The answer always is it depends.
I get it. Medical professionals earn a lot of money. They pay a lot of taxes too. So, if there is a way to get income to a low rate tax paying spouse it makes sense.
But as always, it not as simple as that.
The reality is that there is nothing stopping you for paying wages to whoever you want including your children. So, if you want to pay $80,000 to your spouse who does nothing except spend endless days in Louis Vuitton you can actually do that.
The problem is if the tax office will allow you to claim a tax deduction for it. If they don’t then the whole thing is a bit pointless.
Here is what you have to think about if you want to pay wages to your spouse
1. That tricky thing called Personal Services Income (PSI)
If you are a contractor, the chances are you may be caught under the PSI Rules.
These are special tax rules applying to medical professionals whose income is generated mainly from provision of personal effort, skills or expertise. Eg a doctor does the hours and gets paid for the time and effort they put in.
In a nutshell under PSI any payments made to your family members for administration, practice management, bookkeeping etc will not be tax deductible unless you can prove it was necessary.
And that also includes Superannuation payments.
Crap.
2. Does it make sense? And is it reasonable
It is not unusual for doctors to employ their partners and family members in the business to perform roles like reception work, research or bookkeeping. If the employment makes sense and the wages are reasonable, these arrangements are acceptable.
What is reasonable? For the tax office it might be $5,000. For you it could be $80,000.
There’s more. What are considered acceptable hours?
So, this is how I explain it. Imagine you are not paying your family member but are paying Mrs Mohanlal (my wife). How much would you pay Mrs Mohanlal to do the work you want them to do knowing the money is going to Mrs Mohanlal and not back into the doctor’s personal coffers? And in how many hours do you expect Mrs Mohanlal to do all the work in?
In other words what is the commercial value and time spend of the work being done? That then become the value that will be acceptable to the ATO.
Any arrangement that gives more than the commercial value will be a problem.
So if bookkeeping would take a professional firm 2 hours then if you were to pay your spouse 4 hours (they take longer because they are not a professional) at a professional bookkeeper’s rate then that would be too much. Paying them 4 hours at a reduced rate of a professional bookkeeper would be acceptable.
The ATO will accept that your spouse may take longer to perform certain roles but again this needs to be reasonable. In the above example to pay your spouse 20 hours even at reduced rates would be considered a problem.
3. Have you documented your employment relationship properly?
When you employ a family member you become an employer. As an employer you have certain legal responsibilities under Law even if your only employee is your spouse.
Written agreements are just good practice,but be careful to follow the agreements. We are aware of claims by spouses during a relationship breakdown relating hours, minimum pay, annual leave and sick leave. Agreements are, more importantly, what the ATO will expect to see.
4. Other requirements
There are a few things to think about
• Superannuation
You can only pay superannuation relating to work and hours performed commercially. You medical business cannot ‘top up’ or pay extra to claim additional deductions.
• Workers Compensation
As soon as you employ anyone your business needs to be registered as an employer for Workers Compensation Insurance.
• Payroll & Single Touch Payroll
You need to run payroll and pay for hours works and remember that these details need to be reported to the ATO under single touch payroll rules
If you would like a consultation with a member of our team let us know.
