Vary PAYG

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

What is the PAYG Tax System

Those of us who are employees have taxes automatically withheld each payslip. At the end of the tax year, we submit our tax returns and claim back any deductions.

Most people consider their tax return like a sort of bonus, for spending on a new TV or holiday.

But a tax return is just what the ATO owes you, as you have paid too much tax through the year.

Self-employed individuals, on the other hand, receive income untaxed. If they (or their business) earns less than $75,000 this tax is due after the end of the tax year. Many save the tax owed for over a year in a mortgage offset account. It’s a great way to save on interest as long as you won’t accidentally spend it! If they earn more than $75,000, they need to register for GST and pay tax quarterly.

The PAYG system means employees don’t have to worry about calculating tax owed on gross income. This is great for those who have not developed a good money management system.

Time to Level Up?

But I’m sure many of my readers are strong money managers. Once you have complete control over your finances, it’s time to start looking at how to get things working, even more cost-efficiently.

Paying too much tax through the year only to be paid back in a tax return is essentially loaning out your cash to the ATO for free. They won’t pay you interest, although they will charge it if you are late in paying.

The ideal situation is to instruct your employer to withhold exactly the right amount of tax. Then that extra money can be funnelled into investments, or paying your mortgage down.

It is possible to vary PAYG tax withholding. If you know you will receive a roughly $10,000 tax refund at the end of the year, you could alternately ask your employer to withhold $400 less each fortnight.

Also, if your income tends to vary significantly from month to month but you have a predictable annual salary, you can request to vary PAYG to an appropriate amount of tax each pay.

Why You May Not Want to Vary PAYG Tax Witholding.

There are a few traps to watch out for when deciding whether to vary PAYG withholding.

  1. You won’t recieve enough of a tax refund to make the effort worthwhile. Owners of negatively geared property will benefit the most from varying PAYG tax. Those with few deductions to claim will probably find it’s not worth the effort
  2. You must be fairly accurate. Some might be tempted to game the system by getting reducing your PAYG witholding too much. The ATO are not going to give you essentially an interest free loan. If they think you have purposely witheld less tax than you need to pay, the ATO will penalise you.
  3. You must have excellent money management skills to make this worthwhile. Many people use their tax refund as “forced savings”. If they were to vary PAYG to reduce tax witholding, it is very likely they will spend the extra income (and not even notice). If you reduce your PAYG tax witholding, set up a direct debit for the corresponding amount to be directed into savings or investments.
  4. Varying PAYG withholding does not just mean making changes every now and then – it requires continuous attention throughout the year. Things change frequently, including expected income and deductions. You need to make sure your PAYG witholding is as accurate as possible.

How To vary PAYG withholding:

  • Visit Mygov and log in
  • Go to the the ATO website
  • Click on “tax” then “Manage” then “PAYG witholding variation”
  • Complete the form including up to two reasons for varying the PAYG witholding.

You will need:

  • Your employers ABN or WPN
  • Employer’s payroll phone number
  • Your employee number or DOB
  • You will need to have lodged all due tax returns (or completed documentation as to why you don’t need to lodge a tax return).
  • You’ve already have paid all moneys owed
  • You must know your expected income and tax liability

Calculating your Tax Liability

One of the most common ways to vary PAYG withholding is by using a special calculator that can be found on ATO’s website. This tool will help you determine how much variation should occur based on your circumstances, but it’s important to note there are some limitations as well.

For example, many people don’t qualify for varying PAYG if they receive commissions or bonuses instead of an actual salary. Other things like changing jobs mid-year may also affect one’s eligibility for varying tax rates because different rules may apply depending on who you’re employed with at any given time.

By vary PAYG, we mean that the amount of income tax withheld from each payment can be changed. This is done through a process called variation and allows individuals to pay too much or too little in taxes throughout the year.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

steps to prepare for the Financial year end

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

The financial year in Australia is soon coming to an end. Due to the tax cuts this year, you may be receiving a larger tax refund (or smaller tax bill) than expected. Schedule a morning or afternoon right now in your calendar to put in the work and claim everything you are entitled to. Ironically, income earned through your own hard work (personal services income) is the least tax efficient income to receive. Optimise your tax as much as possible, and consider funnelling your refund into starting a more tax efficient income stream.

Financial Year Dates

The financial year in Australia runs from 1st July to 30 June each year.

The ATO requires tax returns be submitted by 31st October, or you risk a fine. This is true for partnerships and trusts as well as individuals.

For those that are already registered with a tax agent, this tax return deadline may be extended. When it is in your interest to delay your tax return submission (ie you are expecting a tax bill) speak to your accountant about your individual deadline.

If you are expecting a tax return this year (anyone with simple taxes and a few deductions), it is in your interest to get this sorted asap. So book your appointment with your tax agent and book a time in for yourself to prepare.

Do you Need a Tax Agent?

Any professionals performing their 1st tax return should definitely hire a tax agent. Ask your colleagues for recommendations to find one that is familiar with your profession and will be able to prompt you to claim appropriate deductions.

If you tax is very simple, and you have performed tax returns through an agent in the past, it is pretty easy to submit your own return, based on previous years.

I can’t see the benefit of attempting to submit yourself if things are more complicated. It’s probably easier to pay a professional if you own investment properties, a trust or are self employed. Your tax agent fee is tax deductible (next year).

Actions to Take Approaching the Financial Year End

  • Schedule a full morning or afternoon to gather all your income and deduction information
  • Schedule an appointment with your tax agent or yourself to submit your return
  • Review your financial plan
  • Rebalance your portfolio if you plan to do that at end of year
  • Now is a good time to update your continuing professional development documentation and make sure your on track to hit your goals

Gathering Information

The ATO website should automatically record income information for employees. You can check on the my Gov website, or your PAYG certificate if your employer still provides one.

Any self employment income through the tax year needs to also be recorded. Hopefully you have kept a track of this through the year, otherwise you will need to search through your online banking to make sure you have got this right.

Investment income also needs to be declared, including bank interest. Bank interest is easily found on your online bank website. Investment income can be a bit more tricky. My experience with micro-investment accounts RAIZ and Quiet Growth in previous years has been that they produce all the documentation, but not for some time after the tax year. Share sight can summarize all your investment income from multiple brokers, and advertises it’s handiness at tax time. I’m signed up as I have brokerage accounts with Pearler* and Commsec but can’t comment on how easy it will be until after I’ve completed the 1st tax return. I’ll let you know!

Next you will want to gather information on tax deductions. If you have a small business, or lots of deductions, it may be worth having a separate account or credit card purely for tax deductible expenses. This makes it a lot easier to keep track of it all.

Deductions May include:

Uniforms – You are able to claim for work specific attire – so scrubs with logos can be claimed, generic smart clothes for clinic unfortunately not.

Education Expenses Relevant to your Current Employment – this needs to be with the aim of increasing your income over the long term. Books, journals and course fees are common deductions.

Stationary – note books, pens, headphones, USBs and cables for work use can be deducted.  A bag purely for work use of reasonable cost, stethoscopes, otoscope and other work specific equipment is deductible.  Paper and ink for your printer is deductible if it is used for work purposes.

Working from Home – If you have worked from home, as many of us have this year there are special rules for 2020-2021. A “Shortcut method” has been introduced where you can claim 80c for each hour you have worked from home. This instead of claiming individually for work related portion of electricity, phone and internet bills, heating and cooling and cleaning. Unfortunately, you cannot use this shortcut method if you were working from home before March 2020. Check out exactly how you can claim on the ATO website.

Home office furniture and equipment (e.g. printer and laptop) can be claimed immediately if they cost under $300. If they cost more, you will need to claim them as an annual depreciation.

Postage costs – for work related post

Tax cuts – You don’t need to do anything about claiming the extra tax you have paid since the 2021 tax cuts. These will be automatically refunded as part of your claim.

Schedule an Appointment

This is an insane period of time for accountants. If you are keen to get your hands on a tax refund, book in early. If you owe money, call your accountant and work out when is the best time to book in.

But also schedule an appointment for yourself to do the prep work. 2-3 hours of work preparing everything for a thorough and accurate tax return could pay very well!

Most people find that other people’s priorities trump their own. There is a good chance if you haven’t actually scheduled a time in your calendar, that you will be scrambling to get it together in an hour before your tax agent appointment. Being called into work to cover a gap in the roster, your child getting sick and a million other dramas will inevitably arise to prevent you getting your tax prep work done.

Missed deductions are wasteful, and inaccurate information could score you a stressful tax audit and get you into trouble. It is not worth getting into strife with the tax return.

Other Financial Year End Activities

Review your Financial plan

Either the financial year end, or the start of the calendar year (or both) are great times to review your financial and life goals. Priorities change, and you want to make sure you are still working towards goals that are meaningful for you. It is also extremely motivating to tick off the goals you have achieved, and reflect on the progress you have made in a year towards the huge goals.

Rebalance your portfolio

The financial year end is also a good time to rebalance your portfolio, if this is consistent with your rebalancing plan.

Continuing professional development

I know. This is very painful! But you’ve got to review your continuing professional development plan and submit all your documentation at some time. Why not get it over in one lot? If you need to pace these exciting activities, at least take the financial year end as an opportunity to schedule your CPD year review and submission(s).

Get sorted for the financial year end! Schedule those appointments. While your busy adulting, subscribe to this blog so you get even better at financial adulting, creating a life of abundance and choice.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Tax Brackets 2021 – How Will You Spend the Extra?

Taxable Income brackets 2020Tax on each dollar of income bracketTaxable Income Brackets 2021Tax on each dollar of Income in bracket
$0- $18,2000$0- $18,2000
$18, 201 – $37,00019c$18,201 – $45,00019c
$37,001- $90,00032.5c$45,001-$120,00032.5c
$90,001- $180,00037c$120,001-$180,00037c
$180,001+45c$180,001+45c
    
Income ExamplesTotal Tax Payable 2020Income ExamplesTotal Tax Payable 2021
$70,000$14, 334$70,000$13, 327
$120,000$31, 933$120,000$29, 577
$200,000$63, 134$200,000$60, 778
Excluding Medicare levy and assuming no salary sacrificing

Tax Brackets 2021 – Saving You up to $2,356

The 2020 budget announced the Australian government were keeping their word following the 2018 Personal income tax plan. Phase 2 came into effect this year, and will be back dated from July 2020.

The 2021 tax brackets changes mean an increase in net pay of between $1000 and $2356. This is already being recieved in your PAYG pay deposits. Have you noticed and captured it?

Your ATO pay rise equates between $40 – $90 per fortnight extra. This may not seem a lot of money, but over the year is enough to pay for an interstate holiday, or start investing in the stock market.

This extra cash is so easily lost in your account, and accidentally consumed by a slight increase in discretionary spending that doesn’t add much lifestyle benefit.

I am not going to lecture and tell you have to save or invest this. It just depends on your goals and progress with your financial plan so far. If you are on track and will use -this money to make you (+/- your family) happier spend away.

If you are still need to get investing, this could be an easy way to start. It’s money you will never miss if it’s automatically invested. Perhaps you can add a little more each year? You could be amazed how fast it will grow into a significant amount. When you feel you are making progress, delayed gratification starts feeling easier, and far less burdensome.

High Income Earners Benefit Most 2021 Tax Brackets Changes

The more you earn (up to $180,000), the more tax you will save. I’m not sure if that’s fair, but the government are counting $180,000 as middle (rather than high) income earners. The low income tax offset was increased from $445- $700

Mid- high income earners stand to benefit even further if the intended “Phase 3” tax cuts come into effect in 2024. The government may decide they need the tax income more than the economy needs stimulation provided by tax cuts.

Your Tax Return May be Bigger

Talk about a great starter fund for investing. The backdated nature of the tax cuts means PAYG employees may have paid more tax than needed. Readers may recieve a larger tax return this year. What it means for your tax return. Make sure you are prepared for financial year end

Changes in Superannuation Too

There have also been changes to superannuation this year. The concessional contribution has increased from $25,000 to $27,500, in line with inflation. A concessional contribution is money you can put into superannuation and only pay 15% income tax, instead of your marginal rate.

The non-concessional contribution limit has increased from $100,000 to $110,000. Non-concessional contributions are those that you have already paid tax at your marginal rate. There is no tax benefit at entry to super, but income from investments is still taxed at the discount 15% inside super. Many start to use these limits in the years leading up to retirement.

The mandatory super guarantee is due to increase from 9.5% to 10% on July 1 this year. Whether this will actually occur remains debated at this point.

The amount you can rollover from your superannuation accumulation account (paying 15% on investment income) to a retirement income account after preservation age has increased with inflation from $1.6M to 1.7M. Income from this account is generally tax free.

Maximise these Opportunities

Doctors income is notoriously tax inefficient. It makes sense to maximise any opportunity to optimise tax.

To capture the tax cuts options are to

  1. Have a money management system in place that separates discretionary from obligatory spending
  2. Set up a direct debit up to transfer the fortnightly/monthly tax cut into a savings or investment account
  3. Make sure you get your tax return right and use any refund to start or boost and investment, or make a worthwhile investment in your lifestyle.

Family Trusts Australia: Will they Benefit You?

This article may contain affiliate links. If there are any in this article they are marked *. An affiliate link means if you click on the link and purchase a product, at no extra cost to yourself, I will receive a small commission.

Family Trusts Australia wide are hugely advantageous to the very wealthy due to the ability to split income and significantly reduce tax burden. 

According to the Australian Bureau of Statistics only 3% of households owned family trusts in 2009-2010.  In total, trust income in 2013–14 exceeded $340 billion. 

Almost 50% of persons with a taxable income over $500,000 have some income from a trust. 

Although not exactly an equitable situation, the government have so far failed to limit these advantages for the very wealthy.  What sort of income is necessary before a trust worthwhile? 

There are many types of trusts.  In this article we will focus on “family” aka discretionary trusts Australia, and testamentary trusts.

What Are Family Trusts Australia?

A discretionary trust is not a legal entity, but a legally recognised relationship between trustee and beneficiary(s). 

The trustee can be a person (usually a parent), a group of people (i.e. both parents) or a company (with parents as shareholders / directors).

Setting up a company involves extra costs, adds asset protection advantages and means in the event of death, a new company director can be appointed. 

The trustee is responsible for the trust, liable for it’s debts and decides which beneficiaries trust income is distributed to.  Trustees are legally required to act in the best interest of the beneficiaries and must be free from conflicts of interest.  

The beneficiary receives income from the trust.  There may be one or several beneficiaries, and with a discretionary trust the beneficiaries can change over the time.

Advantages of Family Trusts Australia

The most attractive feature of a family trust is the ability to split income between beneficiaries to minimize tax.  It is therefore most advantageous when a family has several low-income persons (e.g. adult children, retired grandparents and non-working spouse). 

The trust does not have to pay tax on income, unless it fails to distribute all income.  However, undistributed income is taxed at 45%. 

Beneficiaries pay tax at their own marginal rate.  Children under 18 receiving non-employment income are taxed at penalty rates of 66%.  Therefore, kids are not good beneficiaries until they are adults.

Assets sold from a trust retain the 50% capital gains discount eligibility they would benefit from outside a trust.

Asset protection is often a quoted benefit of a discretionary trust.  If a beneficiary becomes bankrupt or financially troubled due to a legal case, any trust assets can be protected in some circumstances. 

This protection is only valid if the assets have been inside the trust for a number of years before the financial/legal situation occurs.  A discretionary trust is unlikely to provide any protection from your assets in the most likely financially devastating event, a divorce.

Disadvantages of Family Trusts Australia

Discretionary trusts can get pretty complicated, with corporate trustees, and lending strategies that can attract the unwanted attention of the ATO. 

It is harder to borrow to buy property inside a trust, usually requiring loan to value rations of 60-70% as opposed to 80-90%. 

Land tax is payable once you own over a state threshold in land value.  Each state has it’s own threshold, and the threshold is for each individual or trust.  So a family could own three properties in NSW with land value under the threshold of $734,000 without paying land tax, if one property was owned by mum, one by dad and one inside a trust.  However, in Victoria, land tax is charged at a higher rated for properties purchased in a trust. 

Family trusts incur set up and administration costs.  I was quoted $600 for set up, $2000 annually for maintenance.  There are firms online that will produce a DIY version for a fraction of this, but if everything is not correct may cost you far more.  In order to save enough tax to compensate for these costs, assets in the trust probably need to value $300,000. 

Any financial losses in the trust remain trapped inside the trust.  They can be used to reduce tax on future financial gains within the trust, but cannot be used to negatively gear against employment income.

A discretionary trust has a lifespan of 80 years.  Then, your children or grandchildren need to transfer the assets and pay capital gains tax. 

Fixed, Hybrid and Bare trusts Australia

Fixed trusts define the beneficiaries’ predetermined income distribution percentage in the trust deeds.    Hybrid trusts can combine some fixed distributions with some discretionary.  A bare trust has only one beneficiary.

For Example: Family A – Single High Income

Mum earns $300,000

Dad stays at home earns $0

Children 16, 18, 20 all non-earning, studying

Inheritance $300,000

Mum’s marginal tax rate is 45%, dad’s is 0%, and they have 2 adult children who are currently on a 0% marginal rate

Option 1.  Invest in dad’s name

Invest $300,000 in Australian shares – Yield 7% investment income $21000 + Franking credit refund

Buy $300,000 in International shares – Yield 4% investment income $12000. 

Income will gradually increase if reinvested over time and reach the point at which dad will be taxed.

Dad could pay dividend income into superannuation to minimize taxable income

Will be protected from legal issues related to mum’s business if high risk

Option 2. Invest in Superannuation as Non-concessional contribution

Mum has plenty of earnings! They want to invest long-term so lack of access to superannuation not an issue

Investment income taxed at 15% but will convert to long-term lump sum after retirement,

Using super is more advantageous the closer to preservation age you are, as you cannot pull this money out before you meet conditions of release.

Despite mum’s high income, dad is still eligible for the spouse contribution – Mum can claim 18% Tax offset for contributing $3000 to dad’s superannuation.  Dad is not eligible for the low income super contribution unless he earns a little himself.

Superannuation is a type of trust, so offers asset protection

Option 3. Invest via a Trust

Will allow distribution of income to dad and adult children on low tax bracket – perfect for funding university studies.  Once the eldest child is earning an income and on a higher tax bracket, the youngest child will turn 18 and become a beneficiary. 

May be an option for parents many years from retirement who don’t wish to have money trapped in superannuation.  This overcomes the issue of investment income exceeding dad’s tax-free threshold, but once the children are all working further beneficiaries will be required to minimize tax burden (eg retired grandparents).  May also be useful for very few families who already contribute the maximum super concessional contributions ($100,000 per year, each!) 

Also an option to own the business inside a trust of self-managed superfund for income streaming and asset protection. Trusts are less restricted by rules than a self managed super fund (SMSF).

 

Family B – Double Strong Incomes

Mum earns $150,000

Dad earns $150,000

Kids 16, 18, 20

Inheritance to invest 300,000

Option 1. Invest in mum/dad’s names

Mum and dad are both on the 37% tax bracket. Dividends will be taxed at this rate.

? Asset protection an issue for either – do they own a business?

Could consider using inheritance to pay down home mortgage, increasing equity.  Then using equity to invest in a growth asset (eg negatively geared property) in the parent with the better income earning potential.  There will be no tax payable until the property becomes positively geared. In the meantime, losses from investment income are offset against employment income of highest earner reducing PAYG tax burden.    Lump sum is no longer accessible, but there may be cash flow freed up from mortgage pay off.

Option 2. Invest in superannuation

Pay $300,000 investment income into superannuation. Could put in lower income potential parent (using bring forward arrangements) or split between two.  Will be inaccessible until preservation age and income taxed at 15% until rolled into a retirement account.  Asset protection benefits of a trust apply.

Option 3. Invest in trust

Will allow income distribution to children whilst they are over 18 and earning low incomes.  As the children earn better income, further beneficiaries will be required to minimise tax.

 

Variations of Discretionary Trust

Fixed trusts defines the beneficiaries’ predetermined income distribution percentage in the trust deeds.    Hybrid trusts can combine some fixed distributions with some discretionary.  A bare trust has only one beneficiary.  Could split contribution between adults, or put in lower earning potential partners account to avoid hitting superannuation cap.  Cannot access until preservation age, but this does support you in sticking to your long-term goals

For the Aussie Doc Family

I talked to my accountant about ownership of the next investment property. 

There doesn’t seem to be much advantage for us right now over owning in Mr Aussie Doc’s name.  Mr Aussie Doc also hits preservation age in less than 5 years, so superannuation is far more attractive to us.  

We may reconsider at a later date (when the kids are closer to 18) but far prefer to keep things simple and low cost if possible. 

Testamentary trusts Australia

Testamentary trusts are a common feature of wills, and could be far more appropriate for your situation. 

These trusts only come into effect on the death of the benefactor (you!). 

Different from discretionary trusts, there is no penalty tax for children under 18.  They are entitled to an $18,200 tax free threshold similar to adults when receiving income through a testamentary trust. In the event of your untimely death whilst your children are dependents, the tax advantages can help make your superannuation, life insurance and other assets support your family for longer.

A discretionary testamentary trust allows income distribution to vary year to year, to maximise tax advantages, but will involve the trustee making these decisions.  A fixed testamentary trust is probably simpler to manage but may not minimise tax as well every year.   You can pay a professional to act as trustee, this will obviously involve fees but may help maintain family harmony.

A discretionary trust is also claimed to help protect your child’s inheritance from divorce, or if your partner remarries.  It also allows some control over assets, if the child is likely to mismanage the assets.

 

A discretionary trust may be advantageous for family’s with businesses or significant assets outside superannuation, and multiple low-income beneficiaries.  Many families could benefit from a testamentary trust as part of their will.  The aim of the article is to give you an easier to understand summary of trusts.  You must seek independent professional, and carefully chosen advice.  Bare in mind that you starting a trust nenefits your accountant due to fees paid when considering this advice.

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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Tax Returns for Doctors: How to Get it Right

29.03.2021 You may be receiving a slightly bigger tax refund this year due to to the changes to the 2021 tax brackets.  Make sure you put it to good use!

As your salary climbs, you will pay a higher and higher effective tax rate (% of gross income paid in tax).  Personal services income (i.e. doctors’ income from seeing patients) is the most severely taxed income.

Optimizing your tax return is just the start to minimising tax.  Read more tips on reducing tax, and don’t forget to get independent tax advise to ensure any ideas raised are appropriate to your situation.

How do Tax Returns for Doctors Work in Australia?

Australian residents who earning over the tax free threshold need to submit a tax return.   The tax year runs from 1st July to 30th June, and tax returns need to be submitted by October 31st.

Accountants can delay your tax return longer, an advantage if you owe tax.    Failure to lodge a tax return can result in a “Failure to Lodge” penalty of up to $1050.

Employed individuals receive $18,200 tax free, then income is taxed progressively.  Your employer will calculate and withhold tax automatically.

The tax brackets cause some confusion about “crossing the tax thresholds”.

Below is a table demonstrating tax you would pay on $250,000 income.  Medicare levies and surcharges will add a little more for high earners.  The ATO have a tax calculator.

Income Marginal Tax rate Tax charged
1st $18200 0% 18200 x 0 = 0 0
18200- -37000 19% (37,000-18200)x0.19 = 3572
37001 – 90000 32% (90000-37001) x 0.32= 16959
91,000- 180,000 37% (180000-90001) X 0.37 = 33299
180,001 -270000 45% (270,000-18001) x 0.45 = 40499
Total Income Essential Tax rate   Total tax paid
$270,000 35%   94,327

One of the most powerful wealth building levers is Salary sacrifice – the ability to reduce taxation on around $17,000 of your income to 15%.

Tax Returns for Doctors: Deductions

Work Uniforms

You are able to claim for work specific attire – so scrubs with logos can be claimed, generic smart clothes for clinic unfortunately not.

Work Related Education Expenses

These include expenses involved in self education relevant to your current employment, as long as it is expected to help you earn more in the long run.  This often includes books, journals and course fees.

Other Work Related Expenses

Stationary – note books, pens, headphones, USBs and cables for work use can be deducted.  A bag purely for work use of reasonable cost, stethoscopes, otoscope and other work specific equipment is deductible.  Paper and ink for your printer is deductible if it is used for work purposes.

If you work from home sometimes, home office furniture and equipment (e.g. printer and laptop) cannot be claimed immediately if they cost more than $300, but can be claimed as annual depreciation.

Keep records for work related postage costs.

Costs of lighting, healing, cooling and cleaning your home office can also be deducted.

You can either deduct a proportion of the utility and cleaning bills associated with your home office, or claim 52c per hour worked from home.

Internet – A percentage of your internet bill can be deducted for the proportion of work use (more than just emails).

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Professional Expenses

AHPRA, specialty college, union and medical indemnity fees are deductible.

Work Related Travel

If you travel between workplaces (not just between workplace and home) you may be able to deduct some costs for car running costs.

Gifts and Donations

Donations to Australian deductible recipient (ADR) charities are tax deductible as long as no products are received.

A charity calendar for the RSPCA cost is not deductible, but a simple donation to the RSPCA would be.

Generally, donations to individuals through Go fund me or similar websites are not deductible, but all the big charities in Australia are ADRs.

Making sure your donating to an effective deductible charity is a great way to make your donations go further and make the world a better place.

Costs of Managing Tax Affairs

Costs of last year’s accountant fees are deductible.

Income Protection

Income protection for doctors is deductible if outside superannuation.  Consider getting it earlier rather than later, particularly if planning on a mortgage and kids.  Getting this locked in early can save money.

Tax Returns for Doctors: How to Keep Tax Records

There is an ATO app that you can record deductions on through the year.  It warns you not to rely on this.  The first year I used the app it wiped all my records before tax time.  Not recommended after that experience!

The easiest way to keep records is probably to take a photo immediately with your phone, and have your photos automatically backed up in a cloud service.  You can organise your cloud photos into categories such as “Tax 2020”.

It is important to keep your tax records so you can claim everything you are entitled to.  How much does an average doctor deduct?  According to this clever interactive tool , the average RMO earning $37001-$87000 deducts $7285 annually.

If we assume 2 hours tax return preparation, 1 hour to lodge and 2 hours over the year organising receipts, that could make your return $466 per hour (at 32% marginal rate)!

The ATO expects records to be kept for 5 years after lodgement.  Your accountant should keep a copy, but always make sure you have an electronic or physical copy in case ever asked.

A tax audit is a painful process.  The Australian Tax office is not a bunch you want to mess around with.

Tax fraud is one of the few crimes you can go to jail for in Australia!

Be truthful with your deductions, keep records and consider getting audit insurance if your deductions are above average.

If your accountant suggests something that doesn’t sound quite right – check!

The ATO will not accept ignorance as an excuse.

Tax Returns for Doctors: How to Find an Accountant

There are several accountant and financial planning agencies geared towards serving doctors.

Due to your eventual high income, you are attractive bait for companies looking for high net worth clients with complex (and expensive) tax and financial matters.

For a junior doctor starting out as an employee without investment properties, your tax is very simple!  If this describes your situation, your tax return should cost less than $300.

It is helpful to have a good accountant familiar with doctors’ tax returns, so ask around for recommendations at work.  After the first year, whilst things stay simple, you could even submit your own tax return via the ATO app.

Things get rather more complex entering self-employment.  Instead of tax being withheld from each pay automatically, self employed doctors need to withhold their own tax and submit a lot more evidence to the ATO.

Many doctors are hit with their 1st tax bill 18 months or more into self employment.

Some have saved significantly less for this bill than they needed, a very stressful start to self-employment with the debt accrued often taking years to pay off.

If you are planning to enter general or private practice, find a qualified, capable and trustworthy accountant to help you before setting up business.

Tax HECS Calculator

Most junior doctors will have substantial student loan debt.  Your employer will automatically deduct repayments once you reach the repayment threshold ($46,620 in 2020-2021).

Compulsory HELP repayments are based on your taxable income with a sliding scale from 1% to 10% once income hits $136740.

There is no interest charged on HELP debt, but it is “Indexed to inflation”.  Inflation is the factor by which the general cost of living increases each year – in recent times pretty low at 2%.

It is possible to make voluntary extra repayments, but there is no longer an incentive to do this.

If you have debt accruing more than ~2% interest, paying this down, or investing your cash is likely to be more efficient.

Extra HELP repayments may be more efficient than saving in a savings accounts.  The security of an emergency fund beats mathematical calculations every time.

HELP repayments are not tax deductible unfortunately.

Can you reduce HELP repayments below the minimum repayments and invest your savings instead?

The ATO calculates repayments in a way to make this impossible.  Repayments are based on your:

  • Taxable income
  • Net investment losses – If you buy a negatively geared investment property or gear (Borrow to buy) shares and make an annual loss, you will still have to pay HELP repayment on this amount of your income.
  • “Grossed up” salary sacrifice – By salary sacrificing $9010 this is calculated as $17000 gross income.  Most will still save by salary sacrificing but some of the tax savings will go into HELP repayments instead (link)
  • Foreign employment income

If you work overseas, you still have to make your HELP repayments.

The First Home Savers’ Scheme release of $30,000 is not treated as income, incurring no further HELP repayment.

Doctors should have an easy system to keep organised records to ensure they claim all deductions they are entitled to.  The beginning of the new tax year is a great time to start Tax New Year Resolutions by optimising your income for tax.

“You must pay taxes. But there’s no law that says you gotta leave a tip.”
Morgan Stanley

Get prepared for the 2020-2021 financial year end now.

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Reduce Tax Australia: Drs can Make Income Efficient

Tax was my highest expense in 2019/2020 – four times the cost of my next largest expense (housing). Prepare for the 2020-2021 financial year end.

If you’re paying tax, you’re earning income.  If you’re paying lots of tax, you’re earning plenty of dough, so have no reason to complain!

But not all income is equal to the tax office.

Tax avoidance is illegal, and will land you in serious hot water!  Definitely not worth taking any risks.  But the Australian Tax office (ATO) allows tax optimisation.  A small reduction in your tax bill can make a significant difference to your take home pay. Efforts to reduce tax are definitely worthwhile

We will discuss some of the ways to make sure you are paying only the tax you are obliged to in this article, starting with the big power moves, and moving on to the easier, small but important optimisations.

Reduce Tax Australia: Favour More Tax Efficient Income

As your income increases in Australia, the tax efficiency declines substantially due to the “Progressive tax” system (the more you are paid, the higher % of your income you pay in tax).

Taxable income Tax on this income “Marginal Rate” Net income for maximum in bracket
0 – $18,200 Nil 18200
$18,201 – $37,000 19c for each $1 33000
$37,001 – $90,000 32.5c for each $1 69000
$90,001 – $180,000 37c for each $1 137000
$180,001 and over 45c for each $1 No max

29.03.2021 These have now changed, check out the new 2021 tax brackets to see how much less tax you will pay!

Investment income is also taxed at your “Marginal rate”, but Capital gains are discounted by 50% if the asset (e.g. property or shares) is sold after at least a single year of ownership.  If you made all your income in a year from capital gains, you would halve your tax rate!

In contrast. Business income is taxed at a flat rate of 30% with small businesses (up to $50 million annual turnover) currently taxed at 27.5%, reducing to 25% for 2021/2022.

If your business income is produced more than 50% from your personal work /skills (Most GP or private specialist practices) it is classed as “Personal Services Income” and taxed at your marginal rate (completely losing out on the advantageous taxing of businesses).

Business income has to be a genuine business, at least 20% needs to come from business income rather than passive investments (some would open a “Company” to keep assets under and pay tax on rent/dividends on business rates rather than marginal rate).

Once you earn above $37000 annually (32.5% marginal tax), income is more efficiently earned through business (25-27%) or capital gains (Up to 22.5%).

You are actually penalised by earning income through personal effort!

It’s definitely worth investing outside your career in medicine and start creating income taxed more advantageously.

Salary Sacrifice to Reduce Tax to 15%

Salary sacrificing your accommodation costs is as close to a no brainer, easy tactic to reduce tax paid for those whose employer offers this great perk.  Cut through the confusion with my article on salary sacrifice for doctors here.

Utilise Your Partner’s Marginal Rate

Single income families are disadvantaged by the tax system.  A couple each earning $150,000 would pay 32.7% of total gross pay in tax.  A single earner bringing in the same household income of $300,000 will pay 41.2% in tax.

Having a stay at home partner/parent is far from a purely financial decision, and the Aussie Doc household have chosen to make this choice, despite the tax disadvantages.

The one advantage of having a non-earning partner is their marginal tax rate – 0%.  That’s the best you can get!  Your stay at home partner can earn up to $18,200 per year in investment income without paying tax.  That’s better than superannuation!

Remember, to think in to the future – if your partner returns to work will it still be advantageous to have the investments in their name?  Selling the investments will result in paying capital gains tax (hopefully with 50% discount if held for more than a year).

Keeping Lifestyle Expenses within a Lower Tax Bracket

There is an argument for purposely keeping annual spending under the next tax bracket (minus tax), and using the excess income to fund tax advantaged investments, or to allow part-time work.

Pay / grade Income Tax Total tax as % of gross income
Intern $70k 14297 + 1400 medicare levy 24%
RMO ~ $90k 20797 + 1800 medicare levy 26.5%
Registrar ~ $150k 42997+3000 medicare levy+875 MLS 32.7%
Specialist ~ $300k 108097+6000 Medicare levy+ 1759 MLS 41.2%

From the table above, if the $300,000 specialist cut down to 0.5FTE their tax % would reduce from 41.2% to 32.7%.  Instead of receiving $82.80/hr after tax on average, he/she would receive $97.10 net per hour worked.

Not everyone would want to work part-time of course, but the choice to do so is limited by costs of annual living expenses.

The specialist would have to keep their annual spending under $100,991.  How much a doctor allows lifestyle inflation to absorb his / her pay is the main barrier to having this choice.

Reduce Tax Australia: Negative Gearing

I almost didn’t include this for fear of encouraging you to invest to save tax.

Investments should be made for their anticipated (well researched) returns.

Many, many doctors before you have fallen foul of making investments to save tax -and lost a lot of money in the process.  If the underlying asset does not perform, you are literally throwing money away!

But if there is an excellent asset (property or shares) that you would like to invest in, negative gearing may be an added bonus.

Negative gearing is more advantageous as you reach the higher marginal rates.

If you brought a well-researched property, but the costs of holding that property (Interest, property manager, repairs and rates) are greater than income produced from rent, you will be losing money each year.

Australia is unusual in it’s willingness to let you deduct this “loss” against other income sources, therefore reducing tax paid on your primary income, and reducing your loss in holding the property.

The idea is that the increase in house value over time more than compensates for this loss.  The big risk comes with choosing the asset … again, a poorly performing asset completely destroys this strategy.

Reduce Tax Australia: Doctor Tax Returns

You are able to deduct work related expenses at your tax return.

The average intern receives a small refund (A great starter fund for your emergency fund, house deposit or first investment).

More senior doctors deducting significant amounts annually should consider a PAYG withholding variation to adjust the amount your employer withholds for tax out of each pay.

This allow you pay less tax fortnightly – a great strategy if you are self-controlled and can direct the tax saved into a mortgage offset account.

If you are receiving a $10,000 refund, you are effectively lending the ATO that money tax free.  You can bet they won’t return the favour!

If you are a home owner with a mortgage of $100,000 at 3%, you could save yourself ~ $300 in interest over a year by having the tax in your account instead of taken out of your pay.

Potentially deductible items include: 

AHPRA Fees

Medical equipment (eg stethoscope)

Self-education (courses or text books, journal subscriptions)

Branded work uniform clothing (Not regular smart clothes)

Professional indemnity fees

Phone and internet fees for the portion used for work

Laundry expenses for washing work clothes

Home office expenses (eg electricity)

Overtime meal expenses (check specifics with accountant or ATO).

Donations to tax deductible charities

Accountant fees

Travel expenses only if you travel between from your place of work to another (Not just a commute to work) – accommodation, flights, food

You will need to record all these expenses and check whether you can claim them.

Have a system for recording your expenses easily.  The ATO have an app, but the first year I used it they deleted all my data.  I now keep a notes document on my phone with pictures of receipts embedded in document.

Locum Doctor Australian Tax Efficiency Hacks

Travel and accommodation are often covered by the hospital or agency, but if not could be deductable.  For irregular locum travel, you may be able to claim cost of food so keep receipts and remember to ask your accountant.

If you earn more than $75,000 as a sole trader, you will need to register for GST, and pay tax quarterly.

If you earn less than that (as I do with irregular locums when dates/hospitals suit), you are able to keep the entire income until your tax is due after June 30.

For fellow mortgage slaves, this money could potentially sit in an offset for over a year!   Just remember to put aside how much you may need to pay in tax (I just put 50% of income in a “tax to be paid” offset for simplicity).

Accidentally spending tax owed seems to be a common issue, especially for the 1st year or two of self-employed business, so watch out for this!

Timing Income and Tax Deductible expenses Optimally

This is especially relevant to those with a mortgage offset account, as significant amounts of interest can be saved.

For those under the threshold for GST registration (<$75,000 in ABN income) it is advantageous to earn this early in the tax year – if you could earn $40,000 in gross side hustle income in July and sit this in an offset saving 3.3% you will not have to pay up the tax until September/October of the following year – saving up $1500 in interest!

Similarly, although unlikely as powerful is trying to time tax deductible expenses for the end of the tax year.   If you need to buy a new laptop or pay for an expensive course, the want to minimise time between you paying and receiving a tax refund, so your money is in your offset as long as possible.

First Home Savers Scheme

If you’re not yet contributing up to the $25,000 concessional cap (which is taxed at just 15%) to superannuation, and saving for a house, consider using the First home savers scheme to boost your deposit with tax savings.

See the ATO to check eligibility as well as small print conditions.

Mortgage Offsets

Mortgage offsets have been mentioned a few times in this article and for good reason!

For those that have a mortgage, putting your savings in an offset will save you more interest (currently 3-4%) than any high interest savings account (currently 1-2%).

Interest earned from a savings account would be taxed at your marginal rate – interest saved is not taxed.

Australian Tax Optimisation Using Discretionary Trusts

Income splitting is illegal in Australia.  You are unable to split your personal services income between yourself and your spouse.  Sorry!  Again, we are back to the disadvantages of having high and low earning partners as opposed to two moderate earners (significantly more tax for the unequal spouses).

Investment income, however, can be far more flexible.  Property or shares can be put into a “Discretionary trust” where earning can be distributed to whichever beneficiaries are most advantaged that year.

It is worth thinking ahead, small children now will be university students in 10 years and may attract a marginal tax rate of 0%.

Optimising Tax Efficiency of Australian Income – But NO Tax Avoidance!

It is worth making sure you are optimising tax within the ATO guidelines.  Watch out for “tax avoidance” investments or schemes.

Many a doctor has been caught out, motivated to avoid the punitive tax levels associated with personal services income, and lost all their money as a result.

Choose your investment first, then optimise for tax not the other way round.


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How to Save on Tax: Salary Sacrifice for Doctors

How to Save on Tax: Salary Sacrifice for Doctors

Salary sacrifice aka salary packaging means you save on tax.  Employers pay for specified employee expenses (eg rent or mortgage) from TAX FREE pay.  It is generally advantageous to those earning over $45,000.  Salary packaging is particularly generous to health care workers, and even more so to public benevolent institution employees.

Savings vary depend on which health service you work for, fees charged by the salary packaging company and according to some special circumstances discussed below.  You should only salary sacrifice expenses you would have paid for anyway.

Many health care professionals are put off by the complexities, and as a result miss out on significant tax savings

Four Ways to Save on Tax

1. Superannuation

One important thing to check is that your employer won’t decrease their 9.5% payments in to your account as a result of salary sacrificing.  As long as this is not the case, you are likely to benefit from salary sacrificing into superannuation.

Another consideration is that the money you “Sacrifice” will be locked into your super potentially until your preservation age (60 years+).  You will probably never miss this small amount of money going from your pay check each cycle.  If you are forced to leave it, through the miracle of compound interest over 35 years or so, it will grow incredibly.

The first home super savers scheme allows eligible individuals who have made voluntary contributions to super withdraw up to $30,000 of those voluntary contributions for their first home deposit.

Those on higher incomes (fully qualified specialists) need to keep within the super caps – a total of $25000 (from July 2021 $27,500) can be contributed to super in total.  If you contribute more than this, you will get taxed at the top marginal rate anyway, and have fees added as well.

2. Sacrifice “Fringe Benefit Items”

Certain items can be sacrificed up to a value known as the “FBT Cap”. This is depending on your employer but often include:

  • Mortgage or rent payments
  • General living expenses
  • Childcare expenses
  • Credit card repayments
  • Health insurance premiums

Because you are theoretically being renumerated with services/goods instead of cash, the employer has to pay fringe benefits tax on these.  As a result,  employers put a limit on how much you can package under this category – Known as the “FBT Cap”.  For health services, this is generally around $9010.  This is a limit imposed by your employer, not the ATO, meaning that if you have more than one employer you can salary package up to the FBT cap with each employer!

You can salary package up to the FBT package with each employer if you have more than one job!  This could be very handy for those with large mortgages

Sally is an intern hoping to pay her rent from tax free money with a gross income of $70000?

In the table below I have calculated the difference in tax paid by Sally when the $9000 FBT allowance is packaged.  Fees have not been included, as each health service uses a different salary packaging company.

No Salary Sacrifice $9000 FBT Cap packaged NSW $9000 FBT cap packaged
Gross Pay $70,000 $70,000 $70,000
Tax paid $14,297 $11,372 $11,372
Benefit 0 $2,925 $1,462.50

The benefit in NSW is not as generous, as NSW health “Shares” the tax benefit 50% with the employee.

Of course, it’s not that simple.  Sally’s total reportable taxable income increases from $70,000 to a “Grossed up” amount of $78000 (Including tax saved at highest tax rate).  This higher income is used to assess:

  • Medicare levy surcharge (1-1.5% of your income after you start earning $90000, unless you pay for private health insurance instead)
  • Super co-contribution – Maximum benefit of $500 if you earn less than $53564 in 2019-20
  • Private health insurance rebate
  • Required student loan repayments
  • Child support obligations
  • Your entitlement to certain income-tested government benefits.

The medicare levy surcharge is not relevant to Sally, as her grossed up income is still under the $90000 MLS threshold. Yay!

Sally would have to pay an extra $1140 HECS repayments if she chooses to salary sacrifice but will still end up with $1785 cash in their pocket.

If Sally was working for NSW health, she will only have an extra $322.50 in your pocket (excluding fees).

Remember, the extra $1140 in HECS payments isn’t really lost – it’s paying down Sally’s debt instead of going to the tax man.

Lets look at another case

Tom is PGY 3 hoping to pay his mortgage from tax free pay.  He earns $83000 per annum

In the table below I have calculated the difference in tax paid by Sally when the $9000 FBT allowance is packaged.  Fees have not been included, as each health service uses a different salary packaging company.

No salary Packaging $9000 FBT Cap sacrificed $9000 FBT cap sacrificed in NSW
Gross pay $83,000 $83,000 $83,000.00
Tax paid $17,872 $20,797 $20,797.00
Benefit $0 $2,925 $1,462.50
“Grossed up Pay” $83,000 $91,000 $91,000.00

.

Medicare Levy Surcharge

Looks good, but Tom is close to the Medicare levy surcharge threshold ($90,000) and the salary packaging pushes his “Grossed up” pay over.

He will have to pay $910 extra towards a medicare levy surcharge, which reduces his overall benefit to $2015 per annum, or just $552.50 if he is working in NSW health.

If Tom has private health insurance hospital cover, he will not have to pay the MLS, and benefits will return to the original table.

Tom will have to pay MLS if his wage increases to over $90,000 next year, so it’s time to start considering private health insurance.

Student Loan Debt

Tom is still paying off his student loan (there’s no hurry!) but salary packaging will mean he will have to make additional HECS repayments – $1350 per year above his usual payments.  This money goes to paying off debt rather than being lost to tax, so I don’t consider it lost.  But it will mean that Tom’s net pay packet will now be only $665 larger by salary packaging.  If Tom works for NSW, he will be paid $797.50 LESS net pay by salary packaging, but is still better off when debt pay off is considered.

As you can see, if your employer has a “Benefit sharing” scheme, or make the employer pay the fringe benefits tax themselves, it becomes borderline whether there is a benefit to the employee.  For most employers that allow the employee to enjoy their tax savings benefits there is clear cut benefit even despite extra HECS repayments.

If Tom or Sally have child support payments, it will be even more complex. Personal professional advice is recommended.

Benefits of salary packaging increase as your wage increases, with a potential benefit of $4050 per year to a specialist earning $200000 who has private health insurance, has paid off student loans and hasn’t gained child support payments

3. Salary package other Items Unlimited by a FBT Cap

Again, benefits are depending on your employer, but include:

    • Entertainment Cards

Alas not all employers offer this (but NSW health does!)  Up to $2650 can be spent, usually on meals out and entertainment venues tax free!

    • Otherwise Tax Deductible Items

Professional fees, a stethoscope, specific branded work clothes (eg scrubs), laptops or mobile phones used more than 51% for work can be packaged. These are all tax deductible anyway, so salary sacrifice just means you get that tax benefit spread through the year rather than after you do your tax return.  Never seemed worth the effort to me.

However, equipment (including laptops and mobile phones) brought for more than $300 cannot be immediately tax deducted in the same year, but undergo a depreciation schedule. This means you get the tax back spread out over three years for laptops or mobiles – annoying.  This might be worth the effort of filling in a form – through salary sacrifice you will reap the tax benefit back spread over the first year instead.

4. A Tax Free Car and Car Running Costs?

Sounds too good to be true, and it maybe is.  This is a complex arrangement between yourself, a car company that is “leased” by you for a predetermined period of time.  At the end of the lease, you give the car back or pay the book price the car leasing company have listed.

Lots of doctors have regretted entering into these arrangements, the complexities can make it really difficult to work out whether there is a real benefit or not.  The tax savings are often eaten up by excessive interest rates and charges from the car leasing company.

At least a second hand car is now an option through leasing, which may make the strategy more financially sensible

A detailed assessment and independent financial advice is necessary to know whether the benefits go to the employee or car leasing company.  Buyer beware!

Detailed assessment to follow!

Summary

  • Salary sacrificing into super is as close to a no brainer as you can get.  Sign up now if:
    • Your employer will still contribute at least 9.5%
    • You earn more than $45000 and less than $289,000
  • Salary packaging ~$9000 “FBT cap items” (usually mortgage or rent) will result in money saved on tax and you will pay any student loan debt off faster.
    • You will end up with more money in your pocket UNLESS you work for an employer that “Shares the tax benefit” eg NSW and are earning between $80,000 to $90,000 and don’t have health insurance, or multiple student debts.
  • An entertainment card means you can pay for meals out and venue hire from tax free money, but is not offered by all employers.
  • You will save money as long as you don’t package more than you would have spent anyway.
  • Other Non-FBT items are those that are tax deductible anyway- you may want to salary package your laptop or mobile phone to get the tax back in 1 year rather than spread over 3
  • Novated Lease – Buyer beware! Get a professional to assess whether you will really get any benefit

For more information check out making doctors’ income more efficient and the ATO website.

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A Quick and Easy Guide to Superannuation Australia

A Quick and Easy Guide to Super for Interns

Congratulations on showing even passing interest in super at such an early stage of your career!  A little bit of forward thinking at this stage will be a major factor in defining your wealth long-term.  Small steps like ensuring you’re in an appropriate super fund, in the right asset allocation and optimizing your contributions have a massive effect when played out over 30 or 40 years of compound growth on your side!  If you have a little less time don’t worry.  It’s still likely the longest stretch of time you will invest.

Super Powers: Compound Interest and Tax Minimisation

Compound Interest Calculator from Moneysmart.gov.au

This graph demonstrates the amazing effect of compound interest over a 40-year period.  By far the most powerful factor in your lifetime wealth is time investing.

These calculations are based on an intern earning $70,000 whose employer is contributing 9.5% contributions, taxed at 15% ($217/FN net).  Growth is assumed at 7%, with a 1% fee.  This is assuming you never earn more than an average intern wage!

Unfortunately, inflation also has to be considered, so in today’s money, this would be worth around $436000 (assuming 3% inflation).

Easy Guide to Super: Protect your Super from Highway Robbery

Fees are the next major factor that will make an impact on your long-term wealth.   Check what fees you are paying – ideally under 1%, over 2% and you are being taken for a ride.

Some financial advisors will try to charge up to 4%.  Over time, these excessive fees just don’t pay off.

You’ve all heard the adverts – multiple super funds charge you multiple fees, and you’re best off combining them. Do you have any puny super balances from pre-or during medical school?  If so, remember that tiny balance could grow significantly over 40 years…or be eaten up by fees and lost. You can probably get this done in ten minutes!  The ATO can help locate your lost super, and you can roll super from one fund to the other directly on the same site.  Alternatively, you can contact your super funds or find their “Rollover” forms on the website.

Insurance is a big topic.  Check out what you have through your Super, and think about what you need.  Consider seeing an insurance broker if you feel you need better coverage.

Beware some super income protection is only for 2 years.  If your super fund hasn’t received contributions or a rollover in 16 months your insurance gets canceled unless you contact them.  If considering canceling insurance, consider that if you develop a chronic medical condition in the meantime you may not be able to secure insurance again. If children are in your future you are likely to need significant insurance in the future.

Easy Guide to Super: Choose Carefully but Make the Decision

Choosing a super fund can seem overwhelming.  Take an evening to look at the options and make a decision.  Review this every ~ 5 years or when you change employers.  Canstar has a great resource to help review your employer’s default fund and narrow down alternatives if appropriate.  Important factors to look at are fees, insurance, and long-term performance (Over 10+ years).

Asset allocation is another important decision that you should consider early in your intern year.  If you do not make a choice, your super will generally be put into a default “Balanced” fund.

When thinking about asset allocation, consider athe number of years to retirement – generally consider more aggressive allocations with longer to go before retirement.

More aggressive portfolios are expected to deliver higher returns over the long term but are associated with higher volatility.

If you choose a higher volatility fund, you need to be able to ride out severe market downturns.  If you are going to panic and sell during a market crash, a lower volatility choice is likely to perform better for you. MoneySmart has an article on choosing your fund allocation.

Optimise Contributions – Claim All Free Money Available

When I signed up for my first post, I stared at the super options (including how much to contribute) in confusion and followed the advice of a random HR person as to which box to tick!

I’m hoping you will go in a bit better informed!

You will have an option to designate a super fund or allow your employer to pay into their default fund on your behalf.  A minimum of 9.5% is paid by your employer into your super by law, but some employers will pay extra if you contribute voluntarily.  I encourage you to contribute what you need to get the full extra employer contribution if it’s an option.  Again, it’s free money, and you will never miss it if this starts from your 1st paycheck!

In your 1st year, and any time you take a career break you have a special opportunity to claim free money into super. If you have income less than $37697 (which is likely in your intern year as you start work halfway through the tax year), and make a voluntary contribution of $1000 (or $40 per fortnight) the government will give you $500 free money (into super)!

That is a 50% guaranteed, risk-free return!

If anyone else offers you this, they are probably trying to scam you, it’s too good to be true.

Even if you earn up to ~$50,000 in a financial year, you will get some benefit.  Details on the ATO website, but it’s very simple to set up a BPAY every pay cycle to your super account and then claim it on your tax return.  Amazingly, if you claimed the 1st year’s co-contribution and then continued paying the extra $40 per fortnight into super over 40 years you would be $177,043 better off (Assuming Net 6% growth).

The biggest factor that puts people off putting extra cash into super is legislative risk.  The government has a habit of fiddling with super, and delays to future preservation age are likely.  The lack of control you have over your super is a reason to be cautious about putting lots extra in years ahead, but small amounts really add up.  Consider putting in an amount you won’t miss, especially when rewarded by a tax offset or co-contribution.

Read about salary sacrificing superannuation contributions here.  

If you have worked through this list, I think you’re WAY ahead of the pack in building your future wealth. Good luck with your internship, I hope your patients are interesting and your colleagues supportive.   Enjoy!

Check out the up-to-date guide to choosing your super fund.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track with your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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