As you transition from being a GP registrar to a consultant, the way you earn income and pay tax will change.
What to expect for a GP registrar income?
Typically, the clinic with which you are training will pay you an hourly rate or a percentage of your billings. To incentivise you to see more patients and gain more experience with patients, in both volume and complexity, trainees are often paid the higher of these two options. As a registrar, you are an employee of the clinic, which means that they will withhold tax from your pay and pay super at the Superannuation Guarantee rate to your nominated fund account, as was the case when you worked in the hospital. You should find this is consistent across all rotations you complete as a registrar.
What changes when becoming a consultant?
After you have obtained your letters, you will be engaged by a clinic as a contractor (sole trader). Your level of income is directly correlated to the number of patients you see and how many of these are bulk-billed, as opposed to privately billed.
Practice software is capable of tracking all the patient visits and thus the gross billings of all the GPs within a clinic. Either a portion of the amount billed by a GP is paid over to the clinic entity as a service fee or this portion is retained by the practice and they pay you a percentage of billings.
How does the Standard Service Fee work?
As the name suggests, a service fee is paid to the clinic for the services it provides to a GP. These include the room in which you see your patients, the equipment and materials you need to treat them and maintain their records, as well as the services of the clinic secretary and/or office manager.
Service fees are typically about 30-40% of billings. This means, for example, if you were to gross $10,000 in patient fees in a given fortnight and have a service agreement that stipulates a 30% fee, you will receive an invoice for $3,000 plus goods and services tax (GST). Some clinics will have the GP collect all billings directly and pay the service fee back. Others collect the fees as an agent of the GP, withhold the service fee and GST, and pay the balance out each fortnight. You should receive a remittance advice and a tax invoice as evidence of the transaction in either case.
Understanding Percentage of Billings as another option
This method is less common amongst GP clinics. Under this method, the clinic collects all billings on behalf of the GP and pays a portion (60-70% plus GST) to the GP each fortnight.
In contrast to the previous example, you may bill $10,000 in a fortnight and then the clinic will generate a Recipient Created Tax Invoice (RCTI) as evidence of your invoicing them $7,000 plus $700 GST being 70% and the inverse of the 30% service fee.
Why is GST part of my billings?
While a GP does not collect GST on patient fees that include a Medicare benefit, GST applies to the service fee paid or the percentage of billings received because this is a transaction between two businesses.
As a sole trader, you will then be required to report to the ATO your gross income and the service fee expense paid or the total amount received under the percentage of billings method. Remember, if you are turning over (that is, collecting gross patient fees or your percentage of billings received) more than $75,000 in a 12-month period, you must register for GST and report your income, expenses, GST Collected and GST Paid every quarter via something called a Business Activity Statement (BAS).
In your BAS, you will return GST collected and claim a credit for any GST paid and once you are in the Pay as You Go (PAYG) Instalment system, an income tax instalment towards the next year’s tax too.
When you or your accountant prepare your tax return, you effectively report in the business schedule the GST exclusive figures for both income and expenses, and pay tax on the net amount.
How do you access the PAYG instalment system?
Once an individual taxpayer lodges a personal income tax return showing business income of more than $4,000 with an amount payable of more than $1,000, the ATO will enter you into the system automatically. The ATO will assume that next year’s tax return will include the same amount of income and expenses and, after applying an adjustment for inflation, ask for the same amount of tax over the remaining quarters in that next financial year. The instalment amount can be a fixed dollar amount or a percentage of income and will show in the BAS due after lodgment of the tax return.
Confused? It would help to speak to a specialist tax adviser who knows how the medical sector works for detailed advice around paying tax as a sole trader. Your accountant will be able to provide a schedule showing how much tax you are expected to pay to the ATO and when.
How is super affected in the transition from GP trainee to consultant?
Depending on your contractor agreement (which you should have reviewed by a lawyer, ideally a medical specialist lawyer), the clinic may or may not be required to pay you super. In some instances, the clinic will withhold 9.5% of your billings after the service fee or from your percentage of billings and send it to your super fund on your behalf.
If not, you have the option to contribute when and how you like. You do not have to make super contributions, but you may be missing out on some tax benefits and building up that retirement nest egg if you do/are not. After making your own contributions directly to your fund, you will need to send a notice of intent to claim a tax deduction form to the fund and then await receipt of the acknowledgement before lodging your tax return; otherwise you will miss out on the tax deduction altogether!
Something else to also be mindful of is your contribution caps. A wealth adviser or financial planner can assist on this front to ensure you do not go over your annual contribution limit.
Anthony Pane is a tax consultant for doctors at all career stages.