FINANCIAL PLANNING FOR YOUNGER DOCTORS NOVEMBER 2007

Our message to you 1 Use trust based structures to own your own practice as soon as possible, developing the practice as a business if possible, and paying particular attention to: owning your car tax efficiently; owning your home tax efficiently; using all other available tax planning options. 2 Do not trust anyone with your money 3 Do not invest in anything that pays anyone a commission 4 Do not work too hard

Sources of Information www.mcmasters.com.au Username: “mcmclient” password: “welcome” Financial Planning for Foreign Trained Doctors The Doctors’ Guide to Starting a Practice The Doctors’ Guide to Financial Planning No charge for consultations with registrars: allow two hours to cover the ground

Should you start your own practice? Net income is higher Tax planning is better If your practice is a business, tax planning is even better; but Some say hospital appointments provide better quality clinical work and less administration work Its not all about money

Practice options 1 An employee 2 An independent contractor 3 A locum 4 an owner of a PSI practice 5 on owner of a business practice

Five options for legal structure 1 Own name 2 Company, with no profit retention 3 Company, with profit retention 4 PSI practice trust 5 Family trust

TABLE OF OPTIONS Engagement type IndividuaL Practice Trust Practice company Independent contractor Yes, provided it is a PSI practice trust Yes, provided no retention of profit Locum Owner, practice is not a business Yes Owner. Practice is a business Yes. Can be a family trust deed Yes. Profits can be retained Employee No

In summary We recommend young specialists start their own practice as soon as possible and develop it to be a business for tax purposes and use a practice trust based ownership structure At least start a part time practice Why do we recommend this? Because the tax planning is better, particular for cars and home ownership, which leads to a better material quality of life

Tax planning issues Car deductions Cash flow management techniques to: create space for a deposit on a home or for significant repayment of non-deductible debt generally reduce after tax cost of debt Income splitting to spouses Better superannuation including superannuating an employee spouse

Owning a car or cars See Part 4, Financial Planning for Foreign Trained Doctors for more detail Main points: home to work is business travel due to carriage of bulky medical equipment and/or potentially offensive or embarassing items no limit on number of company cars second car taken as a fringe benefit under statutory method GST on cost of car if bought by a GST registered entity

Cash flow management See Part 5 of Financial Planning for Foreign Trained Doctors for detailed explanation In summary: the change from being an employee to being self-employed via a PT creates a significant tax deferral of up to 22 months, enhanced cash flow is used to create a deposit and/or pay off a non-deductible home loan asap, when the tax bill comes in, borrow to pay it. ATO accepts interest on amount borrowed is deductible, generally borrow to pay tax deductible outgoings, and preserve your cash to pay off the non-deductible home loan.

Diagram: Cash flow management Soontobe Medical Pty Ltd as the trustee for the Soontobe Medical Trust. Derives all practice income, pays all costs using tax deductible debt, and then distributes cash and net income to doctor owner Pays all practice costs plus salary to spouse with debt Derives all cash/practice income Pays tax for doctor with debt Pays super for Soontobee and spouse Borrows from bank to pay all outgoings Provides car fringe benefits Distributes cash and net income to Soontobe and then to spouse. Spouse uses cash to pay off non-deductible debts and pay living costs

Other tax planning options overseas and extended domestic travel; employing spouses and other family members; superannuation contributions for the doctor; superannuation contributions for related persons; super co-contributions for children and other relatives; ownership of related businesses; double deduction for lap top computers, PDAs and brief cases; and various other minor tax planning devices including: dedicated credit card interest and charges, laundry costs, protective shoes, mobile phone, home internet connection, home office depreciation of plant and equipment, and newspapers and magazines Intergenerational financial planning issues, including tax efficient support for older parents and other family members

Superannuation planning Pay maximum superannuation contributions each year, using deductible debt if necessary $50,000 a year every year Superannuate your spouse as well Hesta and Health Super are good funds Self-managed funds are probably better, investing in: small number of Australian shares; and/or Vanguard Index Australian Shares Fund See www.mcmasters.com.au client only section for more details