Making Debt Structuring Work For Your Medical Practice


Making Debt Structuring Work For Your Medical Practice

Debt structuring, when done well, offers significant benefits for you and your general practice.

In the light of the Medicare freeze, you may find like many other practices that your above-the-line growth isn’t living up to your expectations. To secure your practice’s future growth and increase your profit margin, you may consider reducing your costs but is this the optimal approach?

What if taking a loan could boost your overall profits? The suggestion may sound ridiculous, but if the additional expense brings a tax deduction without impacting your cash flow, there just may be something in it.

Thinking outside the box – tax-deductible interest

The interest accrued on your existing debt may qualify as tax-deductible for any number of reasons. These include cases where the borrowed money is used to purchase an investment property, buy shares or to cover business costs. We are going to focus on the latter point, i.e., borrowing related to your practice expenses.

According to Section 8.1 of the Income Tax Assessment 1997, interest is deductible from your assessable income in the instance it is (a) incurred during the gain or generation of said assessable income or (b) necessarily incurred in the running of a business for the purpose of gaining or generating your assessable income.

Note that Division 35 prevents losses from non-commercial business activities being offset against other assessable income.

As you can tell, the accrued interest may qualify as tax-deductible if, as per point (b) above, it is necessarily incurred during the running of your practice for the purpose of gaining or generating your assessable income. Or in other words, if the debt relates to a business loan.

As an associate doctor or partner, you might borrow money for your practice for various reasons including to cover staff superannuation, wages, service fees, or merely regular day-to-day costs. So long as you can demonstrate the expenses are genuinely business related, the interest on the accumulated debt will be tax deductible.

What is the money for?

The intent when acquiring a loan is critical to determining if the accrued interest will qualify as tax deductible. It is also vital to ensure the process of borrowing is completed correctly.

Let’s take, for example, the case of doctors A and B, who are partners in a general practice.

Doctor A borrows $10,000 to pay the practice’s services fees, meaning the interest on this loan will be tax-deductible.
However, Doctor B, finding he is short on funds one month after paying his business costs, borrows $10,000 which he then transfers out through a trust account to ensure he can cover his personal expenses.

While Doctor A’s loan is clearly for business purposes, Doctor B’s loan would be deemed for private use, even though it was essentially taken to replace the funds he’d already assigned to pay his share of the practice costs. In other words, the interest on Doctor B’s loan would not be tax-deductible.

The purpose of this example is to highlight the importance of structuring your debt correctly and ensuring the purpose for your borrowing is one hundred percent unambiguous, so you can take advantage of the opportunity to claim back your business loan interest.

The difference of smart debt structuring

Now let’s examine the case of Doctor C who simultaneously contracts to a medical practice and runs a second business. In this example, Doctor C borrows $50,000 to cover his service fees for the year. As the service fees are a business-related expense, the interest on his loan would be deemed tax-deductible.

Now, Doctor C also happens to have an aggressive strategy for paying his home mortgage. On receiving his monthly income, he immediately puts as much as he can afford to into his personal account, via a trust, with the aim of paying off his home loan as quickly as possible. Coincidentally, the amount he’s paid towards his home mortgage is approximately the same as the loan amount he took to pay his service fees. His degree of debt exposure is therefore limited plus the interest on the business-related portion of his debt is tax-deductible.
So, let’s assume the interest on his business-related loan (of $50,000) is 5%. If this matches the rate on his home mortgage, he stands to reduce the interest owed on this loan by about $2,500 annually given his strict repayment schedule. However, he also has the interest on his business-related debt to consider – let’s say it is also approximately $2,500 annually – and which in this case qualifies as tax-deductible. It might not sound like much, but over a period of five years, the cumulative effect means it will work out to be around $18,000 worth of tax-deductible interest.

Granted this is a fabricated example and subject to controlled variables. However, it demonstrates that given the correct structuring, you can make debt work in your favour and make a significant difference to the long-term success of your practice.


What now?

Need advice regarding debt structuring or an unbiased opinion about whether you are borrowing for the right reasons and as part of a genuine strategy for your practice? SMART Business Solutions can guide in you making healthy financial decisions and will work with you to design a strategic business plan, helping you make the most of your hard-earned cash and take advantage of every opportunity to move your practice forward. Contact us today on 03 5911 7000 to request an appointment.

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