Frequently Asked Questions
Here are some answers to frequently asked questions so you can quickly learn how MedCapital can help you secure financial independence.
When should I think about Asset protection? I have a number of assets now.
Asset protection needs to be set up BEFORE any assets are acquired. It is can be very costly (stamp duty and tax) to transfer your current assets into a new structure.
However, we have a number of strategies that can assist you with some level of asset protection without the need to transfer the ownership.
Each case will need to be assessed separately and there can be a number of strategies.
What is an investment trust?
Investment trust (typically discretionary family trust) is an ideal vehicle to provide asset protection, transfer inter-generational wealth and tax benefits. Investment income from the trust can also be distributed to lower tax rate to beneficiaries within the family.
Control of the trust can be passed on to the next generation without the need of paying capital gains tax or stamp duty. The assets in the trust will continue to stay within the family bloodline and can’t be accessed by non-bloodline beneficiaries in the event of any separation or divorce.
However, investment trust is not for everyone as it generally cannot distribute losses. Losses must be carried forward to future years.
Speak to your adviser on how this will best work in your own personal circumstances.
What type of insurance should I have?
There are 5 major policies that Doctors should consider to have in place:
- Income protection
- Total and Permanent Disability
- Critical Illness
- Needle Stick Injury
Doctors should aim to have a solid income protection policy from early stages as your ability to earn an income is the greatest asset you have. This is usually recommended on a level premium structure, which is cumulatively much lower than a stepped premium structure over the life of the policy.
Under the income protection you can have either indemnity or agreed value cover.
- Indemnity – the benefit is calculated at claim time. As the benefit is not guaranteed, an indemnity policy has lower premiums than an agreed value policy. e.g. you are not working at claim time, and receive a reduced or no income protection benefit. With a indemnity style policy the responsibility is on the client to prove their income at claim time.
- Agreed – The insurance provider will financially underwrite your case at the time of application. Upon acceptance of your application the provider essentially agrees on the sum insured. This provides greater security to the consumer (e.g. you are not working at claim time, and you are still paid the whole benefit amount).
Total and Permanent Disability-
TPD insurance will pay you a lump sum in the event that you are deemed unlikely to ever be able to return to work. The funds can be used for any purpose you see fit, but are often used to extinguish debt and pay for home and vehicle modifications that may be required depending on the level of disability. This is a very important policy type a that Doctor should have in place to protect his ability to earn income.
For many Doctors they are the main income earner of their family, and in case of a tragic event, many Doctors choose to have insurance in place to leave debt free assets to their families in case of a sudden death. Additionally, other considerations when calculating the required sum insured are future lost income, children’s future education costs, living costs, etc.
The majority of specialist doctors will not earn an income if they are not working because the nature of their profession depends on their personal service. Therefore, any time away from work can potentially cause in economic loss for Doctors.
Critical Illness policy aims to cover medical cost, rehabilitation and incidental costs associated with the critical illness event such as: heart attack, stroke, cancer, etc.
Needle Stick Injury-
A daily risk of working in the Medical service arena is accidental infection and the risk of occupationally acquired HIV. Occupations associated with these fields such as doctors, nurses, pathologists, dentists, ambulance officers,paramedics and police put their health at risk.
Thousands of Australian health care professionals suffer needlestick injuries each year, and this figure is growing.
What is an offset account?
An offset account is a transactional account that is linked to your loan. One of the main benefits of an offset account is the balance being offset daily against the outstanding liabilities of the loan ultimately reducing the interest you pay over the life of the loan. Again, when we consider the importance of compounding, managing your offset account effectively may a great impact on your financial future.
I’m thinking about investing, what’s the single most important thing?
When you consider the fact that as a doctor you earn a lot more money than most people it probably won’t come as a great surprise that the single most important thing when it comes to your financial health is the same as the single most important thing in medicine – do no harm.
Warren Buffet has two rules for investing:
Don’t lose money
See rule number one
If you start saving when you’re 25 and invest 10% of your income at a 10% return, then you’ll have $15M when you retire.
You can live a very high quality of life, both now and when you retire if you don’t do anything stupid, if you don’t take unnecessary risks, and you apply a model so you can systematically and responsibly build your wealth.
I am concerned about asset protection – especially in relation to my family home – what can I do about this?
If you are looking at buying a new family home, your best option may be to put this into your spouse’s name, subject to their own asset protection concerns. Alternatively, you might also consider putting it in a discretionary trust – but you need to be aware that this may preclude you from using the main residence capital gains tax (CGT) exemption on eventual sale.
If you are looking at protecting your existing family home, you might consider transferring ownership into your spouse’s name (subject to duty costs). Alternatively, you may wish to discuss a “gift and loan back” arrangement with your legal advisor to determine whether it might be appropriate in your circumstances.
I would like to protect my home, what should I do?
If you have not purchased your home, you can either have it under your spouse name or under the family trust name. Each option has it’s pros and cons that need to be careful considered before implementation.
If you have already purchased your home, there are also complex strategies using debt and trusts.
Why is it important to structure your debt effectively?
Depending on your goals, circumstances and stage of life you will view debt differently. You might have a fear of debt and a goal of being debt free. By talking to us you will know how debt can be used as a great tool to reduce tax and slowly build wealth. If your debt is not structured effectively you may miss out on opportunities. We say to all our clients, ring us before you make any financial decisions, not after when it may be too late! Debt can also be used as an asset protection strategy.
Why do I need a will?
There is a common misconception that writing a will is expensive and time consuming, and is only necessary later in life. You are a doctor, and understand that tomorrow is not promised. Having a will gives you the opportunity and the control of how you would like your assets distributed when you die. It is a responsible action that you can take, that may save your loved ones with another thing to deal with in a time of grief. It is not a time consuming exercise and we can guide you through the process today.
I want to fund my children’s education and higher education. What should I do? What should I invest in?
You need a plan! The tailored plan will be based on: how many children do you have, how old are they, how much will it cost per year, how old you are, how much do you earn, how long will you work, your your estimated income in the future, what structure that you need to set up to hold the investment, tax consideration, asset allocation consideration, liquidity consideration, minimum return and risk consideration.
There are a number of strategies and products: bond, notes, education fund, managed funds, direct shares, direct properties. That can be used to meet your objective.
Why do I need a financial plan?
If you don’t have a plan for your money, then someone else probably does.
As a doctor you earn a lot of money, but that alone won’t make you set for life. It’s critical to have a financial plan, and to execute on that plan, to build income producing assets in a low risk environment to ultimately replace your income when you retire.
If you save just 10% of your income and build it at a 10% rate of return, you’ll retire with $15M. You don’t have to do anything silly or take risks to have an exceptional quality of life.
I’m young, do I need to start investing now or can I just leave it?
The life of a medical student and junior doctor is one of deprivation. Long hours, debt, personal sacrifices, and little sleep. It’s no wonder doctors want to reward themselves when they start work.
And there’s no shortage of people looking to accept that money from you so you can live the life you ‘deserve’; to get the big house, the flash car, to reward yourself with an expensive holiday. Despite having huge student debt.
The big problem this causes is that it delays you structuring your finances and investing for your future. To put this in perspective, if you save $20 a day and invest 10% of your income at a 10% rate of return, if you start at age 25 you’ll have $3.8M when you retire. If you delay until you’re 35 you’ll have just $1.3M. And if you are really smart and invest 10% of your income from age 25 then you’ll retire with $15M. The power of compounding is huge, any delay will be very costly in the long run.
I’m smarter than most people, I can beat the market, right?
Doctors are used to being the best and not failing. You are well above average in terms of raw intelligence and income, and it can be tempting to think you can size up investments as quickly as you can take a patient through triage.
So many doctors think they can ‘beat the market’, but generally speaking no one beats the market. Warren Buffet has a bet going with ten of the top hedge funds that they can’t beat the market through actively trading it. They are seven years into the bet and the market is up three times that of the top hedge fund. If they can’t beat the market with their teams of experts and researchers, then what chance do you have?
It’s not about timing the market, it’s about time in the market and having an asset allocation strategy that means you’ll do well when the market is growing, you’ll mitigate losses when the market is falling, you’ll be OK in inflation, and you’ll be OK in deflation.
Meal Entertainment and Venue Hire
The 2015 Federal Budget proposed that from 1 April 2016 the Meal Entertainment and Venue Hire will be changed. At the moment there is no cap on these benefits, however the new Budget propose:
- A capped at $5,000 grossed-up (up to $2,550 in cash value only).
- The cap is for meals and holiday accommodation (venue hire) combined (there is NOT a cap for each expense).
- The benefits will be reported (which may impact employee entitlements and obligations – HELP, Centrelink, child support etc.).
It is important to note that these changes are not in place yet. You can continue with the salary package meal, entertainment and holiday accommodation costs as normal and without any cap, as long as your employer allows these benefits, until 1st of April 2016.
The legislation has been proposed, but it remains to be seen whether it will pass through Federal Parliament.
Medical professionals of both public health and non for profit sector will be directly affected if they are currently packaging meal, entertainment or holiday accommodation/ venue hire benefits, or intends to package these benefits.
The changes also propose that benefits will be reportable from 1 April 2016. Meaning that these benefits will be declared on your tax return as Fringe Benefits and could potentially affect obligations such as HECS and child care payments.
Salary packaging provides you with the ability to use pre-tax earnings to pay for certain items. Many doctors pay top tax marginal rate on their earnings, and salary packaging is a common strategy in a doctors’ tax planning strategy.
In summary, any benefits that are provided by your employer which are not in the form of your normal salary are known as fringe benefits. These benefits still to be considered types of income and incur taxes known as Fringe Benefit Tax (FBT).
Medical professionals in public hospitals and not-for-profit hospitals are FBT exempt on many items such as: living expenses card, loan and mortgage repayments, rent, bills and more. There is a limit on how much you can package free of FBT.
What can I package?
There are many items that medical professionals are allowed to package as part of their salary. The main items include:
- Living Expenses – Paying for living expenses with your pre-tax dollars through a debit card,
- Loan and mortgage repayment – for principal place of residence (not available for investment property)
- Rent – Portion of your rent can be paid with your pre-tax dollars
As a rule of thumb, you want to package items that are non-tax deductible, therefore maximizing your earnings purchase power.
Why should I have tax planning?
Tax planning is when you arrange your tax affairs in ways that postpone or defer taxes.By implementing a tax planning strategy, you will have more disposable cash to spend and/or invest your into assets that will provide a bigger return.
In other words, tax planning will assist you to defer income and diminish your tax liability by utilising legal, tax-law provisions, increasing and accelerating tax deductions and tax credits, and generally making maximum use of all applicable breaks available.
It’s important that you don’t change your financial decisions only to defer taxes. Truly effective tax planning strategies are those that permit you to do what you want while reducing tax bills along the way.
Should I pay down my home loan?
Yes, or no.
It will depend on your answers to a number of questions: how old you are, how long are you intending to stay at the current home, will you upgrade, how long before you will upgrade your home, will you keep this property as an investment when you do upgrade to a new home, do you have other investments, how much debt do you have…
Should I pay cash or borrow to buy a new car?
Again, it will depend on many factors such as; how much is the car, is it over or under the luxury car limit threshold, is it a fuel efficient car, whether you are using or planning to use the car for work or business purposes, percentage of work/business use, how old is the car, are you registered for GST, do you currently have a non-deductible debt, what’s your investment strategy.
There are a number of strategies that can be implemented to maximise your tax benefits.
How much money will I need to retire comfortably?
How much money you will need in retirement depends on you. With people living long into retirement, many retirees fear they will outlive their retirement savings. Talking to one of our specialists will help you find the answer to this question. We will understand your needs and objectives, and then apply our technical expertise to formulate strategies for you to follow to achieve your goals.
What’s the big deal about self managed superannuation funds and do I need one?
Self managed superannuation funds (SMSF) are considered useful for those people who want to take more control over their superannuation. Also, for larger superannuation balances, the annual running costs of an SMSF may be less when compared with the fees charged by a public offer fund. While it is generally considered that you need at least $200,000 in superannuation savings to make a SMSF worthwhile, you should discuss the option of setting up an SMSF with your financial advisor.
Are you guys accountants?
Yes, and more.
Generally accountants will process your tax returns, but they don’t help you create a total financial plan for your life.
We help you get clear on what you want and how much income that you will require, then we apply the exceptional wealth model of Protection, Growth, and Enjoyment, so you can have the best chance of getting what you want at the lowest risk.
And yes, we are accountants and we will also process your tax returns!
I am a locum, can I invoice through a company or trust?
Yes, however there are minimal tax benefits. You will be caught under Personal Service Income legislations (PSI) where all income of the company or trust (less deductible expenses) will end up being distributed to you at year end.
I am about to set up my medical practice. What is a service trust, do I need one?
No, you don’t need one, however, it can provide a number of benefits.
Service trusts’ (typically discretionary family trust) can be a great vehicle to employ staff, provide administration service to the practice and hold assets of the practice. The medical practice, then pays a market value service fee to the service trust. The profit from the service trust can be distributed to a spouse or other family members with lower tax rate or can be distributed to an investment trust.
I’m interested, what happens from here?
The first thing we need to do is to get together to understand you; your goals, your aspirations, and your financial situation.
We will then apply the Exceptional Wealth model to build you a plan to have a great quality of life both now and after you retire. The plan will be a responsible one that obeys the principle of ‘do no harm’ to grow your wealth systematically and responsibly.
Your plan will cover the foundations of protection, growth and enjoyment.
With regards to protection, we’ll create a plan for you, ensure you have the right structures for business, investing and retirement, and ensure you have the most appropriate insurances for your income and your assets. We’ll then take ownership of reviewing that plan with you regularly, and reviewing the parts of the plan, such as your insurances to ensure you are getting the best deal.
With regards to growth it is about investment and debt management. We’ll ensure your investment portfolio has a sound asset allocation strategy to protect you no matter what the market does, and we’ll review your debt regularly to ensure you have it in the most tax effective structure and are paying the best rates.
With regards to the enjoyment we’ll create a pre-retirement distribution strategy so you have a great quality of life, so you enjoy the journey and stick with the plan, and a post-retirement distribution strategy so that when your income stops you have adequate income from your assets to replace it so you can maintain an exceptional quality of life.
I’m looking at buying a new motor vehicle – should I be buying this in my business?
This decision is usually based on a number of different factors, including:
- Type of vehicle – does it meet the Tax Office definition of a “car”?
- Cost of vehicle
- Likely level of work-related use
- Your personal circumstances
Deciding if it is worth having the car in the business is determined by calculating the best deductions available in your circumstances. Your accountant should be able to assist you with this process. It is important to remember that there is no one answer for everybody – just because it is better for your colleagues does not mean that it is better for you.
- 2018 Resolutions – Get Your Finances Sorted
- Royal New Zealand College of General Practitioners Conference and Quality Symposium 2017
- The First Steps to Financial Freedom – A Guide for New Zealand’s Junior Doctors
- The Key Issue Affecting General Practitioner’s Finances
- 6. Insufficient Insurance Coverage and Structure