Maximizing your superannuation and investing in your own future is a hallmark of any savvy Australian. For doctors, who spend a few additional years in training compared to most other university trained professionals, starting your plan early is doubly important.
If you haven’t started yet, it’s not the end of the world. However the sooner you begin, the sooner you’ll reap the benefits – and the larger those benefits will be. If you are self-employed, you need to think about super more than anyone else. If you don’t act now, you might not have enough money to live on when you retire.
Why super is important for Doctors
Superannuation is a tax efficient financial planning tool that integrates tax planning with investment strategies to produce superior long-term results. Superannuation tax concessions aim to decrease reliance on welfare and increase economic independence in retirement. There are three main concessions. These are:
- Deductions for contributions;
- Low tax on income and capital gains in the accumulation phase; and
- No tax on income and capital gains in the pension phase.
This seems simple enough. And for most people they are a generous set of rules that, if acted on, almost guarantee a comfortable retirement and a significant legacy to the next generation.
Superannuation is the most tax-effective vehicle available to doctors regardless of their employment arrangements, as all doctors are able to contribute money into superannuation pre-tax to reduce their tax liability.
How can a doctor best use the super rules?
Super may not be at the top of your priority list if you’re self-employed. But don’t leave it too late – putting super money away now will make sure you have enough to live on later. Careful planning over the years, even the decades is the key. Doctors should start super planning as soon as possible. Paying the maximum deductible contributions each year, for both yourself and your spouse, is a good start. Get your super balls rolling as early as you can and make a big effort to pay the maximum deductible contributions whenever possible.
Slash your Tax Liability
Doctors tend to be more fixated on taxation than other professionals. Sure, a lot of money can flow into the coffers but, because this often attracts the top marginal tax rate, a sizeable chunk flows right back out again.
But doctors have another disadvantage: those operating their own businesses are not entitled to the 30% company tax rate on any “personal services” income they generate. Doctors must therefore think outside the box to take advantage of the tax-friendly options at their disposal, such as trust structures and self-managed super funds.
One of the first things you need to know when planning a long-term superannuation strategy is the money in your super is taxed at a much more lenient rate than the money you earn day-to-day. Understanding the rates at which super can be taxed is your first step to unlocking a whole host of investment and borrowing strategies that can piggyback off of this reduced rate.
The tax rate on your super contributions is currently at 15%, which is similar to the effective tax rate someone earning roughly in the middle of the $37,000-$80,000 tax bracket would pay. For most doctors, you’ll be earning well above that price range once you become fully qualified, and you’ll be taxed accordingly. Luckily, you can ease this tax amount through making regular super contributions.
What are the tax savings for deductible contributions?
The potential tax savings for deductible contributions depend on the doctor’s age (which determines the amount that can be contributed) and marginal tax rate.
Here is an example of tax saving:
Enter salary sacrificing. By sacrificing part of your paycheque to make an additional contribution to your super, you’ll be taxed for that contribution at less than 15% as a separate figure to your regular PAYG. This not only helps you with your taxes, but also helps raise more money for your retirement.
This kind of agreement is usually made with your place of employment (even if you’re self-employed, as the funds are, legally speaking, employer contributions to the fund). The vast majority of workplaces – especially those who employ high earners such as medical practitioners – will already have some kind of scheme in place, or have similar agreements with other employees.
There’s no upper limit to salary sacrifice contributions, but if you’re a high contributor already it might send you over the superannuation contribution threshold. Going over the threshold means paying an additional tax over the 15% cap.
Check out the Australian Taxation Office’s page on salary sacrificing for more information.
What’s the cap?
However, the superannuation environment is constantly changing – so please contact our financial adviser to find out what the current situation is.
Borrowing from super fund
Through a proxy of a trust operated by your SMSF, you can borrow money to invest in property from your own superannuation, with the income derived from the property being the main source of repayments and serving as security for the loan itself. The doctor can salary sacrifice into super (again, attracting a lower tax rate) and then use that money to repay the loan used to purchase the property.
In simple terms, 85c in the dollar would be used to repay the loan in super, opposed to as little as 53.5c in the dollar if the property was purchased personally, if the doctor was on the 46.5% tax rate. Therefore, an investment loan can be paid off a lot quicker inside of super.
Once it’s in super, it’s taxed concessionally so any rent paid into the super fund is taxed at only 15% for most doctors. The beauty of that strategy is that when the doctor retires and converts the super fund to pension phase, the income generated from that property will be tax-free. Further, the capital gain he makes on the eventual sale of the property will be ignored.
Contact us if you’re considering doing this, as some of the laws and obligations can be very crucial. Why not leave it to the professionals, and rest knowing your money and savings are in safe hands!
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