MDGP 4 june 2009 2009 Year taxation and superannuation planning

1. MDGP 4 june 20092009 Year taxation and superannuation planning Terry McMaster McMasters’ Accountants, Solicitors and Financial Planners www.mcmasters.com.au

2. My goal today • 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

3. The Golden Rules • 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. Avoid non-deductible debt • Insure prudently • Have a will that fits your circumstances • 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

4. Further Reading • Temporary access to www.mcmasters.com.au through user name mackay123 and password mackay123 • Everything in presentation is linked back to detailed manuals explanations and case studies on www.mcmasters.com.au • I refer you in particular to the Common Planning Strategies section and invite you to explore what can be done for a doctor with your age and practice profile • Please feel free to download all our display manuals: they are there for you to use to your advantage • Contact Terry McMaster on terry@mcmasters.com.au or 03 9583 6533 if any specific assistance or further information is needed • No problem with a Skype conference or a teleconference if you think this will be of assistance

5. Today’s Topics • Practice structures • The main tax planning issues • Superannuation planning • Issues for rural doctors • Inter-generational financial planning • Issues for foreign trained doctors • Retirement planning for doctors • Doctors’ (commission free) risk insurances • Doctors’ loans/finance profiles • Estate planning for doctors

6. Practice Structures • 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 Structures Dollar Notes 15th January 2006: The use of practice trusts by large practices Dollar Notes 26th April 2006: Practice trusts for personal services income practices

7. Best structure for a solo practice that is a business

8. Best structure for a group practice that is a business

9. Best structure for a solo practice that is not a business

10. Pre-30 June tax planning ideas • Investment allowance of 50% of the cost of new cars and other new equipment • Co-contribution for low tax rate relatives including parents and kids • Employ kids between age 15 and 18 • Distributions to under age 18 nephews and nieces and other relatives • Pre-pay interest • Defer income • Last chance for large deductible super contributions • Superannuate relatives • Second investment company • FTA eligibility? • Do not touch tax schemes

11. The main tax planning issues • Deductions for interest • 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 References The McMasters’ Way: Tax Planning Tax Planning for Doctors and Dentists The McMasters’ Way: Superannuation Planning www.mcmasterssuper.com.au

12. Debt conversion strategy

13. Superannuation planning: the idea • Simple Super is great • LDCs are mandatory. Up to $200,000 for a couple over age 50 before 30/6/9m $100,000 thereafter • Tax benefits up to $63,000 cash a year before 30/6/9, $31,500 thereafter • Very little tax paid on investment earnings • No tax on benefits after age 60 • Height, stability and scalability of income and borrowing ability means all doctors should maximise DCs each year • New rules make this even more important: no space to catch up later on References: www.mcmasterssuper.com.au The McMasters’ Way Superannuation The Doctors’ Guide to SMSFs The Doctors’ Guide to Simple Super

14. Superannuation planning: the techniques • Superannuate maximum amount each year: • $50,000 up to age 50 ($25,000 from 1/7/9), • $100,000 otherwise ($50,000 from 1/7/9) • 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 • Non-concessional contributions for low income relatives to access the $1,500 Government co-Contribution ($1,000 for three years from 1/7/9) • TTRP at age 55 with salary sacrifice • TTRP at age 60 with salary sacrifice • Double trap • Early trap References The McMasters’ Way: Superannuation Planning www.mcmasters.com.au

15. Why we like SMSFs • 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

16. Why we like Health Super • Not just Health Super, but all industry super funds • No commissions • Low management fees • No middlemen • Good corporate governance • Great for balances less than $100,000 • Some control over asset selection • Low cost universal insurance • Consider multiple industry funds to access multiple and cumulative no medical life cover

17. Why we recommend doctors maximise super contributions each year • 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

18. Superannuation, debt, dollar cost averaging and index funds

19. Why we like index funds 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 averaging A small parcel of blue chips shares from the ASX top 20 will perform the same way Warren Buffet agrees with us (which may be reassuring)

20. Issues for Rural Doctors • Incomes are higher than in metro 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

21. City homes for country doctors Example: 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

22. Inter-generational financial planning techniques • 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 References McMasters’ Intergenerational Financial Planning McMasters’ Financial Planning for Foreign Trained Doctors

23. Issues for foreign trained doctors • Usually have a lower asset base than otherwise • Often supporting family members in Australia and overseas • Strategies discussed previously have a higher relevance and a greater urgency • Many FTDs are ripped off by commission salesmen: recent examples of more than $500,000 of dodgy investments now worth nil • Conflict between KIS and need for a business strategy • McMasters’ Financial Planning for Foreign Trained Doctors details and explains the issues

24. Specific strategies for foreign trained doctors • Should you own your own practice? • How should your practice be structured? • Buying your cars • Buying your home. Where? • Investing through superannuation • Financial assistance to parents • Financial assistance to other relatives, in Australia and overseas • Estate planning • Borrowing issues: cultural conflict

25. Retirement Planning: The Problem • 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

26. Work intensity Client’s current projected work pattern Our preferred projected work pattern Retirement Planning: The Solution Start early and never stop

27. Retirement planning: the solution • 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

28. BEP Facilitating Gradual Retirement • Hard for solo doctors or others with fixed costs. • Profit falls more than proportionately to hours

29. Retirement Planning 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

30. The good news • 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

31. Tax planning for a 55 year old GP (See financial planning for older doctors on www.mcmasters.com.au)_ 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:

32. Dr John’s tax profile

33. McMasters’ approach to doctors’ insurances • 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

34. McMasters’ Approach to Doctors’ Finance • 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

35. Doctors’ Wills and Estate Planning • You can download a sample will and explanatory materials from the McMasters’ Way: Estate Planning • Testamentary trusts • Asset protection against trustee in bankruptcy and the Family Law Court • Income tax advantages for children/grandchildren under the age of 18 • Low risk investment options only • Consider what assets are subject to your will: • Joint tenancies • Superannuation balances • Assets owned in trusts