Understanding tax law and what rules apply to you can be difficult at the best of times. The rules often vary depending on what industry you’re working in, and what structure you are operating under.
Individuals working in the health industry such as general practitioners, psychologists, physiotherapists, speech pathologists, occupational therapists, dentists, nurses etc. often find themselves in more complicated tax scenarios, such as contracting out to a practice through an ABN, working on their own as sole traders, or setting up their own practice usually through a company or trust structure.
As such, we wanted to highlight some of the main tax considerations for health professionals that should be taken when moving out of a position as an employee, and into one of the other above-mentioned structures.
GST (GOODS & SERVICES TAX)
GST is an important factor that comes into play once you start working using an ABN. You are required to register for GST if you generate more than $75,000 in income under your ABN over a 12-month period.
You also have the option to voluntarily register for GST.
When you are registered for GST, you are normally required to charge GST at 10% on top of what you are charging to your clients. You are then able to claim back any GST you pay on your expenses where it has been charged, such as insurance and rent.
However, there are exceptions to this rule, whereby certain services or products aren’t required to have GST charged on them.
Medical services are an example of a GST free service. These are defined as either:
- a service for which a Medicare benefit is available
- OR any other service supplied by a medical practitioner/approved pathology practitioner that is accepted in the medical profession as being necessary for the appropriate treatment of the recipient.
Appropriate treatment simply refers to either assessing a patient’s health, planning an action to preserve/restore/improve the patients’ health, or suppling an appropriate treatment to the patient.
There are some other health services that are also GST free, provided they are a listed service, they are performed by a recognised health professional and are necessary for the treatment of the recipient.
If the service is not a medical service or one of the other listed health services, then GST needs to be charged. An example of this may be a medical report that a Medicare benefit is not available for.
This creates an opportunity for those providing these GST free services, to register for GST and claim back any GST they pay on their expenses whilst subsequently not having to charge GST on their income.
Please speak with an accountant if there is anything you wish to understand about GST or if you wish to apply to be GST registered.
SUPERANNUATION
Once you are self-employed and no longer taking a wage, in most situations you will stop being paid superannuation. An exception to this may be where a contractor is working full time in one practice, and still being classified as an employee for superannuation purposes.
As such, it’s important to consider making contributions into superannuation yourself if you wish to continue increasing your superannuation balance as you work.
Besides saving for the future, another incentive for contributing to superannuation is the ability to receive a tax deduction for doing so. You can choose to claim a tax deduction for any funds you personally contribute into superannuation up to your ‘concessional contributions’ cap. Currently the cap is $27,500 for the 2024 financial year.
If you haven’t contributed previously or in some of the last few prior years, there are carry forward concessions available for those with a total super balance less than the eligibility threshold of $500,000.
These concessions allow you to claim a deduction for contributions made in excess of the yearly cap, provided you did not make contributions up to the cap in prior years.
PAYG INSTALMENTS AND STUDENT LOAN REPAYMENTS
Once you are no longer operating as an employee receiving a wage but rather under an ABN, tax will no longer be withheld on your income.
This means you are receiving the gross amount of your pay and tax will be required to be paid on this income at a later date when you lodge your tax return.
This is particularly important for those moving to an ABN for the first time, as money will need to be set aside to ensure you can make your tax payment when the time comes to lodge your tax return.
The same situation applies to student loan repayments such as HELP & HECS debts, as an employer would normally withhold tax on your wage to cover any mandatory student loan repayments. It’s important to understand how the repayment thresholds and rates work so that again, you know how much money to put aside to cover the amount owed.
After lodging a tax return with ABN income for the first time, the ATO will consider the amount of income declared and may enter the person or entity into their PAYG Instalment system.
Entrees into the PAYG instalment system will be issued tax instalments quarterly. Payment of these instalments will count towards your tax payable on lodgment of your tax return for the financial year in which they fall.
The instalments will be based on the most recently lodged tax return up until the point another tax return is lodged, at which point the ATO will reassess the amounts to be paid. We strongly suggest consulting an accountant who can help you assess whether you are paying the correct amount in instalments. Not doing so may result in overpaying tax throughout the year or being left with a significant tax bill on lodgment of your tax return.
PERSONAL SERVICES INCOME & ENTITY STRUCTURES
A common first question we have received working with individuals in the medical profession that are moving into their own business is what type of tax structure they should be using, with options available being sole trader, partnership, company, or trust.
In the health industry from a tax perspective, these options usually do not provide any benefit as most sole traders and small practices will fall under the personal services income rules.
These rules state that income is classified as personal services income (PSI) if 50% of the income received for a particular ‘contract’ is a reward for your personal efforts or skills, rather than being generated by assets or the sale of products.
If the income is deemed to be PSI, then the person who earnt that income must be assessed and taxed in their own name on that income, regardless of what type of structure they are using.
The exception to these rules applying will be in whether it can be established that the income was derived from the business structure of the entity, as opposed to an individual’s personal efforts.
This is assessed on a case-by-case basis, however, some of the factors (not all) that help establish a business structure include:
- Not relying on one particular individual to run the business.
- The number of employees engaged to perform the work the practice offers.
- The presence of business goodwill i.e., business name, reputation, and value.
There may be other benefits in using a structure other than sole trading besides tax rates, however, if the tax rate is the sole motive, then the above should be considered.
We highly recommend speaking to an accountant before deciding on a structure if you are unsure, as going down the wrong path could easily result in wasted spending & opportunities.
There are many other factors to be considered besides those mentioned above, and being caught off guard can easily result in financial distress.
If you wish to enquire with myself or my business partner Ben for assistance with any tax related queries you have and completion of any lodgments with the ATO, you may do so from the contact page of the JET Accounting & Advisory website. You can also contact us directly by emailing enquiries@jetaa.com.au.