Did you know?
Recently, a number of Financial Planners have contacted me regarding planning for Healthcare Practitioners. Their questions included:
- A doctor wants to explore options to reduce his tax liability. Can he register a Private Company? If so, would this be tax-efficient?
- A family member of the Healthcare Practitioner wants to invest in her practice and will own x% of the practice. What are the tax implications for the investor?
- A Practitioner wants his share in the practice to go to his spouse (in the event of his death) so that she can continue to share in the profits of the practice after he has passed away.
- Is it a good idea for my client (who is a Healthcare Practitioner) to form an Incorporated Company? Can she be the only shareholder and director?
Can a Healthcare Practitioner run his or her practice through a Private Company (Pty Ltd)?
As healthcare providers, Healthcare Practitioners retain direct liability for the treatment they provide. In other words, they can’t hide behind a “corporate veil” should a patient want to sue them for malpractice.
An owner of a Pty (Ltd) can have an aggrieved client take legal action against the company he or she owns rather than against them in their individual capacity; healthcare practitioners are not afforded this alternative.
For this reason, Healthcare Practitioners have the following options when establishing a practice:
- Run the business in their own name, as an individual – Solo Practitioner
- Run the business with a partner or partners – Partnership
- Run the business in association with other healthcare providers – Association
- Run the business with other healthcare providers as shareholders – Incorporated Company
- Run the business as a Franchise (subject to compliance with the ethical rules)
Healthcare Practitioners can outsource their administration to a third party or create a company for this purpose, provided the arrangement is not in violation of the ethical rules of the Council.
If any other business model is being considered, this model must first be submitted to the HPCSA for approval.
An Incorporated Company (Personal Liability Company) is usually the best option where more than one Healthcare Practitioner is part of the practice, especially if said partners are likely to change in the future (either through new practitioners joining, or existing practitioners leaving the practice). An Incorporated Company is allowed to have only one Shareholder / Director at any time.
Tax Implications of an Incorporated Company
Profits in the Incorporated Company will be taxed at 28%. The distribution of any profits after tax, in the form of dividends, will be subject to the 20% Dividend Withholding Tax (DWT).
So what, then, is the effective rate of tax being paid?
It is 42.40%. (Please refer to the end of the article for the calculations.)
To reach a net effective tax rate of 42.40% in one’s personal capacity, one’s taxable income must be more than R 6m per annum: on taxable income below R 6m, the personal tax rates are more beneficial than those on an Incorporated Company.
Having financial statements of an Incorporated Company audited is optional, subject to the Public Interest Score of the company. This can add additional expenses for the practice.
Can any person own a share (invest) in the practice of a Healthcare Practitioner?
The HPCSA’s Policy Document on Business Practices, Section 2.2, pp. 4 to 5, determines that:
A person (whether a natural person or a juristic person) who is not registered in terms of the Act and in accordance with the Ethical Rules, does not qualify to directly or indirectly, in any manner whatsoever, share in the profits or income of such a professional practice and which, without limiting the generality of the foregoing, may take the form of:
- transferring the income stream (or any part thereof) generated in respect of patients from the practice to such a person; or
- giving (directly or indirectly) shares or an interest similar to a share in the professional practice to such a person; or
- transferring income or profits of the professional practice to a service provider through payment of a fee which is not a market-related fee for the services rendered by the service provider;
- paying or providing a service provider with some or other benefit which is intended or has the effect of allowing the service provider or persons holding an interest in such a service provider to share, directly or indirectly, in the profits or income of such a professional practice or to have an interest in such a professional practice.
Direct or indirect corporate ownership of a professional practice by a person other than a registered practitioner in terms of the Act is not permissible.
Therefore, a share or partnership in a professional practice cannot be bequeathed to a spouse (or any other person for that matter), unless the spouse is also a Healthcare Practitioner registered under the Act as required. A buy-and-sell agreement between the partners will add tremendous value to their financial planning and the financial well-being of their surviving spouses and other dependants.
For the same reason, third parties who are not Healthcare Practitioners cannot own or invest in a professional practice. The best they can do is extend a loan to the practice and charge interest. This entails numerous risks and one cannot assume that such a loan is advisable without assessing these risks.
Net effective tax rate calculations
Let’s assume a profit of R 100. Less 28% income tax (R 28) leaves a net profit after tax of R 72. If the full R 72 is paid out as a dividend, the 20% DWT will be R 14.40 (R 72 x 20%), leaving a net dividend of R 57.60.
The total tax paid on a profit of R 100 is then R 42.40 (R 28 + R 14.40). In other words, the effective tax rate paid in the incorporated company is 42.40%. This effective rate is fixed, regardless of the amount of profit (assuming the full profit is distributed as a dividend).
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I trust that this information will assist you in your discussions with your clients.