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.
Marginal Tax rate
18200 x 0 = 0
37001 – 90000
(90000-37001) x 0.32=
(180000-90001) X 0.37 =
(270,000-18001) x 0.45 =
Essential Tax rate
Total tax paid
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
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).
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 calender 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 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.