We often receive queries from our clients on how to save taxes. In this edition, we continue to put a couple of the most frequently asked questions about family trusts and working from home to our consulting tax specialist – Alan Leung of Aspiron Consulting Group.
Q: Should I carry on my practice using some other structure like a company or family trust?
This is a complex question and there are a number of factors at play, including risk, tax, income distribution etc and the answer largely falls on individual circumstances.
From a tax viewpoint, however, the Australian Taxation Office has issued a number of public rulings in this area (some have been around since 1984). Once you have navigated through the maze of tax jargons and concepts, the following rules of thumb may be useful:
- for those GPs that have a service agreement with a clinic where they do not (or cannot) hire at least one other GP to do the work for them, there is generally little tax benefit to run their GP practice using a company or family trust. This is not to say those GP cannot legally incorporate their practice, but ATO generally does not allow profits to be retained inside the company (at a lower tax rate) or be streamed to another person with a lower marginal tax rate (eg a family member). In other words, the profit must be taxed in the hands of the GP deriving that income within a reasonable time.
- In the case where a number of medical practitioners get together to start a medical clinic, or one hires or subcontracts at least one other medical practitioner(s) to do the technical work, then the tax planning opportunity of running the practice using a company or family trust expands.
Of course, there may be other non-tax reasons why a GP may choose to incorporate their medical practice or carry it through a family trust, which would be best to discuss with their lawyer.
Q: I routinely do some work from home. Can claim a deduction on my mortgage?
Generally speaking, where your home is also your place of business, you may be able to claim a tax deduction on certain occupancy expenses such as mortgage interest or rent, council rates, land taxes and house insurance premiums etc. The amount you can claim must be directly in proportional to the exclusive area you use as the place of business (eg as a proportion of the floor area).
The Australian Taxation Office has issued a number of tax rulings and interpretative decisions that provide further guidance on the criteria in which it would consider a home (or part thereof) as the place of business. They include:
- the area is clearly identifiable as a place of business
- the area is not readily suitable or adaptable for use for private or domestic purposes in associate with the home generally
- the area is used exclusively or almost exclusively for carrying on business or
- the area is used regularly for visits of clients or customers.
For most GPs, this would equate to an area used as a consulting room or surgery where the GP regularly sees their patients. A room or area that is used for writing medical reports, or undertaking studies or research would not ordinarily be considered as a place of business (particularly for those GPs that works at a clinic during the day). The work area, however, may still qualify as a home office and a lesser range of expenses may be deductible (eg electricity, gas, water, internet, telephone etc).
For those GPs who run their practice from home, while being able to claim part of their occupancy expenses may sound like a good deal, they should also be aware that when they sell their home, the business area of their home would not qualify for the capital gains tax main residence exemption meaning they could be up for some capital gains tax in due course.
Disclaimer: The comments above have been prepared for informational and general purposes only and are not intended to provide, and should be relied upon for tax, legal or financial, or accounting advice. You should consult your own tax, legal, financial or accounting advisors before engaging in any transaction or making a claim on a tax return.