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As doctors, I’m sure that you’re used to giving bad news. It’s just a part of your job. So, before we talk about tax structures for doctors, I need to give you the bad news first.
Then we’ll cover your options.
The bad news is that Australians are just paying way too much tax. If you’re a typical doctor, there’s a good chance that you have a healthy income, many of you making over several hundred thousand dollars each year.
According to the ATO, the medical profession is the highest paid profession in the country. Surgeons, anaesthetists, and specialists make up the top three categories for all high-income Australian professions. And the range is at least over $250,000 a year.
What’s the bad news?
The Australian government doesn’t want you to keep all that cash. They want you to fork over a huge percentage of what you earn to them.
According to a study performed by Price Waterhouse Cooper in 2013, the high-income earners of Australia are only taking home 59% of their income.
The problem is that we feel that’s normal and don’t do anything about.
It’s not normal. It’s blatant theft and should be called out for what it is.
Let me put it another way.
Imagine that you have a holiday planned to Europe, travelling through the canals and spending time with your spouse in the quaint streets of Romania or Germany. At the travel agent, the price on the sign says that it’s going to cost you $12,000 for this two-week vacation.
But when the bill comes, you’re asked to pay over $20,000 for the experience.
It’s pretty simple. That’s how much you’d have to earn in order to afford that trip. That’s the bad news, but there is a cure.
The private practice: Money-maker or tax burden?
As a doctor, you are limited to a physical location. It’s often not really viable to consider some of the tactics that other high net-worth Australians are making, such as moving overseas. It’s entirely possible (and 100% legal) to have entities based offshore, as long as you meet stringent criteria and abide by the CFC and CMC laws.
It’s tempting to take up your bat and ball and just leave, but for now, let’s come up with solutions for the here and now.
We want to look at two of the structures that we advise at Wealthsafe: trusts and companies.
A trust is a separate entity set up by a settlor with the goal of distributing funds from the trust. Anybody who receives funds from the trust is a beneficiary.
Why would you want to do this?
Simple. The real power in using a trust is distributing your money as you see fit to beneficiaries who have lower tax margins. You can distribute money to your kids, your spouse, to any charities that you have, and you only pay the tax after you distribute the money.
Let’s have a look at an example to understand how this could work for you.
Let’s say that you have a couple, John and Mary, with three kids. John works at the local hospital as a successful practicing surgeon and at the university teaching. He brings home a healthy $300,000 net profit every year from his job. Mary works as a part-time teacher, making just $30,000.
They’ve decided to run a side-project, an investment practice that brings in $100,000 a year. If that $100,000 is in John’s name, he would have to pay $48,500 (48.5% tax rate). If Mary had it the investment practice her name, she would pay $35,805 in tax. But if they use the trust to pay each other, the maximum they would pay would be $27,500 a year, possibly even less if they distribute money to the kids or give to the church.
As you can see, the tax savings are substantial. As you earn more, the more you stand to save by using a trust to help you pay tax after it’s been given to the beneficiaries.
The other benefit of using a trust is that it doesn’t own the assets. Think about the protection it could offer from lawsuits, a common occurrence in medical fields. It’s a built-in protective layer on any assets you control.
Worry about your patients, not your taxes.
Right now, I love the use of companies to limit the tax that doctors attract. The goal of using a company is to create a distance between you and another legal entity.
As an individual, you’re going to find your income taxed at the highest rate, often 48.5% including the Medicare Levy. But if you are set up with a company, you have a tax rate of just 27.5% for the income you make.
You can already see the dollars, can’t you? But in case you don’t see it, let me show you what that looks like.
If Gary is a leading anaesthetist at the hospital and makes $400,000 a year, his tax bill is going to be enormous at $153,907 a year. That’s unsustainable in my eyes.
But if Gary uses a company for his practice, it’s possible for him to have a tax bill of just $108,897. That’s $44,800 a year saved through just using a company.
That’s certainly worth the time to look into it, wouldn’t you think?
One thing that you have to take into consideration with a company is to comply with the Personal Services Income (PSI) rules. It’s a very complicated system with rules like you must have 80% of your income come from clients, you are paid to produce a specific result, and it’s your expense for tools and equipment.
This would require the advice of a tax specialist to see if your income falls under this specific case.
Another type of company we could use is the bucket company. You would use a bucket company in coordination with trusts to receive funds. If it’s going to be hard to minimize taxes because you don’t have beneficiaries that have lower tax rates, the use of a bucket company is a real life-saver.
The catch of using a family trust is that you must distribute all funds from the trust or have extremely high tax rates. If you can store them in a bucket (also known as a holding) company, you’ll cap your tax rate at just 27.5% for any funds coming out of the trust.
Peter Martin, an economist working for the Sydney Morning Herald, wrote an eye-opening article on the tax habits of the wealthiest Australians. Of the 58 richest, only two actually declared any income tax, and they paid just $3603 and $4.
The other 56 high-income earners were able to legally reduce their tax to 0$. How did they do this?
Instead, they found the services of higher-level tax specialists, people who can come up with solutions to minimize tax and legally reduce as much as possible. While the tax structures they used were different, many people, including doctors, can apply the same strategies for their own practices.
I’ve been working in the tax industry for over 30 years, 10 of which were spent in the Australian Taxation Office itself. I know the tax laws of Australia and I work with high net-worth clients who want to legally minimize their tax burdens and set up tax structures for their income and assets.
I also specialize in sovereignty and advise people on 100% legal means to take their business offshore and reduce their taxes even further by becoming non-residents of Australia. I was even featured in the Panama Papers and proven to have 100% legal means to reduce taxes and slash your ATO bill.
Talk to us today to discuss your situation. As doctors, you understand the concept of seeking advice from a highly specialized expert. We are the experts in minimizing tax, and we can help you out.
Simply fill in the online form and we can set up a no-risk free 15-minute strategy session for your next steps. Fill it in today and start keeping more of your money in your pockets.