Medical Specialists - Beware The Company Trap

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13
Feb

Medical Specialists - Beware The Company Trap

13.02.17

Over many years of working with medical specialists, I am often surprised by how many doctors commence private practice using a company, rather than establish themselves as a sole trader.  While there are some attracting reasons for incorporating your private practice, there are a number of drawbacks to be aware of.

 

CASH FLOW

Establishing your medical practice as a company requires all profits after deductible business expenses to be paid out to the practitioner as salary and superannuation.  This means the company is required to employ you, opening up a raft of additional compliance requirements to you as the ‘director’ and also ‘employee’ of the company:

  • You must comply with the Fair Work Act regarding employment rules;
  • You are obligated to register for GST and pay Pay-As-You-Go withholding tax (PAYGW) to the ATO every month; and
  • Every three months you must pay the 9.5% superannuation guarantee charge to your nominated fund – if this is paid more than 28 days after the end of the quarter, the company is unable to claim a tax deduction for this super when it is eventually paid.

 

In comparison, as a sole trader you are not locked into monthly or quarterly time frames for payment of PAYG and super as an employee, giving you more flexibility to pay in lump sums at convenient times. 

 

PAYROLL TAX

In NSW, the payroll tax threshold is $750,000, and any salaries in excess of this are liable to pay the tax at a rate of 5.45%.  Often doctors with a specialisation can exceed this amount, even when employing themselves with no additional staff.  Conversely a sole trader is unlikely to become liable to payroll tax, unless there is a large practice with significant staff that pushes employment costs over the threshold.

 

WORKERS COMPENSATION

By incorporating your practice and ‘employing’ yourself, you are required to establish and annually renew a workers’ compensation insurance policy. The workers’ compensation ‘rate’ is based on the type of work undertaken (e.g. administration) and is multiplied by the quantum of wages and superannuation paid to staff during a year to determine the premium.

 

OTHER CONSIDERATIONS

Another key consideration is the eventual sale of your medical practice, which should always be in the back of your mind, even when commencing private practice. Given the different capital gains tax rules applicable to companies and individuals, the capital gain on the disposal of your business at retirement will see a far greater income tax saving, using the small business tax concessions, if selling a business personally as opposed to a company selling your business.

 

It is imperative that you commence private practice focussing on future efficiencies of cash flow, income tax and retirement planning.  Invest the time and money up front to ensure your structure is robust and in the best interest for your career.

 

Should you have any questions relating to your practice structure, or your medical business in general, please contact us or speak to Maree Macphail on 02 9283 1666.