Tax Planning For Dentists: Employee Vs Contractor
Like many other medical professionals, dentists typically pay a high amount of tax. Unfortunately, there is a lot of misconception in relation to the tax planning options available to dentists, in particular concerning income tax.
Often we see dentists who have been incorrectly advised by their accountants, because they are ‘generalists’ and don’t specialise in this area. This may lead you to paying too much tax, but in some cases it may expose you to significant penalties due to the use of inappropriate strategies.
In this article, we explore the differences between being a dentist contractor and employee.
Working As An Employee Dentist
If you are working as an employee, your employer will deduct income tax from each pay and they will also pay your superannuation guarantee contributions.
You are not able to split income with your spouse or anyone else, and your tax deductions will be limited. You will be able to claim work-related expenses such as further education and training, make salary sacrifice contributions to super, salary package certain items and claim negative gearing deductions.
As you can appreciate, your tax planning options are fairly minimal.
Working As A Contractor Dentist
Most dentists in Australia work as contractors. There are some distinct differences with being engaged as an employee compared to a contractor. As an employee for example, the employer would need to provide:
salary and superannuation;
paid leave entitlements (if part-time or full-time);
worker’s compensation insurance;
Thus, if you work as a contractor, you would typically be liable for all your own expenses. You may be asked to set up a company or a trust to contract to the practice, but typically this offers little or no tax advantages to you – more about this later.
As a minimum you would need to register for an ABN and GST; you can do this yourself or seek the advice from an accountant.
Most practices will collect patient billings on your behalf, deduct their management fee (plus GST), and pay the remainder to you. The management fee typically averages around 40%, depending on the arrangement and services provided.
Technically speaking in this type of contractor arrangement, you are working for yourself and are paying the practice for administrative services (reception, bookings, room, etc.). This has the added repercussion that any negligence or malpractice claim is your personal responsibility.
It is also important to note that the practice will not deduct any tax from the payments made to dentist contractors, unlike with employees, which means that you need to allow for future tax liabilities yourself.
Tax Issues For Contractor Dentists
You need to understand that being a contractor does not really allow for income splitting with your spouse, for example, as dentists providing their services are typically caught under the Personal Service Income(PSI) provisions. This is a complex set of taxation legislation. Please note, exceptions may apply, and you should always seek specialist tax advice.
You are required to include all billings in your tax return, claim a deduction for the management fee to the practice as well as any other relevant work expenses. You would also need to lodge a quarterly Business Activity Statement (BAS) to claim the GST credit of the management fee.
Once you have lodged your first tax return as a contractor, you will be issued with quarterly income tax installments (paid towards that financial year’s tax obligations), which means you have paid some or all of your income tax during the financial year. These income tax installments are based on your last lodged tax return, as such additional tax or possibly even a refund may arise if your income was different to that of the previous financial year.
There are many other implications of being a contractor, which should be discussed with your accountant prior to entering into any such arrangement.
Please contact Mitchell at Mitchell@affluenceca.com.au or contact our office on 08 9466 8478 to discuss your tax planning options in more detail. We are the leading dental accountant in Perth.