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