Terry McMasterMcMasters’ Accountants, Solicitors and Financial

Planners www.mcmasters.com.au

2009 Year Taxation &

Superannuation Planning

• Get the structure right• Get the tax planning right• Eliminate non-deductible debt• Pay maximum super contributions• Get the super planning right• The best investment is your practice• Invest passively in low risk, low cost, commission free

investments• Use debt carefully• Never trust anyone rewarded by a commission• Never touch a tax scheme• Never let anyone else control your money• Work shorter for longer• Take lots of holidays

McMasters’ Golden Rules

• To present a technically competent presentation on financial planning for doctors in terms all attendees can understand and relate to

• To improve each attendee’s understanding of financial planning for doctors

• To allow each attendee to take away at least one specific recommendation that will immediately improve their financial profile

• To allow each attendee to take away at least one specific recommendation that will immediately improve their taxation profile

My Goal Today

• Temporary access to www.mcmasters.com.au through user name albury123 and password albury123

• Everything in presentation is linked back to detailed manuals explanations and case studies on www.mcmasters.com.au

• Contact Terry McMaster on terry@mcmasters.com.au or 9583 6533 if any specific assistance or further information is needed

Further Reading

• Trust based structures are best:– Cheap and easy to set up and run– Legitimate deferral of tax– Amenable to all tax planning strategies– Particularly amenable to debt conversion strategies– Access to concessionally taxed fringe benefits, particularly cars– No payroll tax or other employment on-costs– Amenable to inter-generational financial planning strategies

• Hybrid trusts for group practices• Discretionary trusts for solo practices that are businesses• PSI trusts for other solo practices

Website References: The McMasters’ Way: Legal StructuresDollar Notes 15th January 2006: The use of practice trusts by large practicesDollar Notes 26th April 2006: Practice trusts for personal services income

practices

Structure

Best structure for a solo practice that

is a business

Best structure for a group practice that

is a business

Best structure for a solo practice that

is not a business

Debt conversion strategy

• Deductions for interest (as per slide 6)• Correct use of family trusts

– $3,000 under age 18 threshold in 2009 and beyond– Distributions outside the immediate family– Distributions to investment companies owned by trusts

• Deductions for multiple company cars• Deductions for overseas travel• Employing relatives:

– Spouse, children under age 18, parents• Large deductible Superannuation contributions:

– Gearing – Doctor, spouse, parents, children– Family tax assistance? (stops 1 July 2009)

Website ReferencesThe McMasters’ Way: Tax PlanningTax Planning for Doctors and DentistsThe McMasters’ Way: Superannuation Planningwww.mcmasterssuper.com.au

The main tax planning issues

• Simple Super is great• LDCs are mandatory. Up to $200,000 for a

couple over age 50• Tax benefits up to $63,000 cash a year• Very little tax paid on investment earnings• No tax on benefits after age 50• Height, stability and scalability of income and

borrowing ability means all doctors should maximise DCs each year

References: www.mcmasterssuper.com.au

Superannuation planning: the idea

• Superannuate maximum amount each year:– $50,000 up to age 50,– $100,000 otherwise– Double if you are married: no limit on quantum of spouse contribution once

spouse established as an employee for superannuation purposes– Benefits of up to $63,000 a year [ie $200,000 times (46.5% less 15%)]

• Planning ideas:– LDC for doctor– LDC for spouse– LDC for parents– LDC for children (?)– Gearing– Family tax assistance? (stops 1 July 2009)– Spouse transfer– TTRP at age 55 with salary sacrifice– TTRP at age 60 with salary sacrifice– Double trap– Early trap

ReferencesThe McMasters’ Way: Superannuation Planningwww.mcmasters.com.au

Superannuation planning: the techniques

• Incomes are higher than in metropolitan areas• But hours are longer too• Living costs are lower until private secondary

school fees start• Use practice nurses to qualify as businesses• Use trust based structures, investment

companies and self-managed super funds for investment purposes

• Invest in metropolitan real estate, ie city homes for country doctors

• Passive investment strategies based on commission free investments and dollar cost averaging principles

Issues for Rural Doctors

• A growing issue effecting many doctors that opens up powerful planning opportunities

• Upwards support, downwards support, or both• Special case: disabled children• Ideas include

– Employing parents and/or children, as employees and/or directors– Superannuating parents or children– Superannuation co-contribution– Company cars– Trust distributions to low tax rate family members– Non-concessional contributions for older parents– Guarantee parental loans for DIY reverse mortgage– Rent homes to parents/adult children– Loss making businesses in doctor’s name

ReferencesMcMasters’ Intergenerational Financial PlanningMcMasters’ Financial Planning for Foreign Trained Doctors

Inter-generational financial planning techniques

Example based on client from mid-north Victoria

• Bought rental property in Fitzroy in 1983• Classic negatively geared property in eighties• Eldest child moved in at uni 1990: classic student

household next ten years with tax free board paid to his three kids by un-related house sharers

• Then three kids lived there rent free as young professionals, and bought their own homes as rental properties

• Now lived in by clients as their Melbourne home: have moved to be near the grandchildren

• Wonderful appreciation, and great tax benefits• The same thing will happen over the next thirty years

City homes for country doctors

• Burn out is a real issue amongst older doctors, particularly male doctors in rural areas

• At age 40 most doctors have already done more than a “normal” working life

• High pressure• Health problems• High morbidity rates• Marital stress

Retirement Planning: The Problem

Client’s current projected work pattern

Our preferred projected work pattern

Work intensity

Superannuation planning: the solution

Start early and never stop

• Start early and never stop• Live longer• Have more fun• Do more good• Make more money• Pay less tax• And if you die, even better

Superannuation planning: the solution

• Hard for solo doctors or others with fixed costs.• Profit falls more than proportionately to hours

BEP

Facilitating Gradual Retirement

Solution for solo doctors?• Sell your practice • Amalgamate your practice and negotiate a

lower management fee on own patients and reducing hours

• ensure continuity of care• CGT exemptions on surgery• If all else fails, abandon your practice and go

somewhere else

Retirement planning

• Serious shortage of GPs right around Australia• Most practices are desperate for assistance• Age is not an issue if you are a GP• You are interviewing them, they are not

interviewing you, and will be flexible on working hours and related issues

• No reason why any doctor in good health cannot start to retire at age 55 and finish at age 75, earning a very high income in a very tax efficient form each year

The good news

Dr John is a married 61 year old part time GP with $200,000 of practice income, and $100,000 of investment income comprising an unrealised capital gain of $30,000 on his home, an unrealised capital gain of $20,000 on his practice premises and $50,000 of dividends in his self-managed super fund.

Dr John’s tax profile looks like:

Tax planning for a 55 year old GP(See financial planning for older doctors on

www.mcmasters.com.au)

Income Tax

Dr John’s income $34,000 $4,200

Betty’s income $20,000 $2,100

John’s super $55,500 $8,325

Betty’s super $55,500 $8,325

Car costs (two cars) $15,000 Nil

Deductible business interest $10,000 Nil

Deductible overseas travel $10,000 Nil

Government co-contribution Nil ($3,000)

Unrealised capital gain: home $30,000 Nil

Unrealised capital gain: surgery $20,000 Nil

Investment income in SMSF (tax free) $50,000 Nil

Total $300,000 $19,950 or 6.7%

Dr John’s tax profile

Being average is good.Most professional investors do not achieve

the average.No commissions.

Management fees only 0.35% due to lower cost structure

No need to waste time learning about investments

Work well with dollar cost averagingA small parcel of blue chips shares from

the ASX top 20 will perform the same wayWarren Buffet agrees with us (which may

be reassuring)

Why we like index funds

• Government sanctioned tax haven• Tax benefits of up to $63,000 cash a year• Get the super snowball rolling as big and as fast as

possible and as young as possible• SMSF = a concessionally tax investment vehicle with an

average tax on earnings less than 5% per annum• Doctors have high, stable, long and scalable incomes• Doctors have significant borrowing abilities if something

does go wrong• Makes sense to not pay off debt until super contributions

are maximised• On its own will make every client a wealthy person

Why we recommend doctors maximise super contributions

each year

Superannuation, debt, dollar cost averaging and index funds

• Doctors control their own investment strategies• Low costs: as low as $600 per annum irrespective of

amount of benefits invested• No commissions• No hidden fees and costs• Amenable to our tax planning and financial planning

strategies• Control over trustee decisions• No risk you will wake up to find your money has gone• No need for expensive software and investment portfolio

management systems• Part of our KIS principle

Why we like SMSFs

• McMasters’ Commission Rebate Scheme means clients pay the lowest possible cost

• First year commissions greater than first year premiums• Do not over-insure: its a bet you will probably lose (unless

there is something you are not telling us)• Usually there is no need for trauma or TPD insurance• All premiums should be tax deductible• Consider a 90 day waiting period on income protection

insurance• Consider no-medical universal life cover through low cost

industry super funds including Health Super and HESTA• Do not cancel an insurance policy until you know a new

policy is in place or you are 100% satisfied you do not need the insurance

McMasters’ approach to doctors’ insurances

• No commissions• Minimise the interest rate • Maximise deductibility• Minimise after tax costs of interest• Avoid expensive and tax in-efficient forms of finance, particularly

hire purchase, leases and chattel mortgages• Avoid credit card interest: use automatic payment options• Arrange two separate lines of credit, one for business/investment

purposes (deductible) and one for private purposes (non-deductible)

• Borrow to pay costs where interest is deductible, such as deductible interest, taxation, employer superannuation contributions, personal deductible costs

• Use extra cash flow to pay off expensive non-deductible loans• Consolidate loans wherever possible• Keep it as simple as possible

McMasters’ Approach to Doctors’ Finance