As both State and Federal Governments continue to struggle for money, the medical profession is increasingly becoming a low hanging fruit opportunity.
Poor understanding, documentation or a less than wise frugal approach is landing some doctors and practices into hot water. To be fair, setting up and running a practice can be a complex affair. Even with the best advice money can buy, some advisers are not specialised enough to be across all issues which can have a serious and expensive knock-on affect. The following are examples of this.
In a Practice, the employment of registrars will increase payroll tax activity, which then may trigger a full-scale enquiry into all Practice contractors.
Furthermore, a new Australian Tax Office publication called “Allocation of profits within a professional firm” indicates that they are looking for a test case. The central message here is do not operate a practice company or trust. You cannot retain profits to keep your tax bill down.
We did warn readers last year and it did make national headlines see https://thebusinessofhealthcare.com.au/2014/09/14/tax-audit/
We are aware that in at least two States, the State Payroll Tax offices are starting to investigate when employee registrars become contractors after they finish their training. The national training bodies mandate this practice (not for payroll tax reasons), forcing practices to employ trainees. This mandated practice adds risk to practices seeking to hire trainees. This can have a seriously negative affect on the training program.
Of even greater concern, employment of registrars is spreading out: extensive and detailed questionnaires from the State Payroll Tax offices are being sent out to doctors and allied health workers working from the same practice.
Sometimes it is hard to unsay things once a questionnaire is completed. It can be an embarrassing, expensive and arduous process to rectify any misunderstandings, especially if the Tax Offices are attempting to contact your former contractors or healthcare professionals.
Australian Tax Office – Do not use Practice Companies or Trusts to retain earnings
In March 2016, the Australian Tax Office released a new publication called “Allocation of profits within a professional firm” in which they indicate that they are looking for a test case. The central message is not to operate a practice company or trust. You cannot retain profits to keep your tax bill down. For decades, we have recommended against this type of tax planning as it offers no real asset protection or succession planning benefits. Furthermore, you are paying unnecessary fees to your accountant and other compliance costs.
A number of advisers have used this strategy so they could distribute your personal services income money to family members at a lower tax rate via a family or discretionary trust, or retain profits in the medical practice company and only pay tax at 30 percent. It is clear from the publication that the Australian Taxation Office considers this high risk behaviour.
There are legitimate ways to achieve this result, which meets your asset protection and succession planning needs by using service trust arrangements that are commercially realistic and comply with this publication. There are no short cuts.
You know if you may have a problem – simply check if your practice letterhead has “Pty Ltd” or “as trustee for” on your letterhead or stationary.
If this is the case, please consult your adviser as the paper from the Australian Taxation Office can be quite a complex read.
If you require a practice restructure watch our latest video on Doctor and Staff Contracts, see “Why Restructure Now” before the end of the financial year and if you need further confidential advice without obligation contact us at firstname.lastname@example.org.