We all hate paying tax although we all know we need to pay it for the benefit of our nation. Yes we all know that governments are not best at spending our money efficiently or effectively but we also know we would not have the health system in Australia that we do without taxes.
Some are happy to pay more than their fair share. Most are not. Most look to pay the minimum and we agree. Why pay more than you need it. So below are 3 ways to pay less tax and also benefit for your financial future.
You see when tax savings are made most medical professionals spend it on lifestyle. But those that are wealthy understand that the more you put away for your future the wealthier you become.
So how can you save tax and help it make you wealthy?
- Superannuation
This is one of the easiest ways to save tax. But many medical professionals do not make the maximum contribution into their Superannuation fund.
Being self employed contractors medical professionals have to organise their Superannuation so it only gets thought about at the end of the year so we advise to make payment every month which makes it manageable and easy.
Ok so you get a tax deduction but what else does it mean because I often get resistance when it come to making payments into super.
The common two reasons we hear are:
- I am young and will not be able to access my super until I retire which is many years away.
- The rules are always changing and there is no certainty what will happen in the future.
To be honest these reasons have merit, but just think about this.
They are
- A great tax strategy. You get a 47% tax deduction and your Superfund will pay 15%. That is a 32% tax saving if your earnings are less than $250,000. If your earn more the savings are less but there are still savings. So not bad.
- After speaking to a Financial Planner they may advise that it is possible to purchase investments, including property or shares which are tax efficient.
- When you retire and take a pension the tax rate may be 0%. There are conditions, but I don’t know about you but I like 0% tax rates.
Is it worth it?
Well most medical professionals pay tax at 47% so a $25,000 contribution will save you $11,750. Your Superfund will pay $3,750 (15%) giving you a net gain of $8,000 a year. Doesn’t sound much but bear with me a second because there is a bit more to it.
Even if you are a late starter and only start contributing when you are aged 30, that is still $280,000 in tax savings alone (assuming tax rates stay the same).
But here’s the good bit. It forces you to make savings of $2,000 a month. This if invested probably this will grow and over a umber of years becomes a sizable pension pot.
So before you dismiss this strategy just make sure you know what it means.
- Ensure Passive Income Does Not Come Back to You
We always say that apart from Superannuation you need to invest in assets that create income even when you do not work.
The issue with medical professionals is that if they stop working then the income stops. And most have day to day expenditure that is more than normal. So, if the money coming in stops it becomes a real problem.
The second issue is that if other income comes in and it comes to the medical professional it is taxed a high rates which may make the whole exercise pointless.
This means you do not make investments in your personal name but use companies or trusts. We like trusts because they are flexible and have the ability to distribute profits to a number of people in the family group.
For example. You invest money you have saved in a family trust and it generates income of $15,000. If you receive it you will pay tax of $7,050. However, if you distribute it to your adult daughter who is at university and has no other income the tax payable is $0. Zero. Zilch. You make an immediate saving of $7,050.
But it gets better because if you were to give your daughter $15,000 you would have to earn $28,301 and pay $13.301 in taxes.
You can distribute to a company as well (especially if you do not have adult low income family members which you can distribute to. You will still pay tax but this will be at lower rates of 27.5%. However, you need to be aware that when assets are sold in companies you could pay more tax so you need to get professional advice before making a decision.
But apart from Tax how else do you benefit?
Well if in a trust the assets are held for beneficiaries and not by the medical professional so the assets are protected and it is also easier to hand down assets to the next generation. Tax planning and estate planning become much easier.
- Get Your Structure Right
As a tax professional that advises medical professionals I find that almost 80% actually pay too much tax. Most pay more because their accountant does not understand how medical professionals are taxed. They do not understand Personal Services Income and when it applied and when it does not.
If you own a medical practice and employ 4 other doctors but you also work there then technically you can split some of the income with members of your family.
Not all accountants understand this.
I recently had a medical professional see me where they run a medical centre with 6 other GPs. All his income and the service fee from the other 6 doctors also came to him. This is bad tax planning because to change it now is not easy or cheap. But it can be solved.
If the practice is owned by a company then the tax amount would be $27,500, a saving of $19,500 A YEAR. If the shares are held by a trust then any dividends paid can be transferred to family members who lower tax rates.
So as an example if held in a trust and you have a family member who has no other income the $100,000 can be distributed to them and their tax bill would be $26,497 saving you $20,503 A YEAR.
So getting your structure right can really make a difference to your taxes.
What are the other benefits?
As assets are not held in personal names it is asset protected which means if the medical professional is sued the asset is safe. It also assists in estate planning so that generational wealth is maintained.
