double taxation’ of company profits. Under the imputation system, in addition to your dividend the company gives you franking credits that represent the amount of tax already paid by the company.

Example: — Company ABC, achieved earnings before tax of $100 per share. It pays tax ($30 in this case) and pays $70 as a dividend to its shareholders.

— Along with the dividend, the company gives investors $30 in franking (or imputation) credits.

— When you fill in your tax return, you add up the $70 dividend and $30 franking credit and declare $100 per share in pre-tax income.

— Next, you calculate your tax payble. Please refer to the following table, which ignores the Medicare Levy:

Investor marginal tax rate

Top up tax payable (based on $100 grossed

up dividend)

Franking credit refund (based on $100 grossed

up dividend)

0% (e.g. pension fund) Nil $30

15% Nil $15

19% Nil $11

32.5% $2.5 Nil

37% $7 Nil

45% $15 Nil


The bottom line is that if your tax rate is higher than the company tax rate of 30%, you pay the difference. If it’s lower, the Tax Office refunds you the difference.

CAPITAL GAINS TAX ON SHARES

The general capital gains tax provisions apply to shares. Please refer to the Capital Gains Tax notes for further information on this topic.

PROPERTY

What tax deductions can I claim on my investment property?

Many doctors are attracted to investing in property because of the tax deductions. It goes without saying that this should never be the primary reason for investment.

Below we have outlined a non-exhaustive list of possible deductions. It is important you check these with your accountant before claiming them in your return.

— Advertising for tenants

— Body corporate or strata fees

— Decline in value of assets (depreciation)

— Capital works

— Cleaning

— Council rates

— Insurance

— Interest on loans

— Land tax

— Legal costs

— Property agent’s fees and commission

— Repairs and maintenance


What cannot be claimed?

Expenses for which you are not able to claim deductions include:

• acquisition and disposal costs of the property (stamp duty, buyer’s agent fees, selling fees, etc) – this is included in the cost base for capital gains tax purposes;

• expenses not actually incurred by you, such as water or electricity charges borne by your tenants;

• expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year.

CAPITAL GAINS TAX ON PROPERTY

The general capital gains tax provisions apply to property. Please refer to our notes on this topic.

However, it is important to note that the cost base of the property will be reduced by any capital works deductions you claimed on the property during your time of ownership.

Example:

The cost base of the property is $500,000. However, you claimed $20,000 in capital works during your time of ownership.

As a result, the adjusted cost base is now $480,000.


OTHER TAX PLANNING STRATEGIES AND CONCEPTS

SUPERANNUATION

Superannuation is a long-term investment structure to help you accumulate savings for retirement. Superannuation is concessionally taxed to make it more attractive to save for your own retirement.

However, due to the frequent changes over the years, many medical professionals are skeptical about superannuation and as a result don’t actively contribute.

CONCESSIONAL CONTRIBUTIONS

The main type of contribution that is relevant for doctors wanting to accumulate wealth in a tax-effective way is via a concessional contribution.

The person or employer making this type of contribution can typically claim a tax deduction for the amount of the contribution, up to the maximum limit of $25,000 p.a. from 1 July 2017.

This contribution can be made by way of salary sacrificing or by making a personal deductible contribution. The effect is the same, and the amount of the contribution reduces your taxable income.

For example, let’s say your income is $200,000. Making a $20,000 deductible contribution would reduce your taxable income to $180,000 and save $9,400 in income tax. As the contribution will be taxed at 15% when entering the fund, your net tax saving would be $6,400 or 32%. As such, it is a very tax-effective way to save for your retirement.

However, if your income exceeds $250,000 you will pay 30% tax on your super contributions rather than 15%. This is extra 15% tax is called the Division 293 tax, and it makes superannuation less attractive for high-income earners. The net tax saving in this scenario would be $3,400 or 17%, which is still worthwhile.


It is our firm belief that superannuation should still be part of many doctors’ wealth creation strategies, but we encourage you to seek personal advice in this area.

Note: Certain public hospital employees may be contributing to a constitutionally protected fund that is not subject to the $25,000 concessional limit. This can be a very useful tax planning strategy and specific advice should be sought.

USING YOUR SUPER TO BUY YOUR OWN ROOMS

Self managed super funds (SMSFs) are very popular among medical professionals, in part because many doctors in private practice would prefer to own their own rooms, and SMSFs can be an excellent ownership vehicle in the right circumstances. For many doctors this strategy is thus an incentive to build their super, despite all the apparent disincentives to contribute to super.

If you would like to learn more about this strategy, please download our ebook on this particular topic via www.affluenceprivate.com.au/free-resources.

NEGATIVE GEARING

Gearing is the commonly used term to describe the situation when you borrow money to invest. It is sometimes also referred to as ‘leveraging’.

Gearing is often used as a tax-effective wealth accumulation strategy, for the following reasons: — You are not limited to investing your own savings, by borrowing you can achieve a higher initial investment balance. This may be attractive for young doctors who have not had the benefit of time to accumulate substantial savings. This might be a way to accelerate your wealth creation.

— As long as the investment was pur-chased with a view to producing as-sessable income, the interest costs on the loan should be tax deductible.


POSITIVE, NEGATIVE OR NEUTRAL?

Gearing is often described in terms of the tax outcome it leads to. There are three possible scenarios:

— Negative gearing: this is the most common scenario, where the costs associated with the investment are greater than the cash flow return.

Example:

The rent on an investment property is $15,000 p.a.

However, the costs are $22,000 and include the interest on the loan, rates and insurances, property management fees and repairs. There may also be some depreciation and capital allowances.

The negative gearing loss is $7,000 p.a. ($15,000 less $22,000) and you would claim this in your tax return.

As a result, your taxable income will reduce by $7,000. If you are on the highest marginal tax rate of 45% and 2% Medicare levy, you would receive the following tax refund:

$7,000 x 47%= $3,290

This means that the real, after-tax cash flow loss is now only $3,610 ($7,000 - $3,290).

Some investors see this as a way for the Tax Office to help fund their property investment! As you can appreciate though, negative gearing is more effective on higher marginal tax rates, as the tax benefit is greater.

— Positive gearing: where the investment income exceeds the interest and other costs, and you will thus incur tax. This situation can arise where the loan is or has be-come a small part of the total asset value.

— Neutral gearing: where the income and costs balance each other out, and there is no income tax effect either way.


BENEFITS AND RISKS OF GEARING

Let’s have a look now at some of the benefits and risks of gearing.

Benefits Risks

Gearing can magnify gains – if the investment goes up in value, you will get a higher return than if you had just invested your own funds.

Gearing can magnify losses – if the investment goes down in value, your loss will be greater thanif you had just invested your own funds.

You can invest more money sooner – you do not have to save first.

Gearing is high risk: you may lose the entire value of the investment AND be left with the loan.

You may be able to achieve tax benefits due to the tax-deductible nature of the interest on the loan.

Gearing comes at a cost – your return will need to be higher than the interest charged and any other costs, or you will be eroding capital rather than growing it.

GEARING IN PROPERTY

Banks and other credit providers are very comfortable with providing credit for the purchase of (in particular) residential property. Generally speaking, they will provide a loan for up to 80% of the value of the home without charging lenders mortgage insurance or LMI. (Note: This is an insurance premium to protect the lender in the event of a foreclosure where the sale proceeds of the property do not fully cover the bank’s loan.)

Thus, generally speaking, you need to have a 20% deposit as well as funds to cover costs such as stamp duty and settlement fees. For doctors this may only be a 10% deposit, as lending institutions are comfortable with your loan repayment capacity.

If you have been unable to save sufficient funds for a deposit but have an existing property, you may be able to provide this property as security for the bank. This is referred to as ‘using your equity’.


FAMILY TRUSTS

We have referred to trusts a few times in this document.

A trust is a tax structure under which a ‘trustee’ holds assets for the benefit of certain members of a family.

In a discretionary family trust, the trustee has total discretion on how to allocate income and assets to the beneficiaries. Please refer to the below illustration of how a trust works.

Note: — Settlor: The Settlor is the person who “settles” a discretionary trust, by providing the settled sum to the Trustee.

— Trustee: A trustee is a person or firm that holds and administers property or assets for the benefit of a third party. The trustee manages the day-to-day operations of the trust.

— Appointor/Principal: Is the person seen to control the trust. They are able to change or remove the Trustee.

— Beneficiaries: The people who are entitled to the benefit of any trust arrangement.


Benefits of using a trust:

• The ability to distribute income to beneficiaries in a manner that is likely to reduce your family’s overall tax.

• Create continuity of ownership and succession planning.

• Protect assets from potential creditors or from family members where there is a dispute.

INVESTMENT BONDS

Investment bonds are a type of investment generally offered by friendly societies or life offices and are suitable for short, medium and long-term savings. They typically offer a number of investment options including capital guaranteed, diversified and sector specific options.

Returns on an investment bond are taxed in the hands of the bond issuer (friendly society or life office) and the earnings are reported net of this tax and fees. The maximum rate of tax is currently 30% however; tax concessions such as franking credits can further reduce the amount of tax payable.

This is particularly useful for high-income-earners, who might be taxed up to 47% on any investment earnings in their own name.

The 10-Year Rule Provided that you do not make any withdrawals within the first 10 years of commencing your investment, you are not required to declare the earnings in your personal tax return on an annual basis.

Withdrawals can be made at any time, however, if you make a withdrawal before the 10th anniversary of your initial investment, you will have to declare some or all of your earnings in your tax return as follows:

Years 1-8 All earnings

Year 9 2/3 rds of earnings

Year 10 1/3 rds of earnings

After Year 10 Nil


A 30% tax offset is available on these declarable earnings.

No tax is payable on benefits received as a result of death irrespective of when the investment bond was commenced.

125% Rule

During the first 12 months of your investment, you are able to contribute as much as you wish into an investment bond. In subsequent years, you are able to make additional contributions of up to 125% of the previous year’s total contributions without commencing a new investment or impacting the 10-year rule.

Where an additional contribution in excess of the 125% limit occurs, the ten year period to achieve tax paid status will start again for the entire investment – recommencing at the beginning of the investment year in which the excess contribution occurred.

Investing for Children

You can also establish a bond that allows you to invest on behalf of a child and transfer the investment to your nominated child when they reach a specified age (vesting age) without any tax consequences to either yourself or the child. Until this time, you retain full control of the investment.

As you can see, investment bonds offer many potential benefits under the right circumstances, and can be used for various investment scenarios. Education bonds are a particular type of investment bond, which can offer additional tax benefits.


OUR APPROACH

At Affluence we specialise in working with medical professionals. We understand the specific issues that affect you and your industry.

Because we provide integrated tax and financial advice, we are able to consider both your personal and business circumstances and provide holistic advice. You benefit from the expertise from two experts, who have also built an extensive network of other medical industry service providers such as finance specialists, lawyers, fit-out builders, etc.

We only recommend sustainable and conservative strategies, so that you can sleep soundly at night.

Please refer below to our profile. We work with medical professionals throughout Australia and would welcome the opportunity to offer you a complimentary Strategy Meeting. Please contact us via email: [email protected] or [email protected].

Yves Schoof CFP – Director Affluence Private WealthAuthorised Representatives of Synchron for financial planning, AFS License 243313

Yves is a highly experienced and well-regarded Financial Adviser who has developed a particular expertise in working with Dentists and Medical Specialists; he is Australia’s leading medical financial planning specialist.

AFR Smart Investor Masterclass For Financial Planning recognised Yves for being the number 2 Financial Adviser in Australia in 2013, and he was also in the ‘Top 10 Financial Advisers’ in 2010 and in 2012.

Yves was also recognised as one of Australia’s best client servicing and goals-based advisers in the ifa Excellence Awards in 2017 and 2018.

He has been working in the financial services industry for over 17 years, including in Belgium and Ireland.


Mitchell Walmsley CA – Director Affluence Chartered Accountants

Mitchell is a director of Affluence Chartered Accountants, and he is passionate about helping his clients achieve their personal and business goals.

Mitchell is a Chartered Accountant with over 10 years’ experience in delivering accounting & taxation services.

Mitchell has extensive experience in working with dentists and medical professionals. He can advise on areas such as asset protection, contractor agreements, personal service income rules, business structuring and set up, as well as service trusts.

Mitchell has guided many dentists in starting and purchasing their own practice.

In 2018 Mitchell was a finalist in 5 categories of the SMSF and Accounting Awards:

Accounting Firm of the Year, Fast-Growing Firm of the Year, New Firm of the Year, Partner of the Year and Small Business Adviser of the Year’


Yves Schoof and Affluence Private Wealth Pty Ltdare Authorised Representatives of Synchron, AFS License No. 243313

www.affluenceprivate.com.au (08) 9381 2704 [email protected]

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