Structuring: the trade-off between asset protection and tax deductions
Ensuring you have the right financial structure in place is crucial for any dental practice.
Correct structuring will not only help you to accumulate wealth through tax efficient strategies (i.e. minimising your tax liability), it will also offer you peace of mind by ensuring you have the correct level of asset protection to minimise the risk of losing your hard- earned wealth.
There is often a trade-off between tax efficiency and asset protection. Take the example of a negatively geared asset such as property.
While owning the negatively geared property in a dentists’ name may seem like the right thing to do in order to obtain tax benefits, there can often be an asset protection trade-off.
The trade-off is that the negatively geared asset in the dentist’ name is subject to risk if there is a claim against the dentist.
A company structure could be an alternative. Companies have access to lower tax rates than the typical dentist. However, the trade-off with companies is that they don’t have access to the 50% General Capital Gains Tax Discount, and distributions are restricted to shareholders. There are also specific rules for dental companies in relation to retained profits, which may eliminate the lower tax rate benefit.
Another option is a Trust (Family, Discretionary, Unit or Hybrid) structure. Trusts generally offer an effective form of asset protection as beneficiaries do not generally have a legal entitlement to the assets of the Trust.
Trusts provide flexibility in the way profits can be distributed. Discretionary Trusts have choice as to the type and the amount of income beneficiaries receive.
This allows a beneficiary’s specific tax profile to be considered, in order to achieve better tax results.
For example, capital gains can be distributed to individual beneficiaries in order to access the 50% Capital Gains Tax Discount.
The trade-off is that Trusts can’t distribute losses, therefore they are trapped until there is income in the Trust to be offset.
It is therefore critical to select the appropriate structure for your specific circumstances as well as understand and discuss the trade-off between tax efficiency and asset protection prior to making any significant investment decisions.
A final but often forgotten aspect of asset protection is to consider whether you should protect what is referred to as your biggest asset (being your ability to earn income) with an income protection insurance policy. The premiums are tax deductible so it’s also tax efficient.