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News Bulletin : ADA News Bulletin March 2011
32 MARCH 2011 Compiled by Stuart Wemyss Many dentists are often recommended not to own assets in their personal name in case they are sued. If you are successfully sued and you don't own anything, you have nothing to lose! However, if you don't have the ability to stream taxable income to other individuals such as your spouse (and consequently have to declare all practice income in your personal name), it can often be tax-inefficient not to own investments in your personal name -- particularly when you have borrowed to acquire them -- as you won't enjoy the negative gearing benefits. This begs the question, what's more valuable; asset protection or tax benefits? WHICH RISK WORRIES YOU MORE? There are two things that can go wrong in life that can result in a dramatic loss of wealth. Firstly, you might be sued by someone, i.e., an action by a patient -- we call this external asset protection. Secondly, you might be party to a relationship breakdown (marital or de facto) -- we call this internal asset protection. You need to decide which risk concerns you the most because often you cannot protect yourself from both. For example, putting 100% of your assets in your spouse's name might provide external asset protection but could cause some headaches should you go through a nasty separation. Protecting against one risk might expose you to other risks so you really need to understand which risk concerns you the most. I am not aware of any dentists suffering a personal loss, i.e., loss over and above what the professional indemnity insurer has met as a result of an action by a patient in say the last decade (more on this later). However, the divorce rate in Australia is over 40%. Therefore, one could argue (based on probabilities alone) that internal asset protection is perhaps a greater risk than external. TAX SAVINGS FORGONE If you are a commission based dentist or operate your own practice and earn more than 50% of the practice's income, i.e., from the patients you see, you'll have to weigh up tax benefits and asset protection -- you can't have both. However, if you operate a practice that employs a dentist (or multiple dentists) who works as many hours as you do, then your practice income will typically be classified as 'business income' and you should be able to structure your affairs so that you enjoy tax savings and asset protection, i.e., you can have your cake and eat it too (often through a company and trust structure). Consider a situation where a dentist, John, wants to invest in a $700,000 investment property. He will utilise the equity in his family home to borrow the total cost (including stamp duty) of the purchase -- say $740,000. The property's taxable loss in its first year, i.e., rental less expenses including interest on the loans is expected to be $36,500. If the property was owned by John personally and he is on the highest marginal tax rate, then he would save approximately $17,000 in tax, i.e., negative gearing benefit. A discretionary (family) trust often provides good asset protection. If John's property was owned in a family trust then the tax loss of $36,500 would be trapped inside the trust and carried forward. Therefore, the dentist could not offset the trust's loss against his income. The trust could carry forward losses and these would eventually offset any profit that the trust makes. This means you don't lose the tax breaks -- you just don't get the benefit now. The difference between owning the investment property in personal name versus in a family trust is just under $250,000 over a 20 year period (in today's dollar). Put differently, placing the business perspectives Save tax or protect your assets? Both? Read on... "There are two things that can go wrong in life that can result in a dramatic loss of wealth... you might be sued by someone... [or] you might be party to a relationship breakdown..."
ADA News Bulletin February 2011
ADA News Bulletin April 2011