As a newly self-employed doctor, there are a significant number of considerations that need to be worked through, for example; registering for GST, managing practice obligations, managing tax liabilities and finding new patients. Often, growing wealth at this time can be difficult or become a low priority.
When moving into private practice, you become self-employed and therefore, no one is making superannuation contributions on your behalf. Whether or not you make super contributions comes down to a number of factors, including available cash flow, profitability of your practice, cash flow priorities and other financial planning objectives, like buying a home or paying off debt.
Generally, for most clients the focus in the first one to two years of private practice is more on developing the business. This means reinvesting cash flow back into the business in order to build the practice over time. Therefore, our recommendation is that a client only makes superannuation contributions at the point in time that they are willing to forgo this cash flow into superannuation and not be able to access it until age 60.
If a doctor is not able to make superannuation contributions in the current year, the good news is the government introduced legislation in 2018 that allows for superannuation contributions that are unused in any financial year to be carried forward for five years. This is called the carry forward provision. This strategy allows a self-employed person to make retrospective contributions for previous years. Therefore, once the practice is well established and the doctor has a comfortable level of income that could be allocated to long-term wealth creation, the doctor then is able to make contributions to super including those retrospectively.
In the long-run, our suggestion is that every self-employed doctor should maximise their superannuation where they are able to do so as it is the most tax effective vehicle to grow wealth in Australia.
As a self-employed person when making a superannuation contribution, you can claim a tax deduction up to the limit of $27,500 per year. So, depending on the person’s marginal tax rate they might receive a tax benefit or saving between $10,000 and $14,000 (assuming a tax rate of 39-47%). Once the money is inside the superannuation account these funds are only taxed at 15% (or 30% if adjusted taxable income is greater than $250,000), which is a lot better than a person’s individual tax rate of generally between 39 and 47%.
In addition to the tax savings, superannuation offers doctors a place to allocate their money that is creditor protected. Meaning that if anything ever went wrong with the practice, all funds held in the superannuation account could not be accessed by creditors in the event of a bankruptcy.
Alongside creditor protection, superannuation offers a method of reducing long term retirement risk. Most doctors will aim to sell their practice at the end of their working life and in doing so, risk their retirement savings, depending on what the value of the business is at the time. If the market conditions, legislation or economic climate is not favourable at the time of the sale, the practitioner may not receive very much from the sale of business, therefore not allowing them to fund a comfortable retirement. If superannuation contributions had been made throughout the practitioners working life, there would be a significant hedge against the sale of the business which would help build for a comfortable retirement.
So, in short, a doctor does not necessarily need to make immediate superannuation contributions when starting out in private practice, they have the flexibility to be able to focus on their practice and can make retrospective contributions. However, it is in a practitioner’s best interest to maximise super contributions thereafter at $27,500 per annum, or as soon as they are able to do so.
Walshs are committed to our clients’ needs, we welcome you to contact us for specialist medical, accounting, lending and financial advice on 07 3221 5677, email@example.com or you can book a meeting here.
By Peter Hodgson, Director, Walshs