(First published in Australian Doctor Magazine - August 2021)
It may have passed many of you by given the speed of recent events, but another financial year has recently ticked over. The future, of course, is always uncertain — but the need to look at your past experiences and results to prepare for what looms is prudent.
With that said, here is a list of the top five resolutions for the coming months.
1. Do a financial health check
Having closed the books on 2020/21, it is crucial that you take some time to review your overall personal and business position. This will help in identifying what worked and what didn’t, and what needs to change.
What was your practice’s profitability, financial position and growth status?
How does your financial performance compare with the industry benchmarks for last year?
Are there any new risks inherited during the year, such as payroll tax exposure, personal services income rules, fringe benefit tax, risks of Medicare audit?
What is your after-tax cashflow position from last year? Are you reducing your group’s tax position in every way you can?
Examples include deductions for working from home when providing telehealth, work-related car and travel claims, home-office expenses, leasing and instant asset write-off benefits.
Once you have reviewed the above, it should provide you with enough input to assist in setting some new goals for this financial year.
The key take-away is that if you don’t have the answers to your health-check questionnaire, consult an expert who does.
2. Prepare for payroll tax
Payroll tax varies in terms of thresholds and tax rates depending on the state in which you are based.
For example, NSW currently has a 4.85% tax rate per annum for every dollar of taxable wage paid above $1.2 million.
In Queensland, it sits at 4.75% or 4.95% per annum (depending on the total taxable wages) for every dollar paid above $1.3 million of taxable wages.At a glance, maybe your staff salaries and wages are well under these thresholds, so you won’t need to consider the risks.
However, following the Victorian 2019 decision in the Optical Superstores case and the NSW 2019 Homefront Nursing case, the various state governments have been actively running payroll tax audits on medical and dental practices, particularly around the net payments flowing from the medical practice to the independent contractor — which in the past has not been subject to payroll tax.
So as a business, you may be pushed into the uncharted territory of payroll taxes, which can impact on your practice cashflow.
The key take-away is that it is critical to review whether your practice is at risk and decide on any remedial action needed.
3. Watch out for ‘income splitting’
In March, the ATO released a draft set of compliance guidelines to assist practices to self-assess the level of compliance risk involved with their profit-sharing (also known as income splitting) arrangements.
While the draft guidelines are still under consultation, the ATO has stated that once finalised, they will apply to the whole 2021/22 financial year — meaning you will need to consider their implications for transactions from 1 July 2021.
Under the guidelines, the ATO says it is primarily concerned with arrangements where, without good commercial reasons, the compensation received by an individual professional practitioner (IPP) is deemed to be artificially low due to income-splitting arrangements with related entities, resulting in an ultimate tax-minimisation benefit for the IPP.
The ATO has already been gearing up a dedicated team to identify any arrangements that fall outside these new guidelines.
As a result, understanding your current arrangements is crucial.
The ATO will be rating businesses on their level of risk to determine the level of its engagement in scrutinising your arrangements.
The guidelines state that professional services firms (including medical professions that carry out any income-splitting activities within their business structures) are also required to self-assess their level of risk on an annual basis, and document their assessment for compliance purposes in the event of any future ATO reviews and audits.
As you would expect, there is a degree of complexity to these rules which will need to be digested, with several tax calculations that must be performed in order to complete the risk-assessment process. This process will need to be conducted annually, based on the prior year’s pattern of distributions.
4. Benchmark your practice performance
Now that the 2020/21 financial year has drawn to a close, it is the right time to compare your financial and non-financial data with your industry peers. This can offer valuable insights on the key performance indicators that are working (or not) in your practice.
The focus here is on trading, performance, staffing levels, utilisation, operating costs and asset utilisation.
The results can also be an important tool to use with your bankers or potential investors.
Many medical practices are using external benchmarking tools to identify and improve on their practice profitability.
The key take-away is not to be left behind. Consider commissioning a benchmark report for your practice.
5. Plan for succession
If you are a practice owner, you are likely to have spent most of your lifetime building up your assets (including your medical practice) which have possibly grown in wealth over time. That is great.
But have you considered what will happen when you decide to leave or retire from your business?
If not, consider what is needed to achieve a well-defined approach to transitioning more quickly out of the business.
This is about choosing your successors and deciding whether they are equipped with sufficient skill sets, what their training requirements are, and their future intentions in wanting to take over your practice.
It is also wise to consider ways of improving the value of your practice and goodwill prior to succession.
Then come the operational, financial and legal issues that will need to be looked at by both you and your successor.
The key take-away is to plan now.
If you have any questions regarding the above, contact Associate Director of Business Services and Taxation, Sam Gadani at sgadani@prosperity.com.au. Alternatively, we have Specialist Health Sector Advisers in each of our offices. If you would like to speak to one in your location, call 1300 795 515.