Making debt structuring work for you in your Medical Practice

Debt structuring is something that’s easy to do but often not done well. If it’s done correctly it can add significant advantages for you and your practice.

Given the Medicare freeze, many practices are finding that top line growth isn’t where they’d like it to be this year and in the future, so they’re looking more towards reducing their expenses to increase their profit. Sometimes we need to think outside the box; can increasing an expense increase your overall profits? It can if a side effect is creating a tax deduction, but not reducing your cash flow.

What interest is tax deductible?

Interest can be deductible for a number of reasons; it might be borrowing to buy an investment property, it could be borrowing to buy shares or borrowing for business expenses. For this article we will focus on borrowing in relation to business expenses.

Interest is deductible under Section 8.1 of the Income Tax Assessment Act 1997:

General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or(b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

As you can see, (b) refers to interest being deductible as it’s necessarily incurred in carrying on a business gaining or producing assessable income. Therefore, if the debt relates to a business loan, then it will be deductible under the second limb of Section 8.1.

For an Associate Doctor, borrowing for their business can be a variety of things; it might be borrowing for staff superannuation, for staff wages, for service fees, or just to pay normal business expenses. If that’s the case, and if they’re genuine expenses for the business, then that interest will be tax deductible.

Interest can be deductible for a number of reasons.

What is the purpose of borrowing?

This is something that should be asked more regularly, because it’s the purpose of the borrowing that makes the interest tax deductible. If you were to borrow $10,000 to pay some of those business expenses mentioned earlier, then that interest would be tax deductible. It’s important to understand the purpose of the borrowing to make sure you are borrowing for business expenses and that it’s done correctly.


If Dr A is running a business and borrows $10,000 to pay service fees, then the interest on that borrowing would be tax deductible.

Dr B works at the same practice, in a very similar situation. He spends all his money on paying his business expenses, finds he is a little short on funds for that month and borrows $10,000 to top up, which he then transfers out through drawings, or through the trust account, down to his personal funds.

Where Dr A borrowed $10,000 specifically to pay for business expenses, Dr B already paid his business expenses, so when Dr B borrowed his $10,000 it was essentially for private use, because he transferred it to himself for personal purposes. Therefore, Dr B wouldn’t get a tax deduction for his borrowing.

As you can see, they are very similar examples and both of them are in the same situation, but Dr A has structured his debt better and he has borrowed for the right purpose. Neither of these doctors have higher debt than the other, but Dr A has deductible interest, and Dr B unfortunately does not have deductible interest.

How big a difference can debt structuring make in your situation?

It might not sound like much, however it does make a big difference that can build up over time.


Dr A is a contracting doctor, running a business and working at a practice. Dr A borrows $50,000 over the year to pay for his service fees. The borrowing for those service fees would then be for business purposes and therefore the interest would be tax deductible.

The same doctor has a reasonably aggressive strategy in relation to trying to pay down his home loan, so when he gets his income from the practice, he’s paying down as much as he can, through trust drawings (and structuring to get that right is important) to his personal account, to pay off his home loan as quickly as he can. Coincidentally, that might be a similar amount that he’s paid off his home loan ($50,000) and he therefore doesn’t have any higher debt exposure, he just has some debt as tax deductible.

In this situation, his borrowings for a year would be $50,000 (assuming 5% interest). If his home loan is at a similar rate, he’s probably reduced the interest in his home loan by about $2,500 for the year, but he’s also got interest in his business loan of about $2,500. In this situation, the business borrowing is tax deductible, and therefore he is getting a tax deduction on that loan. Now, that might not sound like a lot of money, but if we extrapolate that over five years, all of a sudden the numbers start building up and it works out to be a bit over $18,000 over five years (in this example).

Please note, the above example was fabricated for this article, is very specific and has controlled variables. It is important to make sure the structuring is right, the personal affairs are right and the tax advice is right, not only with the business loan but the personal borrowing as well. Make sure you seek professional advice in relation to this, to make sure you have it done correctly. It can make a significant difference, but you have to make sure you are borrowing for the right purpose and doing it for the right reasons and that it is part of a genuine strategy for your business. Please seek advice when you can regarding this.

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