In my book “Growing a Medical Practice: From Frustration to a High-Performance Business” I talk about different ways in which Doctors can set up their businesses. The topic I’ve had the most feedback about has been the use of a Discretionary Trusts, or what is more commonly referred to as a Family Trust.
I am quite open about not being an expert in tax, however, there are a few points that are well made:
- Having the right business structure is critical – and this isn’t just for medical professionals but all businesses.
- In general, medical professionals earn their income through “physical exertion” (i.e. doing the work yourself) as opposed to earning business income by employing others, selling goods, or operating equipment.
- Doctors can be considered to have earned Personal Service Income (PSI) which is income produced from personal skills or effort.
Point two and three can create a situation where Doctors are seeking ways to reduce their tax liability – in the past a common way of doing this was via a Trust – to move income away from a key person (you) and distribute it to family members.
Whether PSI rules apply to your individual situation is subject to several vital tests which are based on how much of your income is derived from specific sources, the result of work performed, use of business premises and so on. A taxation specialist (usually your accountant) is the best person to make this determination.
What do we know about Discretionary Trusts for Medical Practices?
- All income of the practice goes into the Trust, and the trustee has the power to decide how to distribute the income to the beneficiaries.
- A Trust is a complex structure which has to comply with specific regulations, so establishing a Trust is best prepared by a solicitor or accountant.
- A Trust can provide asset protection and can limits liability in certain circumstances for businesses.
If you’re assessed as liable for PSI – then it’s probable you may not be able to legally distribute your income to other family members via a Discretionary Trust. This is on the basis those family members did not do the work therefore, they cannot get the income.
This can mean, even if you have a Trust structure set up to receive your income, the PSI requirements may over-ride the structure, meaning any PSI income is taxable to the individual who performed the actual work.
Medical Professionals are in a precarious position here – as most of the income earned is from “physical exertion” there is potential for PSI to raise an individual tax obligation, which negates the benefit of the Trust structure that has been set up.
Another option available to Doctors who are running a Medical Practice which I touched on in the book was running the business via a Service Business. This involves setting up a separate entity that provides the administration support to the Practice – this entity is responsible for the costs of operating your practice.
You may have already received specialist structuring advice from your accounting and tax partner when you first set up the practice, but you need to ensure the structure is growing with you.
It’s worth, time to time, taking the opportunity to reflect on the structure of your practice and that you have your operations set up to reduce your level of exposure and risk, whilst minimising your costs and tax obligations. This area of law changes regularly.
If you would like a complimentary assessment of your business structure, schedule a 15-minute discovery call with me here.
*this blog is intended for general guidance purposes only, please always seek your own independent legal and tax advice.