The NSW Bar Association will hold a General Meeting on 17 September 2013 in which a motion will be moved expressing support for changes that would permit barristers, who choose to do so, to practise through single member, sole director companies. To assist members with voting on this motion, the Bar Council has released advice from 4 leading senior counsel on the pros and cons of barristers being able to incorporate their practice. The advices are from Webster SC, Walker SC, Richmond SC and Slater QC.
At first glance, the main motivation to allow incorporation of barristers’ practices would appear to be the advantage of the lower corporate tax rate of 30% against the highest individual marginal rate of 45% (plus Medicare levy). However, the detailed advice from senior counsel suggests that any tax advantage from incorporation is largely “illusory” or “mythical” in the case of barristers’ practices.
Under a typical incorporated business model for a barrister’s practice, the company would pay the barrister a salary of $80,000 (ie the limit for the 30% rate), and the company would pay tax at the 30% rate on the surplus net fee income (ie less the salary payment). According to ABS reports, the national annual net income of a silk was $580,000 (id=”mce_marker”95,000 for juniors) for 2007-08. For net fee income of id=”mce_marker”35,000 the advice calculates the tax saving at $5,500, but the tax benefit climbs to id=”mce_marker”5,700 and $80,000 for the average junior and silk, respectively. However, the advice notes that it would be hard to justify the gap in the $80,000 attributed to the barrister’s salary against the value of $580,000 (or id=”mce_marker”95,000) recovered by the company from clients.
Unlike many other businesses that have incorporated for the purpose of asset protection, the advice notes that a barrister who operates under the Professional Standards Act 1994 (NSW) is provided with effective limited liability under the professional indemnity cover (as required for a practising certificate). As such, the advice says incorporation offers no additional advantage over the present mode of conducting a barrister’s practice (unlike incorporation by solicitors).
In this respect, the advice warns that any judge of the Federal Court would not hesitate in finding that the dominant purpose of incorporation was to obtain a tax benefit. Therefore, the advice says that it would be open for the Commissioner to make a determination under Pt IVA of the ITAA 1936 that the profit be included in the assessable income of the barrister.
[FJM Note: And this is not the only/main problem. Most barristers want to spend all their income (not keep it locked in the company where the 30% rate was obtained) and then the payment of dividends out attract further tax in the individual’s hands at maximum marginal rates – achieving little or nothing.]
[LTN 164, 26/8/13]