However, there are a number of rules already in place to limit income splitting in medical practices. As such, it is timely to consider the rules as they currently stand and the consequential impact of Labor’s announcements.
Labor’s Announcement on Discretionary Trusts
Labor plans to tax distributions from discretionary trusts at a minimum tax rate of 30%. This rate will apply to distributions to beneficiaries over the age of 18. While little detail has been provided in relation to the announcements, they are aimed at stopping high-income earners from splitting income with family members in lower tax brackets.
Current Ability to Split Income – ATO Guidelines
The Australian Taxation Office (‘ATO’) allows limited income splitting from discretionary trusts where income is derived from a business (rather than from an individual’s personal exertion). The ATO guidelines provide that a certain level of income derived from a medical practice must be included in the practitioner’s personal income tax return. The ATO provides three tests under which this level of income can be determined and will not open a practitioner up to an ATO review or audit if one or more of these three tests are met.
It should be noted the ATO does not permit a practitioner with no employees to split income, as the ATO considers this income to be derived from the practitioner’s own personal exertion. Therefore, a medical practitioner operating as a sole practitioner through a discretionary trust cannot split professional income with family members by distributing to them.
The impact of Labor’s announcements may only be felt if beneficiaries of income are not otherwise taxed at 30% or higher. It is difficult to quantify this impact with the limited detail of the changes currently available.
However, any impact of Labor’s trust announcements on a medical practice should be considered in light of the ATO rules and guidelines that already prohibit or limit the potential to split income. It is also a timely reminder that practitioners need to be mindful if determining to split income.
Pitcher Partners can assist in reviewing medical practice structures to ensure a practice is operating under an effective structure, while also following the ATO guidelines and not opening itself up to an ATO review.
For more information contact Natalie Claughton or your Pitcher Partners expert.