Taxation in Australia
As a JMO, taxation is fairly simple. You go to work. Work looks at your roster, figures out what it (thinks) it owes you, deducts superannuation and salary packaging, sends your tax to the ATO and deposits the remainder in your bank account. Then after July you sit down with all of your receipts and, over a friendly cup of tea, work out with your accountant how much of that tax you can get back. Easy peasy.
When you become a consultant, it all gets a little more complicated. If you decide to opt for a Level 1 pay scale (See the “Finance and income” article) as a staff specialist, or a sessional contract as a VMO at a public hospital, then little will change. However, it’s more likely that at some point you will opt for a higher Level, work at more than one hospital under a different type of contract and/or secure an appointment at a private hospital. With private income, the responsibility for paying the correct tax falls squarely on to your desk.
There are two components involved in working out your tax obligations. The first is how you set yourself up for private buisness. The second is what tax you pay.
As a JMO, you have a tax file number, to which all you income and taxation is attached. You can continue with this model as a consultant, but it becomes a little clumsy at tax time and may not benefit you much. You can go all the way and set up a company, with an Australian Buisness number (ABN) and a company account into which bills are paid and you pay yourself from. This way, your company income will be taxed at buisness rates, which are smaller than personal tax rates, and you pay tax on you company wage, which will also be small if you pay yourself a small wage and leave the majority in the company account. Your company can also make purchases for the buisness which are tax deductible, such as your car, petrol and mobile phone, which you then use. However, it may generate more work and, importantly, more expense than is really worth it. For instance, your company will have to pay superannuation as an obligation to its employee … you. Banks also often have specific charges loaded on to buisness accounts. So most people register as a sole trader and get an ABN number.
Having the ABN is particularly handy. It allows you to generate invoices when issuing bills and most institutions that you work at will want you to provide them with one. When it comes to tax time, your accountant can use your status as a buisness to claim back tax through your ABN.
The tax itself changes too, with private income. There are two aspects; GST and annual tax. For your private income, instead of paying tax as you earn, like you did as a JMO, you get to keep all of your income until the end of the financial year. But don’t start spending it all, because at the end of the year, the ATO will look at your year’s income and send you a bill; so you need to make sure you have kept enough back to pay that bill. However, any purchases that you make for the benefit of your buisness can be claimed back as tax deductions, just like claiming back the cost of books and exams as a registrar.
Then there’s GST. Any invoice that you issue to a patient is GST free, as the service is considered essential; like milk, butter and bread. However, you are required to charge GST on any invoices issued to institutions, such as the hospital that has agreed to pay you a retainer, or an insurance company that requests you to complete a medical report on one of its clients. You are taxed separately for this GST and you can elect to pay this tax annually, 6 monthly or quarterly. Most people elect to pay it quarterly. To do this, you must register for GST. You can do this at the time that you apply for your ABN number, or any time later on.
The annual quarters are July to September, October to December, January to March and April to June. Towards the end of every quarter you will be sent a Buisness Activity Statement (BAS) which you fill out and return to the ATO within 28 days. The BAS is how both you and the ATO estimate how much private income you have earned balanced against what buisness expenses you have incurred and therefore the net tax that you owe or are owed. The BAS comes with a calculation sheet to help you work it all out, but the first time you tackle it, it doesn’t really seem that simple. So the best option is to sit down with your accountant the first few times and work through it. Later, if you feel comfortable with it, you can take it on yourself.
So you need to keep good records of your income, in order to keep enough available to pay your quarterly and annual tax bill. This is where a good practice manager is useful, as they will send you remittance details for all monies received, which means you can track your income, estimate what your tax bill will be and therefore keep enough in your account to be able to pay your tax bill when it comes.
Taxation is not much fun at any time, but it will become a key feature of your career once you have a private income.