As a medical professional in Australia, you’re always looking for ways to manage your finances effectively and minimise your tax liabilities. One tool that can help you achieve this goal is a family / discretionary trust. 

Here are the top 5 reasons why medical professionals should consider setting up a trust:

• Asset protection: A family / discretionary trust can provide asset protection, as assets held in the trust are separate from the trustee’s personal assets. This can be particularly beneficial for medical professionals who own a family business or investment portfolio.
• Income splitting: By distributing income to family members who are in a lower tax bracket, you can reduce the overall tax bill for your family. This can be particularly useful if you have children who are still studying or are not yet working.
• Flexibility: A family / discretionary trust provides flexibility in terms of the timing and amount of distributions, allowing you to manage your cash flow more effectively. This can be particularly useful for medical professionals who have changing income levels from year to year.
• Tax deductions: There are several tax deductions available for expenses related to managing a family / discretionary trust, such as trustee fees, legal fees, and accounting fees. These deductions can help reduce your tax liabilities and increase your after-tax income.
• Estate planning: A family / discretionary trust can also be a useful tool for estate planning, allowing you to pass on assets to your beneficiaries in a tax-effective manner. This can be particularly useful for medical professionals who want to ensure their assets are distributed according to their wishes after they pass away.

When is a family / discretionary trust best used? 

It can be particularly beneficial if you have a family business or investment portfolio, as it allows for tax-efficient income distribution. A family / discretionary trust can be a powerful tool for medical professionals looking to manage their tax liabilities and protect their assets.

It’s important to note that there are also tax implications to consider when setting up a family / discretionary trust. While income distributed to beneficiaries is taxed at their individual tax rates, any income retained in the trust is taxed at the highest marginal tax rate.

Some Tax implications to watch out for:

Operating through a company doesn’t automatically lead to lower taxes. Many doctors mistakenly believe that operating through a company will result in reduced tax payments. However, this assumption is not necessarily true. Below are some implications that you need to watch out for:

• Personal Services Income (PSI) Rules: Doctors providing services directly to patients are subject to PSI Rules. These rules limit certain deductions and attribute personal service income to individual practitioners.
• Additional costs: Operating a medical practice through a company incurs additional costs, including compulsory superannuation payments, PAYG withholding, workers’ compensation insurance, potential payroll tax liability, and increased accounting and compliance expenses.
• Individual circumstances matter: The appropriateness of incorporating a medical practice depends on individual circumstances, such as specialty, premises, equipment needs, and staff requirements.
• ATO guidelines for incorporation: The Australian Taxation Office (ATO) provides guidelines for the incorporation of medical practices. Compliance with relevant laws, valid business reasons, no income diversion, and access to greater superannuation benefits are essential considerations.
• Anti-avoidance measures are in place: Australian tax laws have anti-alienation and anti-avoidance measures to prevent income diversion from personal services to family members or other parties.

While there are many benefits to setting up a family / discretionary trust, it’s important to keep in mind that they can also be complex and require ongoing management and compliance.  If you are considering setting up a trust, it’s important to seek advice from a professional accountant or financial advisor who can help you navigate the complexities of trust law and taxation and ensure that it is the right approach for your individual circumstances.

At Aero Accounting Group, we specialise in helping medical professionals setup and manage their family and discretionary trusts. Contact us today to learn more about how we can help you achieve your financial goals and manage your tax liabilities effectively.