Payroll tax concerns for dentists

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payroll tax concerns for dentists
Photography:  adam taylor

A new court ruling could change how payroll tax is applied to dental practices—and it may send some practices out of business with steep retrospective penalties. By Shane Conroy

Dental practices around Australia could be facing devastating new payroll tax bills due to a recent court ruling that may penalise practices that utilise independent contractor dentists. 

State revenue offices have updated an interpretation of existing payroll tax law that could see independent contractor dentists counted as employees—and therefore subject to payroll tax. And with the new tax interpretation set to be retrospectively applied across the last five years, dental practices could be hit with steep backdated tax bills.

It’s a move that could put some dental practices out of business. Others may need to increase treatment fees or restructure employment models and workflows to stay afloat. Independent contractor dentists could also find themselves suddenly out of work as practices race to reduce their payroll tax liabilities.

Regional and rural practices could be most impacted by the new interpretation that may push even small practices beyond the payroll tax threshold. This could mean some rural practices may be forced to close, shed staff, or shelve expansion plans—all of which would further push out already lengthy patient waiting lists in regional and rural areas where access to dental care continues to languish well behind metropolitan locations. 

In many cases, dental practices choose to engage practitioners as independent contractors rather than employees. Under these agreements, practices typically provide contractor dentists with facilities and services in return for a percentage of the dentist’s billings. 

Dr Dominic Aouad, president of the Australian Dental Association NSW Branch (ADA NSW), says independent contractor dentists gain the autonomy to operate as independent businesses, and practices benefit from greater workforce flexibility. 

“This arrangement gives practitioners control over various aspects such as their schedules and financial matters like contributions to superannuation, and they are not encumbered by having to apply for leave or having their procedures reviewed by their employer,” he explains. 

“And many practices opt for this model as an enticing alternative to traditional employment. It gives the business the flexibility to expand or contract as needed.”  

The implications

Payroll tax thresholds vary between states and territories, but all operate as an annual wage limit that a practice must exceed before it is liable for payroll tax. Current annual payroll tax thresholds are $2 million in ACT, $1.5 million in SA and NT, $1.3 million in Qld, $1.25 million in Tas, $1.2 million in NSW, $1 million in WA, and $700,000 in Vic.

Inclusion of independent dentists in this calculation often pushes practices beyond the threshold, leading to additional financial burden. Therefore, this is not just a tax on big business. It will also capture small- and medium-sized practices.

Dr Dominic Aouad, president, ADA NSW

Payroll tax rates also vary between states and territories. Current payroll tax rates are 6.85 per cent in ACT, 5.5 per cent in NT and WA, 5.45 per cent in NSW, 4.95 per cent in SA, 4.85 per cent in Vic, 4.75 per cent (on $6.5 million or less) in Qld, and four per cent (on up to $2 million) in Tas.

So, in NSW for example, a practice must pay 5.45 per cent payroll tax on every dollar it spends on annual wages over $1.2 million. Or, in Victoria, a practice must pay 4.85 per cent payroll tax on every dollar it spends on annual wages over $700,000.

Traditionally, many practices did not include money earned by independent contractors in their payroll tax calculations—typically because relationships with contractors were viewed as service agreements, not as employment contracts. 

This has enabled practices to grow without the impediment of an additional tax burden. Dr Aouad says the new ruling will unexpectedly push many smaller practices over the threshold. 

“The payroll tax threshold encompasses all support staff, including receptionists and dental assistants. Inclusion of independent dentists in this calculation often pushes practices beyond the threshold, leading to additional financial burden. Therefore, this is not just a tax on big business. It will also capture small- and medium-sized practices.”

Retrospective penalties 

With the new interpretation likely to force practices to include contractor dentists in their payroll tax calculations, many practices will be pushed beyond the payroll tax threshold and face increased payroll tax liabilities. 

And with state revenue offices seemingly intent on backdating this new interpretation across the last five years, practices could face steep retrospective payroll tax bills that many are unlikely to be prepared to pay. 

“It’s completely untenable and will send practices bankrupt,” Dr Aouad warns. “Practices need to plan their structures, remuneration and fees around it. This is a changing of the goalposts, and to backdate it for five years and apply it to practices that have always behaved between the goalposts is a cash grab.”

Have a conversation with your accountant and get across what you need to know to keep operating, whether that means adjusting your treatment fees or revising your existing workflows and employment structures.

Dr Dominic Aouad, president, ADA NSW

The impact of the new ruling is likely to be felt hardest in rural and regional communities where access to dental care has already fallen behind metropolitan areas. According to the Australian Institute of Health and Welfare, people living in rural areas have access to fewer dental practitioners than their city counterparts, and oral health status generally declines as remoteness increases. 

Dr Aouad says that disparity could be exacerbated as the new payroll tax ruling threatens to put an additional financial strain on rural practices.

“Some practices are hesitant to expand their workforce, which could lead to longer waiting times. The additional tax burden may, in turn, prompt many practices to increase treatment costs for patients, posing challenges in terms of affordability and access to dental care—particularly in regional and rural areas.”

 A perfect storm 

This comes after many practices have resisted increasing fees in line with spiralling inflation. The Australian Dental Association’s (ADA) Dental Fees Survey found that, on average, practitioner fees increased by only about 2.14 per cent between 2017 and 2022, despite inflation increasing by 14.5 per cent over the same period. 

Adding unexpected payroll tax liabilities to inflationary pressures will create a perfect storm for many dental practices that will need to decide to either increase their fees or close their doors. Dr Aouad says that’s why ADA NSW is calling on the government to apply the same 12-month payroll tax amnesty some states have afforded general medical practices. 

“With poor oral health now linked to several other health conditions including cardiovascular disease, diabetes and Alzheimer’s disease, there is a growing need for the government to reduce the barriers to people being able to see the dentist,” he explains. “It’s not clear why such an important aspect of health is being overlooked or penalised disproportionately when most medical GPs operate under the same contractor model and have been granted amnesty.”

In the meantime, Dr Aouad says dental practices need to be aware and prepared. “Have a conversation with your accountant and get across what you need to know to keep operating, whether that means adjusting your treatment fees or revising your existing workflows and employment structures,” he advises. 

“It’s important to understand that this could completely change how the relationships between practices and independent contractor dentists work, and to ensure your business is structured on good accounting and legal advice.” 

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