Wednesday, 15 March 2017

Playing the Numbers

Lets talk about 2 Drs - GT and SM.

GT is an independent contractor. He works in a surgery and pays them 35% in Management Fee.

SM is also an Independent Contractor, but the way his contract is written, his Management Company pays him 65%.

Both work 46 weeks a year

GT's gross billings are $414K and SM's are $506K per annum

Therefore, GT would pay his management company 35% of 414K = 144.9K. Add 10%GST =159.39K
In bank = 260.61

SM's management pays him 65% plus 10% GST. So he gets (506*0.65)*1.1 = 361.79

So, >100K difference pa.

Quite a big difference in the amount each gets into their bank accounts. But, Medical Services are GST exempt. So, SM will pay back all the GST he is getting each quarter with his BAS and GT will reclaim it back. Therefore, actual earnings for them are 269.1K and 328.9K (65% of their gross billings)
Real difference is more like 60K. Lets call these figures 'A'

Both GT and SM have other deductible expenses (accountancy fees, indemnity, professional memberships, CPD events, equipment etc). These are usually fixed costs and not percentage based. Say 20k each.

To round things off lets say GT's pretax income is 250K and SM's is 310K. Let's call these figures 'B'

Now, lets look at taxation. If you put these figures into the ATO tax calculator here, you'll see that GT will pay roughly 86K in tax. This will yield him a post tax income of 164K. This is roughly 65% of B or 35% tax.
But does SM get to take home 65%  of the excess income in B? Again using the same calculator, we see that SM pays 113K in tax. Therefore take home = 197K. 
So, the 60K extra in B translates to only 33K post tax, or roughly half of the difference in B, not 65%. If you work this back all the way to the first figures or the Gross Billing, you'll see that a difference in earning of 92K (506-414) has been whittled down to just 33K or roughly 1/3rd!!

This happens because up to about 240K per annum, based on the tax slabs we are able to retain about 65% of income. But anything higher is taxed at the highest rate (currently 47%). The highest tax bracket starts at 180K but there are allowances and deductions one can make.I am unable to give an exact figure where the tide begins to turn, because that depends on many variables like number of dependents, residency status and the deductibles one may have. I have used 240K as a theoretical top end and worked the 414K and 506K backwards from these figures. I believe these to be realistic.

So, the point of this whole exercise or the lessons I learnt from this are as follows:

1) Firstly, as an Independent Contractor we are basically selling our skills and this is the single most sellable item we have, i.e we can almost certainly make the most money possible by simply plying our trade. Generating $165K per annum in post tax profit from a business isn't easy. This should be borne in mind by those hoping to open their own surgeries. 

2) There is no point flogging this horse beyond a certain point. After a certain threshold, for every hour you work, you only get 20 mins worth of extra income.
Up to about 240K pre-tax income, you get to keep $1 for every $1.50. Beyind that, if you want to earn an extra dollar to spend, you'll have to earn $2 in pre-tax. How much gross billings that translates to depends on the percentage fee you pay management.

3) The most important factor is lifetime income. Now look at GT's and SM's incomes again - GT can make up the difference of 33K (difference between his and SM's post tax pay) if he works 2.5 months or 10 weeks extra compared to SM. 
You might say that that is a silly suggestion - why work more?

But, if I were a betting man I'd say the chances of GT being able to work without burnout are so much higher than that of SM. If SM is off for even 10 weeks due to stress or burnout, he will have lost out an entire years' worth of extra income. I'd bet on GT! That is the second reason I've used the 400K gross billing figure. This I think is a good figure for a GP who is on the top of his game to earn working comfortably within his or her boundaries. If you're lower than this (working less hrs for example) then it makes sense to maximise income by working more (if that's what you want)

Now, instead of income or money, you could transpose the figures into other useful numbers- call them number of hours worked per week or weeks per year or patients/hour and the same principle holds.

Lastly, if you work the numbers backwards, there is actually a plus to this. So, going from gross billings to post tax income, we notice that  92K extra in billings only translated to 33K extra take home income. But, reverse that- 33K drop in income frees up working time required to generate 92K worth of billing. 1 hrs worth of wage loss frees up 3 hrs of time.

Isn't that great? If you take  3 weeks extra  holiday, you'll only lose 1 week's worth of post tax pay.
If you currently work 33 hrs (32 is very common) and find yourself taking work home or struggling to cope with blood results, letters etc., then giving yourself 1 hr per week of dedicated paperwork time, which is a 3% drop in working hours will only yield a 1% drop in income! That might just enable you to spend more time with your kids at home, get home on time each day or enjoy your weekends.

Actually, it might even make you more productive and not drop your income at all.

So, my message to all of you out there is this: look after yourselves and think long term. You owe it yourself and to your families.

Best wishes,

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