a question about doctors, companies and income tax

My friend is a doctor. He has his own company (one director). His accountant told him that he was not allowed to use his company to gain tax benefit because of his profession, i.e., he still has to pay income tax higher percentage than company tax (30%).

Any one know anything about it?

Chris

 

Sounds like he has an issue with the Personal Services regime.

Where you derive income principally from your own personal services, you cannot income split nor shelter it in a lower taxed entity (e.g. company).

This area is complex and there are advisors who specialise in assisting medical & professional practitioners.

Thanks again Taxation Law drafters for keeping advisors in work !!!

Cheers,

Rob

 

Without knowing the details I suspect what the accountant was referring to is the personal service income rules.

Tell your friend to go to the Tax office website Australian Taxation Office Homepage and do a search on the above or perhaps just psi and that may give some answers.

That said there may be all sorts of other structuring opportunities available so your friend needs to get value from the accountant or get a new one!

Cheers
N.

 

Thanks Rob, Nigel.
He's a contractor GP.

 

The problem is the legislation simplistically treats everybody as either an employer or an employee.

Unless contractors gain their work from multiple sources, are responsible for their own work and perhaps employ others then they are often caught.

An example would be a contractor GP who operates through an agency that does all the tasks of finding placements, or who really only works for one practice - especially if the practice supplies facilitities and pays by the hour.

Basically, when you are deemed to be an "employee" then you lose your ability to split income, as well as losing many business deductions.

In some cases you are worse off than employees who get protection, benefits and FBT packaging opportunities.

Cheers,

Rob

 

A long time ago doctor's were allowed to incorporate to get various tax advantages such as the now defunct 100% deduction for super on the first $5000 (rather than the 75%).

However there was a ruling that stated that if a doctor had an interposed entity for their practice then all profits had to be distributed to them each year. Why the tax system penalises professionals over other businesses is anyones guess!

Check out
IT 2503 (Addendum exists) - INCOME TAX : INCORPORATION OF MEDICAL AND OTHER PROFESSIONAL PRACTICES (As at 3 November 1988)

IT 25 - Incorporation of medical practices (As at 7 August 1981)

IT 2330 - Income Tax : Income Splitting (As at 30 June 1986)

The issue with doctor's is whether or not they are in business - this is complicated by Medicare and their provider numbers.

Its quite a complex area.

 

another thought:

So, according to tax law, sole traders / contractor doctors / accountants etc are not business but personal services. I was thinking how these people protect their personal assets? Can they still use company or trust structure effectively without facing challenge?

 

This rule isn't defunct, it's now dollar for dollar up to $50,000 (instead of the previous Age Based Limits) and transitioning for people over 50 before 1st July 2012 can put in $100,000 per annum each financial year when they are over 50.

Cheers,

Dan

PS Before making an investment decision speak to your FPA registered Financial Planner.

 

Yep ... PSI is only for working out who bears the income tax liability and how much deductions to deny the poor guy deriving it !!

Cheers,

Rob

 

Just another thought:

Let's say the company's income is $50,000 a year, the company contributes $5,000 to his superannuation fund. Will his gross income at the end of financial be $45,00 or still $50,000?

Also he has a car under the name of the company. Can he deduct the costs of the car (i.e. maintenance, repair and petrol) from company's gross income?

Cheers.

 

If he is self-employed he can claim a tax deduction for his personal contribution into his superannuation fund, these funds will be taxed at 15% vs his marginal tax rate.

If he is not self-employed he can ask his employer to salary sacrifice this amount into his superannuation fund, these funds will be taxed at 15% vs his marginal tax rate.

One would imagine his accountant would say that this is a business expense as the car is a business asset. Hence, yes.

Cheers,

Dan

PS Speak to your accountant or tax adviser before making accounting or tax decisions.

 

BEFORE answering the super/car deductions:

Go to a Tax Accountant and ask the following questions based on your facts:

1) Do you derive income from MAINLY personal services.

2) If so, do you conduct a personal services business (PSB).

If you don't derive income from mainly personal services, or you are deemed to be carrying on a PSB then there is generally no problem.

*IF* you are deriving personal services income and are not carrying on a PSB, then there are severe restrictions on the deductions available. Assuming you are the sole employee:

SUPER - provided you are an employee, the company can claim deductions for super contributions for your benefit. TR 2003/10

CAR - the company can claim deductions. Beware of private use & FBT. A second or more cars are generally not deductible. TR 2003/10

Again ... check with an advisor on your specific circumstances.

Cheers,

Rob