There is no doubt that the biggest frustration for doctors is paying too much tax. However, if you too aggressively and blindly pursue tax savings it may actually and up costing you more, due to investment losses for example.
So what is my number one rule in terms of tax planning for doctors?
Well, it I my sincere belief that any tax planning for doctors (and anyone else for that matter) needs to be sustainable.
Let me explain.
All too often I have seen doctors make decisions based on the tax deduction alone, whether it be for property investment (negative gearing) or some other type of tax-effective scheme. For tax planning for doctors to be sustainable, it needs to look at the bigger picture and fit it into your long-term plan.
Examples of poor tax planning for doctors
Let’s consider the following two common examples:
1/ Buying a brand new property for the depreciation benefits
This strategy is typically promoted during property seminars where high-pressure sales tactics are used. The premise is that anyone can invest in property, as the negative gearing benefits derived from the significant depreciation, cost you relatively little in actual cashflow.
However, I would make the following comments:
– You may be paying more than true value for the property, as it is often sold at an inflated price;
– The depreciation benefits are handy to minimise the cash flow holding cost, but will impact your capital gains tax as depreciation reduces the cost base – I have seen people sell property at a loss, and paying CGT at the same time;
– A loss or low capital growth on such a property is not out of the question given the nature and often (sub-optimal) location of this type of property.
Property investment should never be undertaken with tax savings as the main driver.
2/ Agribusiness schemes
Plenty of agribusiness schemes (where you invest in olive or almond plantations for example) have failed in the past, leaving many investors with significant capital losses. I have seen clients lose more than $2m following the demise of schemes like Timbercorp for example. A hefty price to pay for some small tax savings.
The types of problems these schemes might have include the following:
– They are typically fairly risky and may never return much; there is a real risk of a 100% loss.
– The interest on the loan is typically high and will need to be repaid over time.
– These schemes are heavily tax-driven and often sold on that basis, with a lesser focus on the quality of the investment.
You can read more about agribusiness schemes HERE.
Conclusion – tax planning for doctors
Many doctors make tax savings the key driver of any financial decisions. However, this causes you to lose sight of the bigger picture and may end up costing you more.
Instead, I recommend making your personal financial goals and aspirations the main focus of your financial plan. Ultimately, once you have secured the attainment of your goals and dreams, a little more or less tax will not affect your happiness, will it?
If you would like to create such a plan for yourself and your family, then contact us today on 08 6160 5918 or firstname.lastname@example.org.