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Session One Choosing an Appropriate Structure for your Practice. 2007. Issues Impacting The Choice of Structure. Form of organization Available legal structures Is your practice a business Do you need a service entity? How much does the structure cost? Are your assets protected?

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Presentation Transcript
issues impacting the choice of structure
Issues Impacting The Choice of Structure
  • Form of organization
  • Available legal structures
  • Is your practice a business
  • Do you need a service entity?
  • How much does the structure cost?
  • Are your assets protected?
  • Our usual preference: practice trusts
form of organization 3 basic options
Form of Organization: 3 Basic Options
  • Solo Practitioner
      • Practices in own name
      • Derives own income
      • Pays own costs
      • Income may be business income or personal services income
  • Associate
  • Practices in own name but shares facilities
  • Derives own income
  • Shares costs
  • Income may be business income or personal services income
  • Partner

Practices in combination with others, shares income and shares costs. Entitled to a share of partnership net income

Income may be business income or personal services income

Each of these three basic options may be an individual, a company or a trust and a service entity may or may not be used.

This creates a large number of possible practice structures.

available legal structures 6 options
Available Legal Structures: 6 Options
  • Individual, whether solo practitioner, partner or associate, PSI
  • Individual, whether solo practitioner, partner or associate, BI
  • Practice Company, whether solo practitioner, partner or associate, PSI
  • Practice Company, whether solo practitioner, partner or associate, BI

5 Practice Trust, whether solo practitioner, partner or associate, PSI

6 Practice Trust, whether solo practitioner, partner or associate, BI

A Personal Services Income Practice Trust uses a special trust deed that complies with the ATO’s published rulings.

A Business Income Practice Trust may use a discretionary trust deed, a unit trust deed or a hybrid trust deed depending on the circumstances

preliminary question is your practice a business
Preliminary Question:“Is your practice a business?”

Income Tax Ruling IT 2369 provides two tests:

  • The Commissioner of Taxation’s “rule of thumb”, ie does the practice have more non-owner fee earners than owner fee earners, on an equivalent full time basis?
  • Other factors, such as size, number of staff, plant and equipment, degree of organization, investment in premises, reliance on owner’s skill and judgment

Most doctors who own their own practices can meet these tests if they wish to do so.

taxation considerations
Taxation Considerations
  • Different structures have different tax implications.
  • Consider:
    • Who pays the tax?
    • At what rate is tax paid? and
    • When is tax paid paid?
    • Can other tax planning strategies be used, such as large superannuation contributions?
    • The need for simplicity
    • The costs to set up and run the structure
    • Employment on-costs
case study 1 the costley and kumbersome associateship
CASE STUDY 1: THE COSTLEY AND KUMBERSOME ASSOCIATESHIP
  • Four doctors practice in an associateship
  • Each doctor uses a practice company
  • The practice companies pay each doctor a salary
  • Each practice company pays a management fee to a service trust
  • The service trust distributes its net income to the doctors’ family trusts
  • The family trusts distribute net income to low tax rate related persons
  • The Practice engages a total of 9 equivalent full time material fee earners
case study number 1 problems
CASE STUDY NUMBER 1 PROBLEMS
  • Complexity – 5 BAS’s, etc
  • Expensive to maintain: 9 sets of accounts, 9 bank statements, etc
  • Staff taking stress leave
  • Tax benefit limited, ie only profit on services able to be shifted to low tax rate related parties
  • Expensive to maintain
  • Payroll tax on doctors’ salaries (?)
  • Workcover and other payroll on costs
  • Compliance with service entity ruling’
  • 45% tax rate on doctor’s earnings ,ie very limited tax planning compared to alternatives
  • Professional indemnity issues
advantages of a practice trust
Advantages of a Practice Trust
  • Hybrid trust gives discretion as to profit share;
  • Units are transferable
  • Simplicity (one BAS, etc)
  • Efficiency (fewer sets of accounts)
  • All income is business income therefore all income can be directed to lower tax rate family members
  • Family trust maximizes discretion on tax planning
  • Lower accounting costs
  • More corporate look
  • Better CGT results
legal issues on changing to a practice hybrid trust
LEGAL ISSUES ON CHANGING TO A PRACTICE HYBRID TRUST
  • Practice must be a business re IT 2639
  • CGT issues need to be considered
  • Unit-holders’ agreement needed
  • Sale of practice agreements needed
  • Unit-holders (and their accountants) actually agreeing can be the hardest thing
  • Consistent with ATO’s public rulings
  • Many examples in practice accepted by the ATO
case study number 2 independent contractor
Case Study Number 2: Independent Contractor
  • Dr John Smith is 55 year old GP and an independent contractor practising through a practice company called Smith Medical Pty Ltd
  • John pays an independent service provider a management fee of 35% of billings
  • John pays his own family trust a management fee of 15% for providing all other services needed to run her practice
  • John’s gross billings are $300,000, hence an independent management fee of $105,000 and a second management fee of $45,000
problems with case study number 2
PROBLEMS WITH CASE STUDY NUMBER 2
  • Second management fee is not commercial and will not be accepted by the ATO
  • John will have a taxable income of close to $195,000 and a tax liability of $75,000
  • Limited other tax planning options
  • Workcover on salary payments
  • Complex BAS: must pay PAYG Withholdings on salary payments to John
case study number 2 solution
Case Study Number 2 Solution
  • Change John’s practice company to a personal services income (“PSI”) trust
  • Transfer John’s practice from company to trust
  • PSI Trust? Special trust deed that satisfies income tax ruling IT 2369. See Dox4Dox
  • New ABN and TFN. Not much more needed
  • Enjoy a tax holiday switching from PAYGW to PAYGI
  • Possibility of using enhanced cash flow for other purposes such as paying off non-deductible debt
further tax planning issues for dr john
Further tax planning issues for Dr John
  • Dr John is a good opportunity to digress and consider other tax planning opportunities
  • Consider:
    • Spouse super contributions
    • Double super contributions
    • Other super strategies
    • Debt conversion strategies
    • Multiple deductible cars
    • Deductible overseas travel
    • Employ child over 14 and 9 months
    • Consider frequently overlooked deductions
digression frequently overlooked deductions
Digression! Frequently Overlooked Deductions
  • Dedicated credit card interest and charges
  • Protective shoes
  • Laundry costs
  • Mobile phone
  • Internet connection
  • Home office depreciation of plant and equipment
  • Second or third car costs
  • Salaries to children and spouses
  • Superannuation related persons
  • Newspapers and magazines
  • Travel allowances
  • Home to work travel with bulky equipment or offensive items
  • Lap tops, PDA and brief cases
  • Co-contribution for children
summary of tax savings
SUMMARY OF TAX SAVINGS
  • Summary of tax savings