Archive for May 2014

Simple Income Protection Methods for Doctors

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Income protection is a usual concern for doctors who seek to sort their finances – personally or with professional help. Here are some common income protection methods:

1.       Set up an emergency fund. Emergency funds are separate accounts from your savings and expenditures. These represent at least six months of your salary and are placed on near-cash or easily-converted-to-cash instruments like time deposits.

2.      Purchase an insurance policy. This is a regular way of protecting one's income earning capabilities. Policies are designed to make payments to you or your beneficiaries in case of unemployment, incapacity, or death.

3.      Invest in mutual funds. Unlike insurance policies that have fixed returns, mutual funds can offer higher payout as these rely on the funds' performance. A fund can be managed to invest in bonds, equity, both bonds and equity, or even commodities and foreign exchange (Forex).

4.      Invest in stocks. New players in the stock market can use a method called dollar cost averaging where you would need to invest a certain amount on regular intervals in a stock you think would perform well in the long run. This method helps reduce the impact of volatility on your investment purchases.

5.      Invest in a business. You can also set aside cash you can use to start a business that would bring in extra income for your family's use.

There are more available strategies to protect your income. Qualified financial planners can present you with varied or even combination of options tailored to your needs.

When Can Doctors Claim GST Credits?

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Running a medical practice has a lot in common with operating other businesses. For example, you have to hire a staff and prepare their payroll. You also have to deal with overhead costs, such as office space rental, utility bills, inventory supply costs, and the like.
Of course, one can’t forget about taxes, which all doctors are obligated to pay. Fortunately, they can claim goods and sales tax (GST) credits when they purchase items that will be used in the conduct of their business. The following conditions must be met though:

You Must Be Registered
You can’t claim GST credits if you are not GST-registered. The Australian Tax Office (ATO) has made this easier though; aside from the standard pen-and-paper method, you can now also register online, over the phone, or through a registered agent.

Purchase Price is GST Inclusive
If the item you purchased already includes GST in its price, you can claim the GST as a credit. Note, however, that you need a tax invoice as proof of this, and the invoice must explicitly state that the price is GST inclusive. Fortunately, suppliers are required to provide tax invoices for most purchases worth $82.50 and above.

You’re Paying for It

You can’t claim GST credits for something you didn’t buy. For example, you can’t claim a credit for a PC someone else bought and gifted to you even (though it will be used as an office computer).

Making Small Dents to Tax Expenses

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With a marginal tax rate of up to 46.5 per cent, doctors commit a large portion of their income to tax. To deal with this, doctors use different strategies to lessen their tax burdens. The largest cuts are made by making concessional superannuation contributions, engaging in tax-friendly investment opportunities, and altering their business structure. However, there are other ways to make small dents to tax expenses.

These include:
  • Claiming a deduction on the expenses to launder lab coats and uniforms, as covered under Taxation Ruling TR 98/5. Doctors may provide written documentation of their actual laundry expenses, or use the Commissioner’s estimate, which pegs the price of washing work clothes at one dollar per wash, if the work clothes are laundered on their own, or 50 cents per wash, if the work clothes are laundered with private clothing.
  • Claiming a deduction on the purchase of lab coats and uniforms, as covered under Taxation Ruling TR 97/12. Lab coats and uniforms are deductible if they are not capital in nature (such as the initial purchase of judges’ ceremonial robes), private or domestic in nature, or incurred in earning tax-exempt income.
  • Claiming a deduction on the purchase of low-cost work-related items amounting to $100 or less, such as prescription pads, notepads, etc., as covered in Law Administration Practice Statement PS LA 2003/8.

The examples above are just a short sampling of deductions doctors can claim. Physicians are encouraged to consult with medical accountants in their area to learn more about tax deductions.

Superannuation Tax Minimisation Strategies

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Contributing to superannuation in order to claim deductions on income tax is one of the most effective ways that doctors can slash their tax liability. Using a practice called salary sacrificing, doctors can contribute to the super using pre-tax income. This allows them to claim a deduction on their taxes and attract a 15 per cent rate, a significant reduction from their marginal tax rate of up to 46.5 per cent.

Doctors should be wary about contributing too much to superannuation, however. Concessional contributions, or contributions made before tax, are capped at a limit predetermined for each year by the Australian Taxation Office. When going above this limit, doctors may be charged an excess concessional contributions charge that would add a further 5.6 or 5.8 per cent to their tax liabilities.

Upon reaching the age of 60, doctors also have another superannuation tax minimisation strategy at their disposal: transition to retirement. This allows them to withdraw up to 10 per cent of their super account balance each year. This pension, which is tax-free, can then be used as an additional source of income.

When dealing with superannuation tax minimisation strategies, doctors should work with experienced accountants to ensure that these are correctly put into place. This will help them avoid any problems that they might otherwise be unaware of, as well as keep their tax minimisation efforts on track with the latest changes to caps and excess concessional contribution charges released by the ATO.

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