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What tax deductions can I claim as a doctor?

Medical professionals can incur a range of out-of-pocket costs in the nature of their professional practice and not all employers have a reimbursement program.

As a doctor, you can claim a range of work-related deductions as long as you personally spent the money and have not been reimbursed for the cost, the expense was directly related to your profession, and you have a tangible record, either physical or digital, as proof.

Deductions for medical professionals fall under the following key categories:

  • Car and travel
  • Clothing expenses
  • Tools and equipment
  • Self-education and training
  • Computer and office equipment
  • Professional memberships and subscriptions
  • Financial management; investments, taxation, insurance, donations

In circumstances when the expense is both relevant for work and personal reasons, you must prove the work-related portion and may only be eligible to claim a portion of the expense.

It is vital that you keep a record of all your expenses and maintain your receipts in an orderly manner to ensure that, come tax time, your accountant can process them.

How can I reduce my tax?

As a doctor, there are a number of strategies available to you that are easy to implement and will drastically reduce the amount of tax you pay.

You could put any extra cash you accumulate into a mortgage offset account to reduce the interest on your home loan and avoid paying tax on the interest it would have earned.

You could also put some into your super, where it will be taxed at a maximum of 15% on earnings and 10% on capital gains.

Another good idea is a discretionary family trust, where you can distribute the income and capital to family members on lower tax rates than yourself.
Other perfectly legal ways doctors can beat the tax man include:

  • Salary sacrificing into your super if you are over 55 and drawing an income from super benefits
  • Investing in 10-year bonds where the interest has already been paid by the provider
  • Setting up an investment company, ensuring you never pay more than 30% tax on the investments you buy.

How do I do my tax return?

If you only have your own income as a doctor to declare, you may prefer to lodge your own tax return. If so, the procedure is fairly straightforward:
The ATO offers two online methods

  • myTax – an app for PCs, tablets and mobiles suitable for those with relatively simple tax affairs (i.e. salary and wage earners).
  • e-tax – an app for those with more complicated tax situations (i.e. those with business income, rental income and investments).

You can also lodge your tax using the ATO’s paper forms, although the processing time can be much longer (up to 50 days compared with only 12 days online).

If you are running a business such as a medical practice, you may be better off hiring a medical tax agent or accountant to do your tax for you.

As they are up-to-date with the latest tax laws and deductions that apply to your profession, they can ensure you receive your maximum entitlements.

What tax cycles are important for a doctor?

As a doctor, there are two important tax cycles that you need to be aware of. They each contain key dates for reviewing, submitting or implementing changes;

The financial year (July 1st to June 30th)

Tasks during this period include;

  • Chasing up group certificates
  • Salary sacrificing to your super
  • Preparing and lodging your tax return
  • Reviewing your investment portfolio, estate plan, income protection insurance and super contributions and
  • Submitting your BAS for ABN income (if applicable).

The fringe benefits year (April 1st to March 31st)
Tasks during this period include;

  • Setting your salary packaging arrangements for the new fringe benefits year
  • Ensuring you’re on track to maximise your benefits
  • Topping up your salary packaging as required.

With an activity required in every month of the year, having a good accounting and financial planning relationship will help to ensure you address every issue and make the right financial decisions.

How can medical accountants help me with my tax?

Using the services of a medical accountant ensures that your tax matters are in professional hands, allowing you to focus on the most important aspect of your practice: saving lives and helping the sick.

A medical accountant can help you find ways to reduce your tax burden such as:

  • Setting up a discretionary family trust, where your income and capital can be distributed amongst family members on lower tax rates
  • Making pre-tax income contributions to your super (at a 15% rate), buying property through your super (tax-free) and converting your super into a pension fund, further reducing your tax.

A medical accountant can also help you avoid making common taxation errors such as:

  • Writing off personal expenses as business expenses (failing to clearly identify and classify each expenditure)
  • Inflating deductions, where you claim more than you actually spent and
  • Neglecting to claim small deductions, which can add up to large tax savings over the course of a year.

How do I manage my debt?

Most of us experience debt at various stages of our lives and being a medical professional is no different. The trick is to be able to manage our debts so they don’t get the better of us.

When you first start out as a doctor, you debts are likely to be related to education or setting up a practice. Later on, they may become more lifestyle and asset oriented as you are making more money and spending more as a result.

Whichever stage you are at, the same tips for managing debt apply:

  • Create a budget – itemising all of your income and expenses shows you how much you have left to pay off your debts.
  • Prioritise your debts – paying off those debts first which have the highest interest or attract the highest penalties.
  • Consolidate your debts – rolling all your debts into one low interest loan and focusing on paying that off.

And if you are having difficulty managing your debts, you should seek expert help in the form of accounting and financial advice tailored for medical professionals.

What’s the difference between good debt and bad debt?

Contrary to popular belief, not all debt is bad. As well as the debt which can lead to financial difficulties, there is such a thing as ‘good debt’.

As far as good debt vs bad debt is concerned, good debt is where the interest you are paying is tax-deductible (i.e. interest on loans for shares, rental properties and other income producing assets).

Bad debt is where the interest cannot be claimed on your tax (i.e. interest on loans such as personal loans, credit cards and home loans).

An example where good debt can be beneficial is where you borrow $100,000 from your home loan and invest it in shares where you expect a return of 10% pa.

Even after being taxed 50% on your profit, you end up with $5,000 from your investment.

Bear in mind, this would be using a split loan rather than an equity loan and if you don’t know the difference, you would be wise to obtain professional advice from industry experts on strategies for managing good and bad debt.

What is debt recycling and what role does it play in financial strategy?

Debt recycling involves recycling an existing debt into an interest-only debt (where the interest is tax deductible) and using the proceeds to invest. You can then use the earnings generated through your investments to pay off your existing debt.

For example, if you recycle your home loan (where interest repayments aren’t tax deductible) into a new tax-deductible interest-only investment loan, you can use any payments you would have traditionally made on that loan plus your investment earnings to pay off your mortgage.

Another example of debt recycling is using the interest-free period of your credit card to maximise the time your pay cheque can be kept in an interest-paying account.

Debt recycling plays a significant role in long-term financial strategy. If you carry high levels of debt like a large home loan or a large credit card debt, you can use debt recycling to help you get out of debt, while generating long-term wealth through investments.

How does debt recycling apply to medical practices?

Debt recycling involves turning a non-tax deductible debt into a tax-deductible debt and then using the proceeds of investing to pay off the original loan.

It applies to medical practices when doctors are looking for ways to reduce high debt levels caused by overspending. This can be a problem in the medical community, due to a desire to maintain a lifestyle consistent with one’s peers and also because the banks tend to over-lend to doctors because of their reliable reputation.

The most common form of debt recycling used by doctors involves the family home. You use the equity to obtain an investment loan and then use this to invest in an income producing asset. The return from this is then put towards paying off the mortgage.

As the amount paid off increases, you increase the amount of the investment loan and reinvest it, repeating the process until the mortgage is replaced by the investment loan.

Because it involves the family home, this type of debt recycling should be approached with caution and you should always seek expert financial advice before embarking on such a strategy.

Is debt recycling a smart financial strategy for doctors?

Recycling debt can be a good wealth creation strategy for those on high incomes who can tolerate a higher level of risk in return for long-term gains. Which makes it a smart strategy for doctors.

If you own an expensive family home with untapped equity:

  • You can replace non-deductible debt (your home loan) with tax-deductible debt (an investment loan).
  • Investing in an income-generating asset then reduces your debt even faster by freeing up more funds to recycle.
  • Your wealth creation starts immediately and you can immediately take advantage of attractive investment options.
  • Rather than just one asset (your family home), you’ll be able to hold a diversified investment portfolio, helping you to reach your wealth goals sooner and to retire earlier.

As with any investment option, there is always a risk of prices falling or interest rates rising, so you should always seek professional advice from a financial advisor if planning a debt recycling strategy.

How do I start my own medical practice?

Establishing your own medical practice requires a lot of planning and there are a number of factors that you’ll need to consider:

  • Personal preparation – do you have the skills to run a business (other than medical skills) and if not, are you prepared to learn them?
  • Creating a business plan – this should cover everything from establishment costs and financing to marketing and targeted patient base.
  • Achieving compliance – among other things, you will need a Medicare provider number, Australian Business Number (ABN), general practice accreditation and be registered for GST (if applicable).
  • Finding the right location – is the premises in an area of demand, accessible to patients, not too close to competitors? Is it suitable for a medical practice and zoned accordingly? Does it have the potential for future growth (i.e. room for more doctors)?

Obviously, you won’t have the time or skills to run every aspect of your practice yourself, so partnering with accountants, taxation and financial experts who specialise in working with doctors is also an important consideration when setting up your medical practice.

Which business structure should I have for my medical practice?

Having the right business structure is an important decision that will directly affect the return you receive for your hard work. There are several options available, each with its own advantages and drawbacks;

  • Sole trader – where you work as a locum or run your own practice. While easy to do, it is harder to maximise your return for your work.
  • Partnership – where two doctors join in business and split the income and expenses equally. Considered an old fashioned structure and is no longer very popular.
  • Trust – has the sole purpose of accumulating wealth for the benefactors and if set up correctly, can offer many wealth creation strategies.
  • Company – an incorporated entity where the shareholders decide on the wealth creating strategies. On the downside, it can be expensive to establish and wind up and the reporting requirements can be complex.

Whichever structure you opt for, you should seek professional advice from experts familiar with financial matters as they relate to the medical profession.

How to improve patient numbers for my medical practice?

Growing your medical practice in a competitive marketplace can be a challenge. But it can be achieved with the right strategy. That includes having the right team behind you and making your customers your primary focus.

Ways to boost patient numbers and grow your medical practice include:

  • Staying competitive – differentiating yourself from your competitors by doing things better than them, whether its providing complimentary services in the same building, employing the latest technologies or simply providing better service.
  • Being customer-centric – making your customers feel valued and appreciated at every stage of the process, from booking an appointment through to paying their bill.
  • Hiring the right people – employing staff with a combination of good technical and people skills, so they can provide an all-round superior level of service.

As well as your employees, you should also work with accounting and financial experts who can offer professional advice that drives growth and supports your strategy.

What is the best way to build a healthy medical practice?

Running your own practice involves looking after the health of your patients, while also ensuring the health of your business.
If you’re better with people than with numbers, some useful ways to establish a healthy budget for your practice can include:

  • Breaking your business down into its components (i.e. insurance exams, prescriptions, blood work) to understand what’s working and what isn’t.
  • Supplementing services you provide that aren’t particularly profitable with those that draw in larger numbers.
  • Regularly reviewing expenses and implementing cost efficiencies where they present themselves.
  • Paying taxes immediately to avoid a bill at the end of the year or incurring penalties for delayed payment.
  • Automating your billing as much as possible and keeping an eye on outstanding invoices to ensure your work doesn’t go unpaid.

Another tip is not to be afraid to ask for help when you need it. Expert advice from a medical accountant could save you a lot of stress in the short term and a lot of money in the long run.

How important is medical accounting for my medical practice?

A medical practice is like any other business: under constant pressure to return a profit in the face of growing expenses.
Having a good medical accounting system allows you to keep track of your income versus expenses and know at any time the financial shape your business is in.
Advantages of a good accounting system include:

  • An accurate understanding of your cost drivers and revenue generators
  • The ability to find inefficiencies and eliminate waste
  • Smooth integration between departments
  • The ability to see an instant snapshot of how your business is travelling.

As a doctor, you should be spending the majority of your time practising medicine and having the right medical accounting system will free you up to do this.
Whether you choose an off-the-shelf product, have one customised for your practice or employ the services of a medical accountant will depend on the size and profitability of your practice and how seriously you view long term wealth creation.

How can doctors maximise their super?

If you run your own medical practice, you will be responsible for your own superannuation and if you want to maximise your returns, rather than leaving it all to your super fund, you can choose to take a closer interest in your investment options.

Ways to maximise your super include:

  • Having plenty of ‘growth’ assets such as shares and property, which will provide a better return over five to 10 years and more.
  • Having a diversified range of investments to reduce the risk of poor returns from one asset class.
  • Having a long-term strategy even when close to retirement, due to the fact that you may have to draw a pension from your super for the next 20 to 30 years.
  • Putting as much extra cash as you can into your super, as your quality of life in retirement depends upon it.

If you don’t have the time or the inclination to take greater control of your super, another option is to seek professional assistance from an investment advisor specialising in the medical industry.

Is a self-managed super fund (SMSF) right for doctors?

Like any investment option, an SMSF has advantages and drawbacks and you’ll need to carefully consider both to know whether it’s the right choice for you as a doctor.

On the plus side, an SMSF gives you total control over how your super is invested. It can also provide a number of tax benefits in addition to the concessional tax rates available with normal super.

And if you’re looking at purchasing property for a medical practice, doing it through an SMSF can provide considerable tax advantages as well.

On the downside, setting up and managing an SMSF can be costly, involving expenses related to investing, accounting, auditing and insurance. It can also be complex, with stringent compliance requirements, needing a level of expertise that, as a busy doctor, you may not have time to acquire.

But if properly managed, an SMSF can be a great option for doctors and if you’re considering going down this path, it is well worth discussing with an expert specialising in medical finance and investment.

How do I invest using my SMSF?

Thanks to changes in response to growing demand for more investment opportunities, an SMSF can now borrow in order to invest.
Advantages of doing so include increased exposure to capital gains, reduced rates of capital gains tax and access to other tax deductions within the SMSF.

Here’s how the process of borrowing through an SMSF to purchase an asset such as an investment property works:

  • The SMSF pays a percentage upfront and the rest in instalments over a period of time
  • The investment property is owned by a separate entity (a Security/Bare Trust), which the SMSF has a beneficial entitlement to.
  • The Trust leases the property on commercial terms and after being used to cover any property expenses, the income is paid to the SMSF.
  • The SMSF then uses this income, plus other fund income including member contributions to pay the loan repayments.
  • After the loan is repaid, the SMSF has the option of acquiring the property.

Borrowing through an SMSF to invest is a complicated area, with severe penalties for non-compliance, so you would be wise to seek professional advice before committing yourself.

Should I invest in Exchange-Traded Funds (ETFs) using my SMSF?

Exchange-Traded Funds (ETFs) are becoming increasingly popular with Australian Self-Managed Super Funds (SMSFs) looking for investment opportunities. And that’s because ETFs offer a number of benefits to SMSFs;

  • They have small fee structures, making them less expensive to manage.
  • They are steadier investments with fewer tax obligations.
  • They give you exposure to asset classes, without needing to pick individual stocks.
  • They make it easier to invest in overseas markets, without the normal regulatory and taxation issues.
  • They can assist you in meeting your regulatory obligations such as core diversification and liquidity rules.
  • They allow you to make more accurate investment decisions by providing better data in real time.

As these benefits become more widely known, more SMSFs are expected to focus on investing in ETFs. And if you are interested on behalf of your own SMSF, you should talk with a professional who specialises in providing investment advice to those in the medical industry.

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