If you’re a medical professional in private or group practice, ensuring your practice structure is optimised for asset protection, tax efficiency, and business goals is essential. Structures set up at the start of your career may not fit your current objectives, especially if your practice or partnerships have evolved. Here’s how to evaluate your structure for the new year and some key tips for getting your practice on the right track.
Sole Practitioners
Starting out or practicing as a sole trader with an Australian Business Number (ABN) remains a favoured structure for many in private practice. Operating under your ABN allows you to claim GST credits on eligible business expenses like equipment, service fees and other outgoings, though you may only be required to register for GST if your turnover exceeds $75,000.
A common misconception is that setting up a Trust or Company offers greater asset protection or tax benefits. Unfortunately, these structures generally do not add extra protection. Regardless of the structure, you remain responsible for your professional actions.
For tax purposes, income earned through personal exertion is subject to Personal Services Income (PSI) tax legislation. PSI rules require that income attributed to you for your work is taxed as your personal income, regardless of the structure used. Essentially, ‘you do the work, you pay the tax.’
Our article on personal services income delves deeper into this issue.
Group Practices: building for growth and partnerships
If you’re an established sole practitioner or already running a medical practice, transitioning to a structure that accommodates potential future business partners and other ownership changes, can unlock growth potential and tax benefits.
A popular initial structure is often a sole trader practitioner, where you may or may not pay a service fee into a discretionary trust. This structure is great if your vision is to continue on your own. However, if you’re considering bringing on a partner or wanting to pass on a legacy, a discretionary trust is not the right fit, as it lacks fixed entitlements to income and decision-making. This structure limits flexibility since new owners cannot be added to this structure unless they are family members.
To bring in partners, consider transitioning to a Unit Trust or Company. These structures allow for proportional ownership, fixed income entitlements, and voting rights. New partners can join the practice, or current owners can sell down their shares or units creating a foundation for sustainable growth.
Restructuring Considerations
Restructuring from a discretionary trust to a more growth-friendly structure requires careful planning. Working with a tax advisor and legal team will help you navigate tax obligations, capital gains concessions, and transfer duties in advance and can provide you with the advice and comfort to ensure that the transition occurs in a legal and tax effective manner.
Trading Through a Unit Trust
A Unit Trust offers fixed entitlements based on unitholder percentages and benefits from the 50% Capital Gains Tax (CGT) discount. However, it has specific requirements and limitations. For instance, unit trusts must distribute all net profits to unitholders annually, with taxes assessed based on distributions even if cash payouts aren’t made. Additionally, losses remain within the trust to offset future profits and transfer duties may apply when new members are admitted.
Trading through a company structure
Company structures are attractive for several reasons: they provide clear income entitlements based on ownership and allow for retained earnings. A company’s profits can remain in the business and be taxed at the corporate tax rate, which is currently at 25%). This can be a significant tax advantage over other structures, as shareholders receive dividends with attached franking credits. Unlike unit trusts, companies don’t have access to the 50% CGT discount, so consider your long-term goals.
How do I choose the right structure?
Choosing the right structure depends on your goals, the practice’s growth trajectory, and how you envision your role within the practice. There is no one-size-fits-all solution and the best outcomes often come from consulting with someone knowledgeable about the nuances of your profession. Discussing your goals with an advisor will give you clarity on the structure that best supports your current and future plans.
Taking the time to review and, if necessary, restructure your practice can have lasting financial and operational benefits. As you plan for the new year, consider whether your current setup truly supports your goals—and make any changes needed to ensure you are well-positioned for growth and success.
If you would like to review your current business structure, contact your local William Buck Advisor.
