When owning a medical practice, it is important to always have an exit strategy in mind, even if you have no short-term plans to exit. This can include considerations such as the timing of your exit, potential successors and the estimated value of your practice.
However, one crucial yet often overlooked step is deciding what to do with the proceeds from the sale of your practice (assuming there are proceeds as sales to medical practice consolidators are quite common these days). Suddenly, you’re faced with a substantial sum of money that needs a new home. Depending on your life stage, financial position and goals, there are several common approaches to consider.
Consulting your advisors
First and foremost, it is essential to seek advice from your accountant and financial advisor if you are contemplating a sale. There can be significant tax implications and opportunities that you need to understand. For instance, you may need to allocate a portion of the proceeds to cover a potentially large tax bill the following year.
Your accountant and financial advisor will work to understand your goals and objectives, helping you develop a strategy that aligns with your financial aspirations.
Clearing non-deductible debt
If you still have a home loan or any other non-deductible (non-income earning) debt, using the sale proceeds to clear that debt can be a prudent step. This can provide a sense of financial freedom and reduce ongoing interest expenses.
Investing outside of superannuation
You have the option to invest the money outside of superannuation in shares, property or other asset classes. It is generally advisable to do this through a family trust, as it offers greater asset protection and flexibility in reducing tax on those investments.
Maximising super contributions
You could make concessional (tax-deductible) contributions up to $30,000 per annum to superannuation. This can help reduce the tax on the sale while boosting your superannuation for retirement. If your superannuation balance is less than $500,000, you may be able to catch up on prior years in which you did not contribute the maximum amount while also creating a substantial tax deduction.
You can also make non-concessional (after-tax) superannuation contributions to enhance your balance. If eligible, you may even be able to make a small business superannuation contribution, allowing for additional super contributions and minimising tax on the sale. It is crucial to consider which super fund is suitable and how this money will be invested.
Case study – Dr Susan Smith
Dr. Susan Smith recently received the proceeds from the sale of her ophthalmology medical practice. Before initiating the sale process, Susan engaged her accountant and financial advisor to explore various strategies.
Susan received $1 million from the sale. She used the first $350,000 to clear the remaining mortgage on her home and then made $150,000 of tax-deductible superannuation contributions by maximising her $30,000 concessional contribution limit and catching up on prior year contributions, minimising the tax on the sale. The remaining $500,000 was invested in her family trust, with sufficient funds set aside within the trust for the anticipated tax liability next year.
Overall, Susan successfully cleared her mortgage, built her superannuation for retirement with a significant tax deduction, and invested the rest to generate a passive income stream. Susan may also qualify for the Small Business Capital Gains Tax concessions to reduce her tax bill further, but this is subject to eligibility.
As seen in the example above, there are many competing and complex options for utilising your medical practice sale proceeds and the tax outcomes can vary significantly.
If you would like to discuss your exit plan or financial goals, contact your local William Buck advisor.
