We understand that starting in private practice can be daunting, so we’ve put together a list of key tax and accounting fundamentals that will help you with a smooth transition into contracting work.
To commence work in private practice, it can be as simple as registering an ABN in your personal name. This is also referred to as a being sole trader. We can assist you to apply for your ABN which then attaches to your Tax File Number and profile with the Australian Taxation Office (ATO).
You then may choose to voluntarily register for GST, depending on the terms of your agreement. If you are starting in private practice as a dentist, whereby you pay a service fee to the practice as a percentage of your patient fees, it may be advantageous to voluntarily register for GST. This means you will be able to claim back from the ATO, the GST credits on the service fees and associated business expenses.
If your agreement terms are more aligned with working as a locum dentist, you may choose to wait until you reach the GST threshold of $75,000 to register for GST.
If you are unsure which of the above methods applies to you, we can review your agreement from an accounting and tax perspective and advise accordingly. It is also pertinent to have your agreement reviewed by a solicitor to ensure you understand the various clauses in the agreement.
Income tax / Tax holiday
As you’re in private practice, your income tax will not be paid along the way as would be the case if you were an employee. This is referred to as a tax holiday as tax is not paid along the way, but rather upon lodgement of your income tax return.
As a result, in the first year, you will have an amount of tax to pay once your tax return is lodged. As such, it is suggested that you set aside (and do not spend) approximately 30% from each pay you receive.
Going forward (upon lodgement of your first income tax return) the ATO will enter you into what is called the PAYG instalment system. Here, the ATO estimates how much tax it believes you need to pay in the next year (based on your prior year income tax return) and determines a quarterly amount that you must pay to them. Please note that this will probably take at least two years to approximately line up with your estimated tax bill at year end, depending on the level your income increases each year.
These instalments will go towards your income tax liability for that year and you will have a smaller amount of catch-up tax to pay upon lodgement of your tax return.
The key to all of this is to make sure you put aside the 30% for tax. Then, while the ATO will eventuallycatch up, you will have money set aside to pay your tax.
If you have a HELP debt, you should set aside an amount greater than 30% to ensure you have adequate funds to cover your impending tax liability.
Personal superannuation contribution
As you will not be earning wages, you will be responsible for the payment of your own superannuation. The maximum cap for the 2022 financial year is $27,500. You can contribute progressively during the year or as a lump sum prior to 30 June of each year. Any amount contributed during the financial year will be eligible for a tax deduction so long as you do not exceed the contribution cap. It is important to note that any super you contribute will be locked into your super investment until you’ve reached retirement age.
If you do not wish to contribute to super initially, you can take advantage of any carried forward concessional contribution caps in future financial years, allowing you to carry forward any unused portion of the yearly contributions cap for up to five years. This allows you to contribute additional amounts in later financial years and obtain a tax deduction for amounts contributed.
It is recommended you open a separate bank account associated with your ABN and business transactions. This allows for your net pay to be deposited into your business bank account, from which you can then pay any business expenses. The amount left over can be transferred to your personal everyday account. This ensures all transactions for your business are located in the one account (nice and clean from your accountant’s perspective) and for you to have oversight as to your net earnings from your business.
It is also advisable to have another separate bank account, or your mortgage offset account, to put aside the money for your tax and super as mentioned above.
You’ll need to keep record of all invoices and receipts for your income and expenses for a minimum of five years. Electronic copies of these are fine – no need to keep a box full of paperwork. You may wish to use an online storage platform such as Dropbox, Onedrive, Google Drive or similar, from which you can share a link to your accountant. This drive could contain a folder of invoices which you can then share when paying your quarterly BAS.
Alternatively, you may wish to look at an online bookkeeping option, such as Xero, which can sync your business bank account and associated transactions. It also allows you to attach tax invoices to transactions to prepare your BAS, Tax Planning or Income Tax Returns seamlessly.
Should you have any questions or require further advice, please contact your William Buck health specialist.