Tax Planning for Doctors, Lawyers and Other Professionals
Running your own practice as a doctor, a lawyer or an engineer can be a rewarding and pleasant experience if you choose the right structure for your business.
Understanding what Personal Services Income (PSI) and service entity arrangements is an advantage for your business to thrive.
What is PSI?
PSI is income earned by an individual using mainly their skills and knowledge to provide services to clients.
This means when PSI rules apply, the business income has to be distributed directly to the person who provide the service and limits the ability to split income to their family members who are on lower tax brackets.
In a nutshell, regardless of which business structure you have, the income is taxed at your marginal tax rate that can go up to 45%.
What are service entity arrangements?
A service entity is the entity that provides facilities including premises, equipment, receptionists, cleaning, administration, bookkeeping and general running costs to the professional so they can focus on providing services to their clients.
The benefit of having a service entity arrangement is to separate the business mark-up for all other expenses from the base service fee that relates directly to the professional's skills and knowledge.
As a result, any profit made by the service entity can be distributed to other family members or associates in a tax-effective strategy.
ATO views service entities as acceptable arrangements as long as relevant tax rules are complied and market rates are used by related entities.
Speak to Tax Advisors
Setting up a right business structure for your practice is important and will save you a lot of money down the track, so it is advised to speak to an expert at the start.
You can call us on 0421 028 050 for a consultation session.