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Having worked with a number of medical practitioners we understand the medical industry can be incredibly fulfilling though and also time-consuming. Potentially long and extended hours, keeping up to date with patient or client details, travelling and on-call jobs can leave you exhausted.
Dealing with your own work, worrying about parts of your taxes shouldn’t be an issue. A professional accountant can assist you with your taxes and accountancy, giving you more time to focus on your career and personal life. Not only can accountants reduce your taxation workload but they can also assist with evaluating your expenses to reduce the amount of tax payable or enhance your tax return depending on your situation.
Medical Accountants of Australia has taken over the burden of accounting and taxation needs from a range of doctors and medical professionals throughout Australia. With a devoted team of accounting experts, we focus on providing great services and support for all our clients, whether an individual, small practice, organization or large business.
There are a great many reasons why all medical personnel should use a specialist medical accountant when it comes to dealing with your finances. These range from changes in Medicare policies that may affect you differently to those in other professions to ensuring you are receiving the correct deductions for your industry.
We’ve put together this list of what you can expect to receive when you employ an accountant that is expert in the minefield of medical taxes, and also some specific areas that non-medical accountants are known to make frequent mistakes.
- Prepare accounts in a standard format ensuring that income and expenses are not netted off. If expenses are set against the income source rather than being shown separately, the true expense of running the practice will be understated and you may not be claiming the GST credits you are entitled to.
- Compare your practice knowledgeably with other practices locally and, if required, at a national level.
- Be aware of what the accounts should look like and which expense claims can be made to minimise ATO enquiries.
- Understand what claims should be made and what income is expected, and notify you if there are unexpected or missing figures.
- Keep abreast of material changes in Medicare funding, and warn you in advance of how these might affect your practice.
- Systemise an agreed timetable with you to turnaround the accounts, while still waiting long enough to finalize accounts to ensure all income is correctly included.
- Understand the complications of GST and medical practices.
- Have a dedicated healthcare team fully up to date with medical accounts so you are not dependent on a single point of contact.
- Help you to prepare meaningful budgets and make calculations for available drawings.
- Netting off income and expenses that can result in incorrect GST claims.
- Incorrect tax treatment of superannuation contributions paid or due to be paid, resulting in the wrong tax relief being applied.
- Allocating profits incorrectly, particularly regarding personal services income. This can affect the balances due to or from partners.
- Miscalculating superannuation contributions where there is a mix of self-employment and employment.
- Including income to which PAYG withholding has been applied in the accounts, resulting in the income being taxed twice.
To find out more about how a specialist medical accountant could help those in the healthcare industry with accounting and taxes, contact the expert team at TAS-Australia.
Most medical practices in Australia operate as small businesses, and that means they are exposed to the same financial challenges as other small businesses through the country. As with any small business, getting the accountancy process right is essential for ensuring the business is able to run in a sustainable manner.
Accountancy can cause headaches for medical practices when those involved typically just want to get on with the job of looking after people’s health. With this in mind, here are some easy tips and tricks that can save your practice from the kind of headaches that can come at tax time with inefficient or poor bookkeeping.
Keep detailed records
Bank statements only go so far – they’ll show you where the money has come in and left the account, but keeping more detailed records than that will allow you to find information quickly when needed. Keep receipts in a dedicated folder, and if possible scan it into a digital file to later give to the practice’s accountant – the easier you make their job, the better the returns for your business.
Collect applicable taxes Immediately
It is important to take taxes out immediately at point of sale or when payroll is generated. While it might be tempting to defer this process at times, either to save time or to gain access to the additional money temporarily, the longer the time that passes between transaction and accounting the more likely it will be that an error is made. Paying taxes immediately will also save the practice from having a large lump tax sum bill at the end of the year, and prevent it from incurring penalties for delayed tax payments.
Schedule Profit & Loss Statements
If your practice borrows any one idea from the way big business works, make it this one. Regular Profit & Loss Statements are an enormously effective way to check in on the overall financial health of the practice. In addition to validating your day-to-day records (and noting discrepancies that should be resolved), Profit & Loss Statements give you an overview of the flow of patients, an idea of where money could be invested into the business, and so on.
Medical practices often forget about these because they are less complex business models than corporations, but they are an essential part of any business.
Don’t let invoicing slip
Making money is important to a medical practice and, while this might sound obvious, keeping on top of invoices is something that many medical practices struggle with. First of all it’s important that you automate the process as much as possible, and having a system that will generate and immediately send out invoices can save the practice’s staff a lot of energy. Next, keeping a close eye on outstanding invoices is equally important in ensuring that work doesn’t go unpaid.
Make use of modern technology
Many medical practices don’t have dedicated IT teams or resources, which means they’re often hesitant to make use of buzzword technologies such as “the Cloud”, but it’s something they should evaluate closely. The Cloud would allow the practice to keep its records in a centralized space that could be accessed from any computer anywhere in the world. This would make the work of the practice’s accountant much easier, as it would remove the need to move paper around, and it would give the accountant a single place to draw documents from.
Additionally, cloud-based solutions require no technical skills to set up. A practice would do well to conduct some research to find a secure service, and then start making use of it to store invoices, receipts, tax forms, and other important accounting documents. In short, the easier you can make the job of your accountant, the greater the returns that you’re going to get from them. Keeping detailed, accurate records might be a time consuming task for an already time-strapped small business like a medical practice, but the alternative – having to scramble to pull documents together when they’re needed – is going to be even more time consuming in the future.
As a medical professional in Australia you are generally considered a high-income earner, and as such the rate of tax applied is also high.
This can be extremely frustrating, but even more so if you are a business owner as well. In this instance, you are not eligible for the 30% tax rate on ‘personal services’, which leaves you with a marginal tax rate of up to 46.5% to contend with.
With almost half of your income going to tax, surely you would want to try and save as much money as you can? Fortunately, there are many options you can choose to make sure your income is protected, all of which are legal and easy to attain. All you need to do is decide which is the right one for your lifestyle, needs, employment and/or business.
So here are the three easiest and most effective ways to cut down on your tax as a medical professional or business owner:
Medical practitioners deductions
Income Tax can be broken down into two parts: Assessable Income and Allowable Deductions. Assessable income is the receipt of earnings for services a person or business provides, whilst
Allowable Deductions are the expenses incurred in producing income.
In Australia once Allowable Deductions have been applied what is left is called ‘taxable income’. So this means that if you maximize your allowable deductions you save on tax. Basically if the cost was paid in the medical practice of your profession, you can make a tax deduction claim.
Medical Practitioners Deductions include but are not limited to the following:
- Medical supplies, equipment, medicines and materials
- Education – as long as it is relevant and/or related to your current employment or income
- Professional subscriptions, accreditations, memberships and literature
- Computer and office equipment
- Professional Indemnity Insurances.
TIP: Maintain an orderly record keeping system that clearly indicates your expenses for the year. This will make reviewing your expenses easier and reduce ambiguous connections between what is and what is not tax deductible. For example, an expense that is not always clear is the home office. Many doctors have a desk or office at home where work may be conducted and therefore expenses incurred. But because this is a private space your accountant will have to determine how much is deductible, which is where having a thorough record can work in your favor.
Transition to retirement fund
If you are a doctor over the age of 60 you can also consider beginning the process of transitioning into retirement in the form of a pension that uses money from your super fund.
The Transition to Retirement (TTR) pension allows you to draw up to 10% of your super account each year that you are still working.
TTR pensions involve ‘salary sacrifice’ which means:
- Your super balance will keep growing.
- You’ll pay less tax because salary sacrificed contributions are taxed at a low rate (15% or 30% if earning over $300,000) when they go into super.
- And if you are 60 years and up you won’t have to pay any tax on your super withdrawals.
A TTR pension can be accessed once you have hit preservation age, which is generally 55 years old for most people. From this age you can begin withdrawing a pension from your super even if you are still working as a medical professional. However, even if you are not the required age to start undergoing this process it is something that you can consider employing in the future to save money as your career and lifestyle changes.
IMPORTANT: TTR pensions are only available to members of accumulation super funds and only if your super fund offers the pension option. However, if your fund doesn’t have this available, a potential solution is to open a new super fund that offers this service.
Medical business structures
Although there has been contention around the legitimacy of these types of structures in the medical field, they are still legal as long as you thoroughly follow the rules, regulations and guidelines. If you are thinking of undertaking one of these business structures consider contacting Us TAS-Australia as we specialize in the medical sector and understand its unique landscape.
This arrangement allows doctors to distribute some of their income to family members who work within the practice. For example, a partner who maintains the books or manages administration within the business. As they have a lower marginal tax rate, they can be paid a moderate salary.
This business structure is set up so that medical professionals don’t have to buy their assets in their own name. They can also distribute income and capital to beneficiaries such as a partner on a low or income. Beneficiaries can also be companies, of which operate to store the income generated from the medical practitioner’s. However this income excludes personal services income earned specifically by the doctor.
The reason why a company is a viable option for many doctors is that it will only be taxed at 28.5% to 30% instead of the 47% that the doctor would personally incur.
NOTE: These structures are completely legal as long as they are developed correctly. However, as they can be dubious at times you need to make sure:
- Your motives are in line with the Australian Tax Office’s legalities
- You aren’t leaving your business vulnerable
To make sure that you have the best structure in place to legally minimize tax and grow your wealth, we highly recommend you get legal and financial counsel before putting them in place.
Personal Services Income (PSI) affects anyone who generates revenue from supplying his or her skills and labour. It’s important you understand if you’re earning PSI, because it can significantly change your tax obligations.
Personal Services Business (PSB) is essentially the same thing as PSI, except that there are no changes to your obligations other than declaring any PSI on your tax return. This means that you are taxed at a business rate instead of an individual tax rate, which can be a difference of as much as 19%.
And if you are operating as a business entity that is a company, trust or partnership that primarily derives its income based on the skills or efforts of an individual, then you most likely qualify as a PSI and so are at risk of being taxed accordingly.
These two classifications tend to be one of the most misunderstood tax-time pains people grapple with.
If you think PSI income does apply to you, the next step is to complete the results test. The results test will help determine whether you’re earning PSI or PSB.
The test has three ‘checks’ to consider:
- Are you paid to produce a specific result?
- Are you required to provide the equipment or tools?
- Are you required to fix mistakes at your own costs?
If you pass those three checks then your business is considered a PSB, so the PSI rules may no longer apply.
It gets complicated for people who have multiple contracts and some of them pass the rules for PSBs, while others do not. The tax department considers you’ve passed the requirements for PSB when you meet all three of the above conditions for at least 75% of the PSI you earn in that financial year.
If, after applying the results test, you determine that you are not a PSB, you will need to apply more tests to determine if your income is PSI. The next test is called the ’80% rule’. For this test, you determine whether over 80% of your income comes from a single client and their associates. If it does, the PSI rules apply.
If it does not, then there is one more set of tests to take.
First, you go through the Unrelated Clients Test. To pass this test, your income must be produced from two or more clients that are not related or connected. Furthermore, the work must have been obtained by making offers to the public (which includes maintaining a website, applying for competitive public tenders, or advertising).
If the Unrelated Clients Test does not apply to you, you can complete the Employment Test. To pass this test, you must either have employees, partners, or contractors perform at least 20% of the principal work, or alternatively at least one apprentice during at last half of the income year.
The final test you can apply for is the Business Premises Test. Passing this test requires that you have a business premises that is owned or leased by you, used for your personal services work for more than 50% of the time, used exclusively by you, physically separate from your place of residence, and physically separate from the business address of any of their clients or associates.
If at least one of these tests is passed then your business is a PSB, and the PSI rules do not apply. There are two ways you can apply to the ATO for a PSB determination.
What to do if the PSI rules apply
If, after going through all of those tests, the income is determined to be PSI, then it changes how you can report your tax for the year.
Most significantly, it means that there are certain deductions you will not be able to claim otherwise. Note, however, if you earn a combination of PSI and non-PSI income, you will still be able to claim deductions as normal to the non-PSI portion of your income – just make sure that the deductions are allocated individually.
What you are not able to claim under PSI includes:
- Rent, mortgage interest, rates or land tax for your home.
- Payments to your spouse, or other associates, for non-principal work such as secretarial duties.
- Any expenses you would generally be unable to deduct as a normal employee.
- Super contributions for associates for non-principal work. So if you’re making super contributions to a spouse or relative for some work they’re doing for you (such as answering phones), then you wouldn’t be able to deduct this.
The exception to this rule is you can deduct super contributions made to an associate for principal work they do. But you can only deduct the superannuation guarantee amount, and this is based only on the salary or wages paid for the principal PSI-related work. In other words, you’d be able to make a deduction if you paid super for your partner teaching part of your PSI-earning course, but not any secretarial work they might have done. And note you are still able to deduct super paid to yourself.
You will also need to fill out additional sections in your tax return: Personal Services Income and Business and Professional Items.
What you can claim as deductions under PSI
There are a large number of deductions that you can still claim under PSI. These include:
- Costs of getting work (such as advertising).
- Registration and licensing fees.
- Insurance against loss of income, earning capacity.
- Meeting GST obligations.
- Salary or wages paid to the individuals performing the services.
- Salary or wages for an “arms-length employees” (not an associate).
- Complying with worker’s compensation law.
- Running expenses for home offices – heating and lighting, phone and Internet bill, but not rent.
- Depreciation of income-producing assets.
- Fees or charges associated with a bank, credit union, or other financial institution.
- Tax-related expenses, such as the cost of lodging a tax return or activity statement.
- Statutory fees.
As the owner of a medical practice, you have special accounting and bookkeeping needs, expense claims and controls, client and Medicare billing, Doctor’s payments, sub-lease income, government/employer record keeping as well as your PAYG, BAS, GST and Superannuation contributions. Not to mention delivering a high quality health service.
Accounting and taxation issues are important to getting the best out of your professional medical services. However in the reality of your busy day, these receive a lesser priority. TAS-Australia are here to help you to keep up to date with your accounting needs from basic bookkeeping through to Business Activity Statements and GST preparation to the preparation of your Annual Accounts (P&L and Balance Sheet), Annual Tax Returns and more. We aim to maximise the dollar value of your time.
TAS-Australia has an absolute focus on medical professionals and their families; as such we are always up to date with the latest tax rulings that may affect your position. We are also there to give you the best accounting advice based on over years of experience assisting medical practices to maximise incomes and pay the appropriate amount of tax. Whether you need advice on a simple work-related expense claim or you are considering buying a significant piece of medical equipment, we have the expertise to help you develop
Our professional accountants at TAS-Australia provide ethical, innovative, proactive and constructive medical accounting services. Our experience enables us to deliver some of the best tax advice, efficient preparation of tax returns and maximise deductions. In particular, we provide specialist tax and accounting advice on optimum medical practice structure for new practice owners or established medical practices to accumulate wealth in the most protected and tax effective environment.