Income Splitting for Doctors and Dentists
A very common question for doctors and dentists in private practice is whether you can split your income with your spouse.
This question is driven by the fact that you have a high income and thus pay a great amount of tax.
Income splitting is a strategy used by high-income earners to reduce their taxable income and the amount of tax they pay.
It works by redirecting income to a spouse, dependant or entity that is on a lower tax rate, to reduce the overall amount of tax payable.
However, caution is warranted as the Australian Taxation Office has strict rules around this tax planning strategy, particularly for professionals such as doctors and dentists. You should therefore always seek specialised tax advice.
PASSIVE OR ACTIVE INCOME
There are two types of income you may be able to split: passive or active. Passive income is the income earned from investments such as shares or an investment property. Splitting this income with your spouse is generally acceptable from the ATO’s point of view.
Passive income splitting is typically achieved by holding investment assets through discretionary family trusts where income can be distributed to low-earning taxpayers, or in the name of low-earning taxpayers, or even a company, which is taxed at a flat 30% rate.
Active income is income you have earned from your own exertion (e.g. your private fees), and splitting this type of income is subject to strict tax rules. It is more commonly referred to as Personal Services Income or PSI.
In this article we will only cover the splitting of passive income.
SPLITTING PASSIVE INCOME
The most common ways to split passive income are by way of having assets in the name of the lower income earning spouse or even more effective, through entities such as a family trust.
A family trust is a separate legal entity and the trust, not the beneficiaries, owns the assets. If you are a beneficiary of a family trust, the trust assets do not form part of your estate and you cannot leave them in your Will. However, you can enjoy the benefit of the income and/or capital from the trust.
Other than for tax planning, trust can also be used for a number of other reasons. Some of these include:
· Protection of assets from creditors or a family dispute in some instances. · Protection from misuse of assets, for example, a spendthrift beneficiary. · Segmentation and management of business assets.
If you would like to find out more about trusts or have any particular questions, please feel free to contact me at firstname.lastname@example.org