Transcript Denzel - McMasters

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This is not the
Commissioner of Taxation
This is the Commissioner of Taxation
Mr Michael D’Ascenzo
A case study based presentation
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Practice structures
Tax planning
Superannuation planning
Debt management
Investing
Risk insurances
Improving practice profits
Estate planning
Summary of tax benefits
Retirement planning and why its not always about the money
Lucy
28 year old hospital employee
Brad
Recently qualified GP
Denzel
The 45 year old IMG GP practice owner
Nicole
The 50 year old cardiologist
Helen
The 50 year old employee specialist
Mickey
The tired 60 year old GP
Structures
Structures
Structures
Advantages of Trust Based Structures
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Simple to set up and run
Lower accounting fees
Less administration time
Legitimate deferral of tax
Payroll tax and Workcover savings
FBT efficient
Income tax efficient
CGT efficient
Don’t just take our word for it
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Eminent tax QC’s opinion
IT Tax ruling IT 2503 dated November 1998
IT tax ruling IT 2639 dated June 1991
Mark Northeast, Picher Partners, LIV 2007
ATO Fact Sheet dated 2008
Numerous legal opinions
And the ATO has never said otherwise or
rejected/questioned a tax return
• Allied Health Care Professionals: Issues in Tax Planning
by Prafula Fernandez, Curtin University of Technology
TYPES OF TRUSTS FOR MEDICAL
PRACTICES
• Hybrid trust to run a multi-doctor owner practice that is a
business
• Simple discretionary (family) trust to run a solo practice
that is a business
• PSI trust used for practices that are not businesses
• Unit trust used to own practice premises
Dr Mickey’s Costley and
Kumbersum Practice
• Four doctors practice in an associateship
• Each doctor uses a practice company
• The practice companies pay each doctor a salary
• Each practice company pays a management fee to a service trust
• The service trust distributes its net income to the doctors’ family
trusts
• The family trusts distribute net income to low tax rate related
persons
• The Practice engages a total of 4 equivalent full time material
fee earners
Problems with Dr Mickey’s
Costly and Kumbersum Structure
– Complexity – 5 BAS’s, many inter-practice transactions
– Expensive to maintain: 9 sets of accounts, 9 bank statements
– Tax benefits very limited, ie only profit on services shifted to low
tax rate related parties
– Payroll tax and Workcover on doctors’ salaries (?)
– Compliance with service entity ruling
– 45% tax rate on doctor’s earnings, ie very limited tax planning
compared to alternatives
– Doctors’ rewards are taxed very inefficiently, ie as salaries
– CGT inefficient with use of practice companies
– Practice manager stressed out
What are the advantages of the
new structure?
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Simple just one BAS and no inter-practice transactions
Cheap to maintain: 1 sets of accounts, 1 bank statement
Tax benefits : income shifted to low tax rate related parties
Payroll tax and Workcover on doctors’ salaries eliminated
Compliance with service entity ruling not necessary
30% tax rate on doctor’s earnings, ie strong tax planning
compared to alternatives
Doctors’ rewards taxed very efficiently,
CGT efficient
FBT efficient
Practice manager smiling (and now working on important matters!)
What are the legal issues?
• Consider CGT, but normally not an issue
• Liaison with practice manager critical
• Legal costs should be no more than $2,000
• an amending deed to convert the old unit trust deed to a new hybrid
trust deed
• deed of termination of associateship may be needed
• re-cycle the old associate companies as new investment companies
• change of name for the old trust
• a new unitholders’ agreement
• various minutes of meetings and similar documents.
Summary of
Denzel’s tax savings: Phase 1
The tax savings are $49,278 a year, every year, as displayed here:
Before
Denzel
$500,000
After
$357,500
$135,500
Katie
$22,750
$2,512
Denzel’s Mum
$22,750
$2,512
Denzel’s Dad
$22,750
$2,512
Katie’s Mum
$22,750
$2,512
Katie’s Dad
$22,750
$2,512
Disabled
daughter
$22,750
$2,512
Other 2 children
$6,000
Nil
$500,000
$150,572 or 30%
$500,000
$199,850
$199,850 or 40%
And there are timing benefits: tax is paid up to 23 months later than otherwise. And there is a Medicare Levy saving.
What is business income?
Three types of income:
– Property income
– Personal services income
– Business income
Business income is better than personal
services income
Business income can be derived by other
persons and usually faces less tax
Summary of Denzel’s
Tax Savings: Phase 2
The tax savings are $49,278 a year, every year, as displayed here:
Original Structure
Denzel
$500,000
$199,850
PSI PT and Service Trust
Family Trust once practice is a
business
$357,500
$135,500
$70,571
$15,214
Katie
$22,750
$2,512
$70,571
$15,214
Denzel’s
Mum
$22,750
$2,512
$70,571
$15,214
Denzel’s
Dad
$22,750
$2,512
$70,571
$15,214
Katie’s
Mum
$22,750
$2,512
$70,571
$15,214
Katie’s Dad
$22,750
$2,512
$70,571
$15,214
Disabled
daughter
$22,750
$2,512
$70,571
$15,214
Other 2
$6,000
Nil
$6,000
Nil
children
And
there are timing benefits: tax is paid up to 23 months later than otherwise. And there is a Medicare Levy saving.
$500,000
$199,850 or
40%
$500,000
$150,572 or
30%
$105,149 or
21%
RULES FOR SERVICE TRUSTS
• All payments must be arms length ie commercial
– For GPs, 40% unless solo or rural, 45%
– No Guidelines for other specialities
• Services must be genuinely provided
• Service entity must tax invoice the professional
• Professional must pay the tax invoice
When will a service trust work?
Not needed when a practice is a business
When a practice is not a business consider if:
• there is an abnormally high income level;
• there is an abnormally low level of costs; and
• particularly in rural areas or solo situations,
where a GP can use the higher 45% benchmark
McMasters’ Dox4Dox
Banklink
A reminder: someone is listening
The Supa Dupa(TM) Medical Centre
Taxation of Corporate Payments
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Capital Gain
$500,000
Less 50% Discount
$250,000
$250,000
Less Active asset exemption
$125,000
$125,000
Less Rollover exemption
$125,000
Nil
Home to work travel, log books and bulky
medical equipment
• Ballesty v FCT
(1977) 7 ATR 411
• FCT v Vogt
(1975) 4 ATR 274
• AAT Case 9235
(1994) 27 ATR 127
18 year old daughter’s car
18 year old son’s car
Mother in law’s car
50% investment allowance
and cars
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50% one off deduction on the cost of a new car
Luxury car rule limit applies
Must be ordered before 31 December 2010
Turnover less than $2,000,000 per annum
GST credits apply too
A persuasive case for bringing forward planned
car up-grades
• Up to about 60% of the cost of a new car is in
effect paid for by tax benefits
Going somewhere?
Deductible overseas travel
What are the rules?
Must be for the purpose of maintaining or
advancing an existing body of knowledge used
to produce assessable income
Purpose determines deductibility
Paper proves purpose
Document, document, document
Before, after and during the trip
Dual purpose trips = part deductions
Dr Nicole’s 2009 Orlando Trip
Dr Nicole’s 2009 Orlando Florida Itinerary
Day 1
Travel from Sydney to Orlando
Day 2
Rest and recovery
Day 3
Cape Canaveral Hospital and University of
Florida
Day 4
Disneyland
Day 5
Preparation for seminar
Day 6
and 7
Weekend
Day 8 to
12
Seminar
Day 13
and 14
Weekend: drive down to Miami
Day 15
Miami Cardiac Assessment Centre
Day 16
Everglades Cardiac Assessment Centre
Day 17
Rest
Day 18
Travel from Miami to Sydney
What Dr Nicole told us
An extended intensive trip to Italy and
France with a like minded cardiologist.
A particular emphasis on the
relationship between fine dining and
regional wines on matters of the heart
Appropriate follow up including detailed
reports, photos and feedback to
interested colleagues in Australia.
What Dr Nicole really meant
Dr Brad’s Bright Idea
Correct use of family trust
• Distributions to u/18 relatives not just
your children
• Distributions to overseas beneficiaries
• Distributions to disabled children u/18
• Distributions to pensioner parents
• Distributions to non-pensioner
non-resident parents
• Distributions to non-pensioner resident parents
• Distributions to companies
Relative advantages of super fund and
investment companies
Super Fund
Investment company
Tax rate before pension paid
15%
30%, but may be less than 15% once franking
credit protocols triggered
Tax rate once a pension starts but
before doctor stops working
Nil%
30%, but may be less than 15% once franking
credit protocols triggered
Tax rate once a pension starts and
doctor stops working
Nil%
Nil % up to $34,000 per annum per principal
(normally two principals for a couple). Ie tax free
up to $68,000 a year. Subject to conditions
Limit
$25,000 per member per
year
No limit
Borrowing
Yes, but tax inefficient
Tax efficient borrowing possible
Audit
Yes
No
Restrictions on choice of
investments
Yes
No
Access under age 55
No (minor exceptions)
Yes
Limits on members
Yes (SMSFs) 4
No
Legislative risk
Yes
No
Tax planning for employee doctors
Tax Planning for Corporate Doctors
Tax planning for IMGs
www.mcmasterssuper.com.au
Advantages of superannuation
Three main tax driven advantages
1 Tax deductible contributions
2 Low or no tax on investment earnings
(particularly once pension starts)
3 Low or no tax on benefits
(particularly once pension starts)
Current issues in superannuation
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Super or debt reduction
Borrowing to pay deductible employer contributions
AuDenzelation
Planning strategies
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Large deductible spouse contributions
Large deductible parent contributions
Large deductible child contributions
Advanced gearing strategies
Spouse benefit transfers
Non-concessional contribution/co-contribution strategies
Pension at age 60 but keep working
Geared employer contributions
Industry Super Funds
Why are SMSFs so good?
• Control
• Better investment performance
• Coordination with other aspects of your
financial plan
• Cost are very low
– No commission investment strategies
– No wraps or other investment platforms
– Simple investment strategies
Tax planning now super
has been cut back
• Start super early
• Be aware of non-concessional concessional
contributions
• Consider superannuating relatives
• Maximise superannuation returns
• Consider company retirement strategies
• Consider gearing strategies
• Increased emphasis on other tax planning strategies
Debt management for doctors
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Pay off non-deductible debt as fast as possible
Completely avoid consumer debt
Insist on the lowest possible interest rate
Never pay mortgage insurance
Avoid personal finance contracts
Develop a relationship with an individual
Review annually: get quotes
Pay maximum super before paying off debt
Your bank manager is not your friend
Two credit cards
Banklink, again
The Doctors’ Guide to Investing
available at: www.mcmasters.com.au
McMasters’ Investment Maxims
• Never invest in anything that pays anyone a
commission
• Never let anyone else control your money
• The best investment is your practice
• Invest through a tax efficient structure
• Being average is good (most aren’t)
• Dollar cost averaging is good
• Do not use wraps or other expensive platforms
Never let anyone control your money
Your best investment: your practice
Tax Efficient Structures
Being average is good!
Do what he says, not what he does
Investors who use wraps
Sensible investments for doctors
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Cash deposits and fixed interest securities
Residential property
Surgery premises
Other commercial property
Index funds and similar vehicles
Direct share investments
Other businesses
Safe as a bank
Safe as bricks and mortar
The Surgery Building
Commercial property
- No commissions
- Low operating costs
- No wasted time
- Average performance guaranteed
- Research shows most professional
advisors cannot beat the average: costs
and commissions drag them down
- Do you really think your advisor is that good?
Share investing
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Use a low cost broker
Do not own more than 15 shares
Hold the shares directly
Do not use a wrap service
Do not trade
Do not hold values less than $20,000
Do not pay commissions
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Adult kids still at home?
Insurances: a necessary evil
Commission Rebate Scheme
The ground rules for risk insurances
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Rebate all commissions
Do not over insure
Make sure insurances are tax effective
Do not bother with trauma/crisis cover
Be prepared to cut back $ as you get older
Industry super funds are the cheapest
Multiple universal no-medical cover?
Wills and estate planning
Will for a doctor with young children
Simple and natural approach
Special role for siblings
Testamentary trust
– tax efficient
– Protect against spendthrift beneficiary
– Protect against the Family Law Court
– Protect against the trustee in Bankruptcy
How to increase your profits
How to improve practice profits
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Work weekends
Engage more GPs
Reduce your labour costs
Reduce your occupancy costs
Raise your prices
(Which one sounds the best to you?)
To summarise $$$$$$$$
Lucy’s strategy
1.
Buy a rental property. Stepping stone. $400,000. Live in it to qualify for home buyer’s assistance.
Rent from boarders is tax free. Rent it out after 6 months.
2.
Claim a deduction for rent paid for home office component on a floor space basis. She has high
rent: she lives in a luxury apartment in Melbourne.
3.
Claim deduction for car costs on a log book basis showing home to work travel as deductible travel
due to need to carry bulky medical equipment.
4.
Salary sacrifice $25,000 a year into Health Super. Paid $1000 non-concessional contribution
5.
Take exempt fringe benefits salary sacrifice. $8,000. Considered a part time position with a second
or even third hospital, and take multiple exempt fringe benefits
6.
Arrange extra units of life insurance with Health Super. Possibly join other industry super funds to
access multiple medical check free life low cost commission free life insurance
7.
Arrange commission free income continuance insurance: first year commission rebate will be
greater than the first year premium
8.
Deductible overseas travel
9.
Lodge PAYGW variation to get benefit of lower tax amounts straight away
Lucy’s tax savings
Before
After
Net salary including
overtime
$91,000
$22,030
Net salary including
overtime
$32,000
$3,900
Superannuation
$9,000
$1,350
Superannuation
$25,000
$3,750
Car costs
Car costs
$10,000
Nil
Negative gearing loss
Negative gearing loss
$10,000
Nil
Exempt fringe benefits
Exempt fringe
benefits
$8,000
Nil
Deductible overseas
travel
Deductible overseas
travel
$10,000
Nil
Meal allowance
Meal allowance
$5,000
Nil
$100,000
$7,650 or
8%
$100,000
$23,380 or
23%
Brad’s strategy
1.
Accept offer to sell practice for $500,000 despite complex CGT
technical issues
2.
Set up a practice trust to run Brad’s practice. PSI deed, with
distributions to just Brad for now.
3.
Employ Jennifer to help run the practice $15,000.
4.
Pay maximum superannuation $25,000 for each of Brad and Jennifer,
using debt, to a new SMSF
Roll over existing Health Super except for $10,000 each to keep the
cheap low cost life insurance and income continuance insurance going
in the Health Super Fund.
5.
Pay two lots of $1,000 non-concessional contributions.
6.
Two tax deductible cars. Up-grade in name of PT to get GST credit and
50% investment allowance. $114,000 total
Brad’s tax savings
Before
Brad’s net profit from
private practice
$73,000
$15,900
Superannuation for
Brad and Jennifer
$50,000
$7,500
Deductible car costs
including depreciation
$25,000
Nil
Investment allowance
$57,000
Nil
Salary to Jennifer
$15,000
$1,350
Deductible interest
$25,000
Nil
Travel costs: third
world medical clinic
$5,000
Nil
$250,000
$24,750
or 10%
Total
$250,000
After
$250,000
$93,150
$93,150
or 37.3%
Denzel’s Strategy
1.
Set up a family trust to run Denzel’s practice. FT deed, with distributions to Denzel, Kate,
Denzel’s parents, Kate’s parents, Denzel’s grandma, their disabled daughter (taxed as an
adult) and the other two children ($3000 each)
2.
Pay maximum super $25,000 for each of Denzel and Kate, using debt, to a new SMSF.
3.
Pay maximum super $50,000 for each of Denzel’s dad and Kate’s dad, using debt, the new
SMSG
4.
Pay five lots of $1,000 non-concessional contributions to the new SMSF.
5.
Set up a LOC in the trust’s name and use it to pay costs where the ATO accepts the interest
is deductible.
6.
Four deductible cars. Up-grade in name of FT to get GST credit and 50% investment
allowance. $100,000 total
7.
Flying lessons are deductible against aviation practice income
8.
Negatively geared rental property losses on two Gold Coast units leased to parents on
commercial leases
9.
Living away from home allowance for Denzel $60,000
Denzel’s tax savings
Before
Distribution: Denzel
$500,000
After
$93,150
$26,057
$3,008
Distribution: Kate
$26,057
$3,008
Distribution: Denzel’s father
$26,057
$3,008
Distribution: Denzel’s mother
$26,057
$3,008
Distribution: Kate’s father
$26,057
$3,008
Distribution: Kate’s mother
$26,057
$3,008
Distribution: disabled daughter
$26,057
$3,008
Distribution: other two children
$6,000
Nil
Distribution: Harare grandmother
$20,000
$5,800
Living away from home allowance
$60,000
Nil
Deductible interest
$25,000
Nil
Superannuation: Denzel
$25,000
$3,250
Superannuation: Kate
$25,000
$3,250
Superannuation: Denzel’s dad
$50,000
$7,500
Superannuation: Kate’s dad
$50,000
$7,500
Flying lessons
$30,000
Nil
Gold Coast negative gearing
$40,000
Nil
Govt co-contributions (mothers)
($2,000)
Meal allowances
$2,000
Nil
Small irregular fringe benefits
$1,000
Nil
Investment allowance
$50,000
Nil
$500,000
$46,356
9%
Total
$500,000
$93,150 or
37.3%
or
Nicole’s strategies
Convert practice to a family trust and expand to become a business for
tax purposes. Spend $200,000 on a new scanning machine
Invest in the business to maximise future tax free capital gains
Maximise investment allowance claims on new equipment ordered before
31.12.9 installed before 31.12.10
Employ mother and daughter part time to help run the practice $15,000.
Pay maximum super contributions for each of Helen ($50,000) mother
($50,000) and daughter ($25,000)
Pay two lots of $1,000 non-concessional contributions
Deductible travel: Orlanda (Cancelled the French Connection)
Distribute $34,000 to Nicole’s mother tax free and generally distribute net
income to wider family group
Distribute net income to Nicole Investments Pty Ltd
Pre-pay deductible interest
Pay daughter’s education costs (business management course)
Nicole’s tax savings
Before
Distribution to Nicole
$20,500
$2,175
Distribution to mother
$34,000
Nil
Distribution to daughter
$20,500
$2,175
Superannuation for
Nicole
$50,000
$7,500
Distribution Nicole
Investments
$650,000
$195,700
Superannuation for
daughter
$25,000
$3,250
Superannuation for
mother
$50,000
$7,500
Daughters’ training
costs
$10,000
Deductible car costs
$25,000
Nil
Investment allowance
$100,000
Nil
Travel costs: Orlando
$15,000
Nil
$1,000,000
$218,300
or 22%
Total
$1,000,000
After
$1,000,000
$425,700
$425,700
or 42.5%
Helen’s strategy
1.
Helen salary sacrificed $25,000 a year into HESTA
2.
Helen salary sacrificed $9,000 pa of exempt fringe benefits
3.
Helen salary sacrificed $20,000 pa of tax free entertainment allowances
4.
Helen salary sacrificed a company car (used by Achilles)
5.
Helen claimed deductions for her own use of her own car
6.
Helen paid Achilles a salary of $34,000 pa for her admin, her research, her paper preparation and her share portfolio
7.
Helen superannuated Achilles $50,000
8.
Helen transferred her super to Achilles
9.
Achilles started a transition to retirement pension at age 60
10.
Helen negatively geared a property, and borrowed to pay deductible employment, practice and investment costs
11.
Helen travelled overseas to better connect with her international peers
12.
Arranged a second public hospital appointment to better connect with peers and get a second exempt fringe benefits
13.
Helen varied her pay as you go instalments
Helen’s tax savings
Before
Helen’s salary, net of deductions
$52,000
$9,450
Exempt fringe benefits: main employer
$9,000
Nil
Exempt fringe benefits: second employer
$9,000
Nil
Exempt entertainment fringe benefits
$20,000
Nil
Salary to Achilles
$35,000
$4,350
Superannuation for Achilles
$50,000
$7,500
Superannuation for Helen
$25,000
$3,750
Car fringe benefit: Helen
$10,000
Nil
Deductible car costs: Helen
$10,000
Nil
Deductible travel costs
$15,000
Nil
Negative gearing loss
$15,000
Nil
$250,000
$25,050 or 10%
Total
$250,000
After
$250,000
$87,350
$87,350 or 35%
Mickey
The tired 60 year old GP
Retirement Planning: The Problem
• Burn out is a real issue for older doctors, particularly males
• At age 40 most doctors have completed a normal working life
– Ie [(40-15)*1.3*1.3] or 42 years work
• At age 60 most doctors have completed two normal working lives
– Ie [60-15)*1.3*1.3] or 76 years work
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High pressure#
Heath problems#
High morbidity#
Marital and other relationship stresses#
#Source: Emotional Health. The Conspiracy of Silence Among Medical
Practitioners. A review of the literature for the RACGP by Dr Danielle Clode
University of Melbourne 2004 (accessible on www.mcmasters.com.au)
Retirement Planning: The solution
Start early and never stop
Work intensity
Client’s current projected work pattern
Our preferred projected work pattern
Retirement Planning: The solution
• Start early and never stop
• Live longer
• Have more fun
• Do more good
• Make more money
• Pay less tax
• And if you die, even better
Facilitating gradual retirement
• Hard for solo doctors or others with fixed costs.
• Profit falls more than proportionately to hours
• Ten sessions a week generates profit of $225,000 pa
• Seven sessions a week generates profit of $90,000 pa
BEP
Retirement Planning
• Solution for solo doctors?
• Sell your practice
• Amalgamate your practice and negotiate a lower
management fee on own patients and reducing hours
• ensure continuity of care
• CGT exemptions on surgery
• If all else fails, abandon your practice and go
somewhere else
The Good News
• Serious shortage of GPs right around Australia
• Most practices are desperate for assistance
• Age is not an issue if you are a GP
• You are interviewing them, they are not interviewing you, and
will be flexible on working hours and related issues
• No reason why any doctor in good health cannot start to retire
at age 55 and finish at age 75, earning a very high income in a
very tax efficient form each year