Taking on the role of Partner in a professional practice or as a newly appointed barrister, is both exciting and challenging. The leap from employee to non-employee comes with a lot of opportunity and demands, but one element that is often overlooked is understanding the financial implications involved.
Here are some essential practical and tax tips to help you navigate this transition as smoothly as possible.
Structuring your practice
- Slotting into an established structure?
You will want to understand the type of structure you are going into. Take time to consider issues such as your personal liability (if any) and how you will be remunerated. Another key piece is understanding how the firm makes money. - Going out on your own and establishing your own practice?
This would require a more detailed conversation, preferably with a suitably qualified tax advisor or accountant. - For barristers
It is crucial to establish yourself as a Sole Trader and register for both an ABN and GST.
Income tax and budgeting
As you shift from having tax automatically withheld on your salary to earning income from the structure, it is vital to stay ahead of your tax obligations to avoid financial strain in the future.
A tax-free break — for now
One ‘perk’ of your new role is receiving a 12–24 month tax free holiday. You will receive gross payments and only be taxed on these payments when you lodge your next income tax return. However, you will need to pay a significant lump sum tax payment to the ATO and then transition onto quarterly tax instalments. It usually takes at least 2 full year income tax lodgements to reduce the size of the lump sum tax payable upon lodgement of your tax return.
Understanding the irregularity of tax payments
As the lumpy tax payables and associated quarterly instalments can be quite unpredictable, setting aside enough funds would be prudent. This is to ensure you are able to fulfil these future payments and not spend the future tax payable.
A recommended strategy is to have a separate offset or bank account for income tax payments to assist with the budgeting process.
It is also worth exploring potential tax planning opportunities resulting from the new structure.
Personal superannuation contributions
Factoring in changes to your personal superannuation contributions is another significant element as you move up the ladder. If you were previously a salaried employee; your employer would have been paying employer contributions on your behalf. As you are no longer an employee, you are responsible for your superannuation contributions going forward.
From a tax perspective, consideration should be given to utilising the annual concessional contributions and receiving the benefit of an associated income tax deduction. If you do not want to use the annual concessional contribution cap and have less than $500,000 super balance, you can carry forward concessional contribution caps into the next financial year. Superannuation is one area where planning is essential due to the complex rules.
Be mindful if your taxable income is above $250,000, you may be subject to an additional 15% contribution tax (total of 30% contribution tax on concessional superannuation contributions). This is known as the Division 293 tax and the ATO will automatically levy this once you lodge your income tax return, and your superannuation fund has provided the required data to the ATO.
Record keeping
Similar to being an employee, you can claim an income tax deduction for cost incurred by you in earning your income.
For barristers acting as sole traders, one useful option to consider is utilising a cloud-based software to simplify their record keeping and associated BAS lodgements.
Be sure to lodge and pay your ATO obligations on time to prevent future issues.
Insurance
Insurance is another critical aspect to consider. Having the necessary business and personal insurance coverage is essential to protect yourself and your practice. Be cautious with personal insurances held as an employee and how a change in your role may impact the ability to claim upon the existing insurances as your remuneration structure has changed.
Stepping into a role of a partner or a newly appointed barrister is major milestone that you should be proud of. However, it comes with a lot of change and steps to consider. Beyond the adjusting to the new responsibilities and added pressures, it is important to make sure you have the right processes in place and advisors to assist with your taxation and other obligations.
