The importance of tax planning & budgeting for medical professionals

A recent decision by the Administrative Appeals Tribunal (AAT) to disallow the release of tax debts of nearly $206,800 owed by a medical practitioner is a timely reminder of the importance of properly managing your tax affairs. This is particularly relevant for medical professionals who earn their income through an ABN, where no tax is withheld at the time of earning.

Case background

The taxpayer was a medical practitioner who lived with his father and 2 school age children. His father had a sole income of a $600 monthly pension, having arrived in Australia in 2020.

The taxpayer had tax liabilities totalling almost $206,800, most of which were unpaid PAYG Instalments. The medical practitioner applied to the ATO to be released from the liabilities on grounds of serious hardship. However, the ATO refused the application.

The AAT confirmed the ATO’s decision was based largely on the fact that the taxpayer could reduce his discretionary expenses, which would allow him to meet his tax liabilities in a reasonable time. The AAT noted that this could be done without impacting upon his ability to support himself and his family in a reasonable manner. The discretionary expenses included payment of private school fees (including school fees for his nephew), more than the minimum monthly payment on a loan, children’s weekend activities and cleaning. In particular, the AAT also noted the purchase of a luxury vehicle and a second (mortgaged) property.

The case also reinforces a previous AAT case from February 2021 where a surgeon was unsuccessful in applying for a release of $1.2m of tax debts.

When will ATO consider a release of debt for serious financial hardship?

The ATO has previously issued a Practice Statement which provides guidance in relation to making decisions involving serious financial hardship. In particular, they will look at:

  • Income/outgoings test: to assess a taxpayer’s capacity to meet their tax liability, considering household income and expenditure;
  • Assets/liabilities test: to assess whether a taxpayer can access equity in assets in order to meet their tax liability; and
  • Other relevant factors: including whether serious hardship is likely to be only short term, whether the taxpayer has a poor compliance history; whether the taxpayer is unable to show they have planned for future tax debts; whether the taxpayer has paid other debts in preference to their tax debt and whether the taxpayer has disposed of income or assets without considering their tax liability.

The medical practitioner failed to meet the tests as it was held that he would not experience serious financial hardship. In particular, the tribunal noted that the taxpayer could decrease his discretionary expenses and be able to afford to pay back the ATO without sacrificing his ability to support himself or his two children.  Additionally, the tribunal ruled that there were a range of viable options available to the medical practitioner and his family to reduce their expenditure. In particular, the tribunal noted the luxury car, private school fees and payments on the second mortgaged property could be reduced whilst maintaining a reasonable standard of living.

What does this mean for me?

While this case may be an extreme example, it serves as a helpful reminder for medical professionals in relation to:

  • Staying up to date on your tax responsibilities – This is so that debts can be quantified and planned for. It was noted that the medical practitioner was often late in lodging BASs and tax returns, as well as making inaccurate representations on his Release Application. We have also seen a poor compliance history impact the granting of payment arrangements.
  • Saving for tax – There is no tax withheld on income earned using an ABN. The tax is paid when the income tax return is lodged, or by way of quarterly PAYG Instalments. Both the ATO and the tribunal expect business operators to make a provision for their upcoming tax liabilities. Although the tax system is ever changing, the ATO will not accept ignorance as an excuse.
  • Budgeting – As above, taxpayers in business are expected to budget for their tax liabilities. Additionally, the ATO and tribunal were particularly critical of expenses the medical practitioner paid which are not “considered necessities according to normal community standards”. Therefore, it is important to have a budget for tax liabilities as well as everyday household expenditure.

Learn more

If you need assistance with staying up to date in your tax affairs and budgeting, please contact Kristy Baxter from our medical services division on (07) 3023 1300.