Withholding and Income Tax

Pay-as-you-go (PAYG) tax is Australia’s version of the widely-known withholding tax. However, the distinction from income tax is often shrouded in obscurity. Most employees don’t know the difference between the two, leaving employers to explain it to them. Here’s a breakdown of the basics.

Withholding Tax

To differentiate withholding and income tax, it’s important to know that withholding tax can also be called payroll tax. A certain portion of a worker’s payroll is withheld as the company’s tax liability. Businesses less than a year old normally don’t remit PAYG tax. The Australian Taxation Office will notify them of their PAYG instalments as soon as they hit their first anniversary.

Income Tax

While the business automatically cuts an employee’s income tax from his monthly salary, the taxation is already done by the government. The income tax is based on taxation policy, no longer the payroll. For a resident who earns $90,000 a year, income tax computation will be based on the latest tax table ($17,547 + $3,700 = $21,247).

Of course, you may still find the distinction unclear. If so, you’ll need a taxation professional taxation service to explain it to you. You’ll also need a certified accountant to perform the complex math.

Avoiding Tax Avoidance Issues

With a large portion of the money that doctors earn going to tax, it isn’t uncommon for many to use different tax minimisation strategies in order to get the most out of their income. However, although tax minimisation is entirely legal if done in good faith, doctors run the risk of being charged for tax avoidance if they mishandle their tax minimisation efforts.

The legal basis for determining tax avoidance is provided for in Part IVA of the Income Tax Assessment Act. This is embodied in a three-point test that asks:

1. Does the minimisation involve a scheme?
2. Did the taxpayer obtain a tax benefit because of it?
3. Was the sole or dominant purpose of the scheme simply to obtain a tax benefit?

If the answer is yes to all these three questions, then the tax minimisation strategy that was used constitutes an act of tax avoidance that may be brought against the taxpayer.

Hiring an accountant familiar with the medical profession and its particular taxation-related quirks is, arguably, the best way to avoid tax avoidance issues in the long-term. With their intimate understanding of tax rulings, such accountants can provide insight into the different matters that might see doctors’ tax minimisation efforts flagged by the relevant authorities so that they can be avoided or resolved.

How to Know if an Accountant is Right for the Job

The medical profession’s accounting and taxation aspect is governed by a set of rules that are a bit different from those governing other fields. Usually, doctors with their own medical establishments hire a practice accountant to handle not only their business’ finances, but also their personal ones. This may work fine at times, but might backfire a bit in the long run.

Finance expert Chuck Jaffe notes the risk that most doctors take in doing just that. “The fact that someone is great with your business doesn’t mean he’ll be great with buying a second home or going through a divorce or advising on your spouse’s personal tax issues”, he says. A true professional is bound to know his limitations, and will almost instantly refer a colleague who can handle it better than he does.

Taxes are a huge part of medical accounting, and it is the accountant’s job to effectively manage it. Jaffe notes that for doctors, it is important to know that whoever’s doing their personal taxes are knowledgeable about special considerations like tax-advantaged retirement plans and other savings strategies, not to mention that the accountant’s personality should reflect their client’s overall philosophy as well.

The accountant should charge a fair amount for his services on personal tax advising, ensure that proper tax rulings are considered in every process, and formulate new strategies based on changing legislation. In other words, he should be updated with the latest trends and practices in the world of medical accounting and finance.