The biggest financial mistake sole-trader doctors make is failing to put away money for the future.
As a wealth advisor who specialises in assisting medical practitioners, I am often asked “what is the number one financial trap you see medical professionals fall into?”
Without doubt, the biggest mistake I see general practice owners and sole trader contractors make is failing to make contributions to superannuation early on post-fellowship.
During their initial years of medical training, prior to embarking on a specialist general practice fellowship, doctors receive generous concessions to contribute to superannuation via salary packaging, and at the very least receive the mandated superannuation contributions through their work and state-based health departments.
However, after fellowship when earning income as a sole trader, it becomes the GP’s responsibility to pay his or her own superannuation. The superannuation contribution is often left to the end of financial year and on many occasions, the GP neglects to make it at all.
Types of superannuation
There are several types of superannuation funds available, and below are some common options for GPs.
Industry fund: An industry fund is typically a low-fee fund originally established to provide for workers from a specific industry. These days they are not-for-profit, mutual funds which means they are membership based, and they are also limited in options which are why they are low cost.
Wrap account: This is an investment account that in most cases is managed by a wealth advisor for a flat annual fee. It’s recommended that an investor have at least $200,000 in superannuation before opening a wrap account, which enables active management of one’s investments. The financial planner will generally make strategic decisions on the investor’s behalf, based on changing economic conditions. One key benefit is the ability to invest in direct shares as well as a wider range of investment options. Wrap accounts offer a unique learning opportunity for those interested in understanding more about financial markets and investing, as they can be actively involved in the investment decision-making process with the advisor.
Self-managed superannuation fund: As the name suggests, a self-managed superannuation fund (SMSF) provides complete control to the member(s) to develop their own investment strategy. They can of course engage a professional advisor to assist. An SMSF allows up to six people to pool their superannuation and has a much wider scope of investments than a wrap account (particularly direct investments). It may be possible to buy commercial premises for a general practice within an SMSF and, if structured appropriately, borrow for this investment.
While there is greater flexibility and control with an SMSF, the disadvantages are in the amount of time it demands of those that do not have good advisors supporting them, greater trustee responsibility regarding its ongoing governance, and the potentially higher operating costs, compared to other options.
What types of contributions can I make?
Concessional contributions: These are tax-deductible contributions subject to an annual limit of $27,500 for the 2021-22 and 2022-23 financial years. Concessional contributions are taxed within superannuation at 15%.
Non-concessional contributions: These amounts are paid from your after-tax income and won’t be subject to any further tax within superannuation. For the 2021-22 and 2022-23 financial years, the annual cap on these contributions is $110,000. If you satisfy certain criteria, you may be eligible to bring forward up to three years’ worth of contributions in one year, up to $330,000.
Tax breaks in superannuation
Apart from the concessions provided when contributing income to superannuation, there are also significant ongoing tax advantages. When in “accumulation” or working phase, superannuation investment income is only taxed at 15% and capital gains tax is capped at 10% if the asset has been owned for 12 months or more.
Current legislation allows for further tax benefits in the “retirement” or pension phase. For example, a pension can be set up from a superannuation fund with a starting value of $1.7 million or less. The assets supporting this pension is invested in a tax-free environment. There is no income tax or capital gains tax on these investments, and you can withdraw tax-free income throughout your retirement that is excluded from your personal tax return.
I have not been contributing. How can I catch up?
From 1 July 2018, the Morrison government introduced new legislation called the Carry Forward Concessional Contribution rule. This rule applies to people who have a total superannuation balance of under $500,000 at the end of 30 June of the previous financial year in which you want to contribute. It enables eligible individuals to carry forward any missed concessional contributions for up to five years from the financial year that the contribution was missed or not maximised. This rule may be considered for future years by newly qualified fellows and GP registrars who meet the total superannuation balance requirements, particularly when their income is at or above $180,000 per annum and taxed at the top marginal tax rate.
This all sounds great, but who can I get to help me with all of this?
Typically, a financial planner will be able to assist you to develop an investment strategy, and will also provide ongoing reviews or check-ins, if required. Superannuation rules change regularly so having a “financial coach” can assist you to optimise your position each year and help you stay accountable for making your superannuation contributions.
Before changing the structure of your superannuation accounts or switching the type of account altogether, we recommend you seek advice. One of the common mistakes we see is doctors changing superannuation accounts and not realising that the associated insurance contracts (life, TPD and income protection) are cancelled when rolling over to a different account. This is typically problematic for doctors who have no other insurance and those who can’t get insurance because of health issues.
Scott Montefiore is director, wealth advisory at William Buck.
