Tax free investing

GPs are hit daily with an almost infinite variety of investment options. Books, magazines, articles and websites go on an on about why this investment is better than that investment and it can become very confusing, and even overwhelming, for all but the hardest nosed GP investors.

It makes sense to set a strategy. And sometimes a simple strategy is the best. One simple strategy is to prefer investments where the return, or at least a large part of it, is capital gains tax, or CGT, free. Sound idyllic? Yes it is. But the good news is it’s also realistic. There are quite a few investments out there which are wholly or partly tax free.

Homes are CGT free. And homes are right up there amongst Australian shares for investment performance over time, particularly for the more fashionable suburbs in the major capital cities such as Perth and Brisbane. Our normal advice to young GPs is to buy as much home as the bank will lend you. And this advice has proven itself year after year. A temporary drop in value is just a good reason to buy some more.

Practices are CGT free too. A combination of CGT exemptions means that virtually all practice sales are tax free, even when the practice is owned by a company and only derives personal services income. Investing in a practice as an owner is probably the best investment a GP will ever make. We do not want to overstate the prospects of a large capital gain on ultimate sale – that is not where the market is right now – but it’s nice to know that whatever gain you do make will be CGT free.

Interest on amounts borrowed to buy or develop practices is tax deductible.

Practice premises are usually CGT free. GPs who have sold their practice premises are often delighted to learn that the gain on sale is CGT free. Some conditions need to be met, but the bottom line is the gain on sale on practice premises is rarely subject to CGT.

Interest on amounts borrowed to buy or renovate practice premises is tax deductible.

Growth investments in a self-managed superannuation fund are normally taxed at no more than 10% on capital gains and, if their disposal is deferred until the fund pays pension benefits, there is normally no tax at all. On 9th May 2006 Treasurer Costello announced a number of far reaching reforms which make heavy super strategies mandatory for GPs over age 60 or approaching age 60. Investing through super now makes more sense than ever.

Interest on amounts borrowed to pay employee contributions is tax deductible but interest on amounts borrowed to pay self-employed persons contributions are not tax deductible.

The franking credit rules mean franked Australian shares have a huge advantage in a self-managed super fund.

The good news is that the Australian economy is looking good, perhaps as good as it ever has, with high growth, strong consumer demand and low unemployment suggesting all is well for quite a few years to come. Now is a good time to be investing.

For most of us the exigencies of the moment, with practice commitments, family commitments and all sorts of other commitments, mean that investing does not get the attention it deserves. It’s nice to know a simple strategy of investing in your home, your practice, your practice premises and your super fund means you can be confident your investments will do well and the effort you put in every day will pay off in the long run.

It does not have to be any harder than this.