Making debt structuring work for you in your Medical Practice

Debt structuring is something that’s easy to do but often not done well. If it’s done correctly it can add significant advantages for you and your practice.

Given the Medicare freeze, many practices are finding that top line growth isn’t where they’d like it to be this year and in the future, so they’re looking more towards reducing their expenses to increase their profit. Sometimes we need to think outside the box; can increasing an expense increase your overall profits? It can if a side effect is creating a tax deduction, but not reducing your cash flow.

What interest is tax deductible?

Interest can be deductible for a number of reasons; it might be borrowing to buy an investment property, it could be borrowing to buy shares or borrowing for business expenses. For this article we will focus on borrowing in relation to business expenses.

Interest is deductible under Section 8.1 of the Income Tax Assessment Act 1997:

General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

As you can see, (b) refers to interest being deductible as it’s necessarily incurred in carrying on a business gaining or producing assessable income. Therefore, if the debt relates to a business loan, then it will be deductible under the second limb of Section 8.1.

For an Associate Doctor, borrowing for their business can be a variety of things; it might be borrowing for staff superannuation, for staff wages, for service fees, or just to pay normal business expenses. If that’s the case, and if they’re genuine expenses for the business, then that interest will be tax deductible.

What is the purpose of borrowing?

This is something that should be asked more regularly, because it’s the purpose of the borrowing that makes the interest tax deductible. If you were to borrow $10,000 to pay some of those business expenses mentioned earlier, then that interest would be tax deductible. It’s important to understand the purpose of the borrowing to make sure you are borrowing for business expenses and that it’s done correctly.

Example

If Dr A is running a business and borrows $10,000 to pay service fees, then the interest on that borrowing would be tax deductible.

Dr B works at the same practice, in a very similar situation. He spends all his money on paying his business expenses, finds he is a little short on funds for that month and borrows $10,000 to top up, which he then transfers out through drawings, or through the trust account, down to his personal funds.

Where Dr A borrowed $10,000 specifically to pay for business expenses, Dr B already paid his business expenses, so when Dr B borrowed his $10,000 it was essentially for private use, because he transferred it to himself for personal purposes. Therefore, Dr B wouldn’t get a tax deduction for his borrowing.

As you can see, they are very similar examples and both of them are in the same situation, but Dr A has structured his debt better and he has borrowed for the right purpose. Neither of these doctors have higher debt than the other, but Dr A has deductible interest, and Dr B unfortunately does not have deductible interest.

How big a difference can debt structuring make in your situation?

It might not sound like much, however it does make a big difference that can build up over time.

Example

Dr A is a contracting doctor, running a business and working at a practice. Dr A borrows $50,000 over the year to pay for his service fees. The borrowing for those service fees would then be for business purposes and therefore the interest would be tax deductible.

The same doctor has a reasonably aggressive strategy in relation to trying to pay down his home loan, so when he gets his income from the practice, he’s paying down as much as he can, through trust drawings (and structuring to get that right is important) to his personal account, to pay off his home loan as quickly as he can. Coincidentally, that might be a similar amount that he’s paid off his home loan ($50,000) and he therefore doesn’t have any higher debt exposure, he just has some debt as tax deductible.

In this situation, his borrowings for a year would be $50,000 (assuming 5% interest). If his home loan is at a similar rate, he’s probably reduced the interest in his home loan by about $2,500 for the year, but he’s also got interest in his business loan of about $2,500. In this situation, the business borrowing is tax deductible, and therefore he is getting a tax deduction on that loan. Now, that might not sound like a lot of money, but if we extrapolate that over five years, all of a sudden the numbers start building up and it works out to be a bit over $18,000 over five years (in this example).

Please note, the above example was fabricated for this article, is very specific and has controlled variables. It is important to make sure the structuring is right, the personal affairs are right and the tax advice is right, not only with the business loan but the personal borrowing as well. Make sure you seek professional advice in relation to this, to make sure you have it done correctly. It can make a significant difference, but you have to make sure you are borrowing for the right purpose and doing it for the right reasons and that it is part of a genuine strategy for your business. Please seek advice when you can regarding this.

Double Accolade for Advisory Firm

Prosperity Advisers selected as national finalist in two categories of the 2017 Hillross Financial Services Awards.

Prosperity Advisers is delighted to confirm that Hamish Landreth, Financial Adviser has been selected as one of three national finalists in the prestigious Hillross Financial Services award for Adviser of the Year. This significant achievement recognises Hamish’s genuine commitment to his clients by making a tangible difference in their lives. Prosperity Wealth Advisers Director, Gary Dean won the award last year.

Prosperity Advisers has also been selected as one of three finalists for Advisory Firm of the Year. The award recognises overall professionalism, operational excellence, superior client service, advice delivery and implementation.

Allan McKeown, CEO and Founder of Prosperity Advisers Group says, “We are very proud to have Hamish as part of the Prosperity team and are delighted that his hard work, knowledge and passion for his clients has been recognised.”

“We are also very proud of the collective efforts of our people across our Newcastle, Sydney and Brisbane offices. To be announced as a finalist in the Advisory Firm of the Year is a wonderful recognition for the tremendous effort our team has demonstrated showing ongoing excellence in providing personal financial advice as well as a clear passion for clients.”

The winners will be announced at the AMP National Advice Summit in Sydney, 17-19 January 2018.

The effect of exponential technology on the GP practice

Two years ago, the global market for wearable medical devices and portable patient monitoring systems was valued at $4 billion and is forecast to grow a staggering 28% per annum over the next 8 years. Australians are renowned worldwide as early adopters of technology, with 80% of us having smartphones. In this article we discuss the effects of the exponential growth in health technology, and the way we see that impacting on general practice.

What is mHealth?

Electronic health, or eHealth as it is familiarly known, was a term coined to encapsulate healthcare practices involving electronic processes and communication.

But what is mHealth and why do practices need to know about it?

mHealth, or mobile health, is the new buzzword which has emerged to describe the practice of medicine, supported by mobile devices.

What kinds of technology are currently available?

While there has been significant improvement in existing technology, for example digital stethoscopes and portable scanners, the real growth is seen in the area of mobile phone apps.

There are apps in the market which can detect, count and time pregnancy contractions and allow parents to listen to the heartbeat of their unborn baby, and apps which provide medical grade ECGs and test blood pressure, blood sugar and lung capacity.

While some may consider these to be gimmicks, what’s more important to consider is where the information might be heading. The obvious next step for patients wearing medical devices, and extracting that information via companion apps, will be those patients wanting to see that information used in personalising their healthcare plans and helping them to monitor and manage chronic healthcare conditions and improve their overall wellness.

What does this mean for general practice?

Practices need to consider what it will mean when they start receiving a constant flow of information from a patient’s device; how is that information going to be measured and monitored? If a semi-urgent or urgent condition arises, who will monitor the condition? Where does the duty of care rest for that information and any action that needs to be taken as a result?

Even if practices resist this form of remote monitoring, they need to consider what other technological advancements will mean for them. Technology will enable GPs to consult with their patients via tablets, laptops and other wireless devices, which technically means that patients will not need to be physically present for consultations. Practices now have the opportunity to become a kind of centralised medical hub, collecting data from mobile technology worn by patients and from other healthcare providers, to provide a centralised model of care. Innovative opportunities exist for practices in areas such as shared electronic health services, telehealth or patient portals. These technologies could allow practices to operate far more efficiently, by allowing administrative staff to be redirected to other opportunities.

But even if practices aren’t interested in pursuing some of these current opportunities, technology growth raises other issues that they need to consider. So what other issues may arise for general practices? To date, we know general practices have been quite slow in adopting some of this new technology. There are quite valid concerns in areas such a confidentiality, privacy and patient security. Even an issue apparently simple as communicating test results with a patient via email raises all kinds of issues around patient security, privacy and technology. Finally, in an era of digital communication, the whole issue of managing patient expectations and patient/doctor boundaries becomes far more problematic.

With bodies like RACGP saying that mobile technology presents significant innovative opportunities for the healthcare sector, mHealth is a fascinating area and practices should be abreast of what is happening in this space and be prepared for it to cause a wave of development in the industry.