Employee dentists and employing dentists: a dummies guide

UPDATE: You can now go into the ATO website and get a WRITTEN opinion to help you work out if you can pay an independent contractor.

You can get an online written opinion from the ATO website which indicates that you have acted on the basis of ATO advice.
“This is a record of your genuine attempt to understand your obligations for your worker and would be considered if we review this working arrangement in the future.”

BE AWARE that this only means you might not receive a fine if you are found to do “the wrong thing”. This doesn’t mean the ATO will not charge you any tax or superannuation which it believes should be owing if the arrangement is not deemed appropriate.

TYPES OF ARRANGEMENTS

1. Service Facility Agreements
In order to avoid some questionable arguments about whether a dentist is a true contactor it is becoming more common for practices and dentists to work under Service Facility Agreements. Instead of a practice bringing in a contractor, the dentist virtually “hires” a facility to work!
Hence the dentist is self employed and pays a fee for an entity (e.g. company) which provide all the services needed in order to practice dentistry. e.g DA’s, room, materials etc etc. In this structure the dentist is not technically employed by the practice.

If the income/payments received from clients (patients) are paid to a service company then
this can be seen as a employee, contractor or employment agency agreement which can then be contested as a sham arrangment or subject to payroll tax grouping.
In order to avoid this, income payments are received into a trading trust account which has the sole role of receiving payments. From this trust money is distributed to the dentist and to the service company as per the service facility agreement. Trust distributions and company dividends are not subject to payroll tax.

As an example for Service Facility Agreements, money received in fees is held in a trust account and the dentist is able to take 34% (for 40% commission) of these fees and the practice receives payment of 66% (including GST) for providing the service facilities. As the dentist is seen to have paid the 66% including GST as a business expense they can claim back the 6% in their BAS statement.

ADVANTAGES DISADVANTAGES
Owner Dentists earning are not included within practice wages so not counted towards payroll tax.
Dentists are self employed so more clearly legal responsibility for own work. Easier to manage once set up.
High set up costs and on going accountant fees;
Experienced lawyer and accountant needed for correct legal entities.
Dentist (worker) Control own superannuation. e.g. don’t really have to have any.
Own GST claimable deductions
Company ABN needed
Own GST reporting (BAS). Need to claim back GST so some minor delay in money received.
Paying your own tax /own superannuation so good record and cash management is required.
Higher Accountant fees than if employees

[About Payroll Tax
Once wages rise to a certain leave in a business, the business needs to pay the state government payroll tax. This of course increases the cost of running a business.
Payroll tax is a state based tax on wages (including superannuation and contractors wages) and it is about 5% of the wages bill once a certain threshold has been reached. The threshold where payroll tax occurs varies greatly from state to state.
Anyone starting a practice or buying a practice might be wise to set up the business structure to allow for dentists to be employed under a Service Facility Agreement so payroll tax remains unlikely. Service Facility Agreements require very specific business structures and should be setup by lawyers very experienced in this field. The benefit for dentists working in this arrangement is that the complexities of retained Fairwork entitlements and retained Long service leave entitlement are not an issue. Dentists are able to decide on whether they consider superannuation a good investment for their particular stage of life. Superannuation is not compulsory for the self employed.]

2. Employee – Only Commission based calculation
This is the arrangement that I am familiar with. I would never recommend it because it is quite complex to manage.
Example: The dentist gets 40% commission (or whatever is agreed upon) which is to include all entitlements such as superannuation, holiday pay, sick pay and long service leave.
Practices (owners) paying with this system need to have an extremely clear idea of all entitlement rules and keep very good records and supply excellent pay slips.
Practices will be retained money from the dentists commission to pay for entitlements. Until entitlements are used the money stays with the employer. Employees dentists need to have a good grasp of the entitlement requirements so they can minimise the money retained by the practice owner. The money retained by the practice for future payment to the employee dentist may be higher than 20% of their total wages.

ADVANTAGES DISADVANTAGES
Owner Retain employee’s money for future entitlements so good for business cash flow Difficult to work out and keep track of entitlements.
Need to have a great understanding of entitlements. Need excellent documentation.
Dentist (employee) No accountants fees – simply employee.
Superannuation paid
More earnings are unavailable as the practice protects itself unless all holidays and sick pay are used each year.
GST costs are not tax deductible unless the practice agrees to include them in costs.

Understanding entitlements:
1. Sick pay is cumulative and can’t be paid out. Personal leave and carers leave accrues at a rate of 10 days (2 weeks) per year (full time). To gain access to withheld entitlements employed dentist should say they want personal, sick or carers leave for the first 2 weeks (for full time worker) of time taken off per year. There is no legal requirement for a medical certificate if the practice does not require this. By taking sick leave rather than holidays the employee enables the practice to reduce the withheld entitlements. (e.g. the employee dentist can access more of the money they are owed)
2. Holiday pay – it is possible to pay out holiday pay once a worker has more than 4 weeks owing. At any time the minimum retained amount of holiday pay needs be 4 weeks. Holiday pay in excess of the 4 weeks can be paid out if the employee asks for it.

If the employee dentist takes all sick time (2 weeks) and all holiday time (4 weeks ) then the practice would only need to retain 1 weeks pay per year against future long service leave requirements. The complexity of the calculations makes this system of employment annoying to manage.

3. Employee – Base salary + Bonus = Commission %
The best option for minimising money retained for entitlements and for simplier calculations is employing a dentist on the minimum wage and paying bonus payments to achieve a commission equivalent payment..
In this arrangement dentists can take advantage of the fact that there is no award for dentists. 
The simplicity of using a fixed low hourly rate to determine entitlements liability, means the employed dentist has minimised the dollar value of retained entitlements and the practice has minimised their liabilities. This is most attractive to both the employee dentist and employer dentist.

Other considerations to benefit employee dentists
Tax deductible expenses incurred by the employee dentist, which include GST, can be paid by the practice and the non-GST cost can be deducted from the overall commission (as with Lab fees). There should be no problem with the practice doing this and will save the employed dentist money.
Employee dentists should remember to ask for personal/carers (sick) leave when they take time off. This helps the employee keep retained entitlements to a minimum. Holiday pay can be paid out (subject to restrictions ) but sick pay will be an accumulating liability so it is important to minimise accrued sick leave.

How employee dentists can gain access to all accumulated entitlements
Resigning from a practice should release all accumulated entitlements. Practices can then re-hire the employee dentist with a zero entitlement balance.
The benefit to employee dentists is they can have their money “now”.
Practices should NOT do this if any personal/carers (sick) leave is owing. Termination payments must include superannuation (which is not generally required for termination payments). Termination payments must clearly state what the entitlements are for: e.g. Holiday pay and long service leave.
RISKS: it can be argued that re-hiring someone without a 3 month break constitutes continuity of service so all their entitlements still stand. In the worst case scenario if this was found to be true then all that will have happened is the holiday pay will be seen as have been paid in advance (which is legal) and long service leave will have been paid before due (also legal). Sick pay accumulates and can not be “paid out” so any “payout” of sick pay would not be recognised by law and the practice would still owe it!
You can not set up fixed length employment contracts e.g. yearly, and reset the entitlements each year as this is seen as manipulating the system.

Using MYOB with an employee dentist payment
a) Minimal wage + bonus
1. Make sure Holiday pay; Sick pay and Long Service leave are enabled and the rate per hour is correct and ticked as enabled for this dentist. For example:
LSL = 1.6667% of gross hours for Victoria (some states have different rates)
Holiday pay = 7.6923% of gross hours (leave loading is not required)
Sick leave = 3.84615% of gross hours
(Check MYOB help to see if this is correct for your practice)
2. Set up a standard pay
Set the standard hours and the minimal hourly rate (make sure you adjust this whenever the minimal pay rate increases)
3. Pay the dentist at the same time as other staff e.g. fortnightly.
Immediately after the first payrun into a new month you will make an additional payment of a bonus. As this dentist now received a fortnightly minimal wage they will be $2800 ahead in payments compared to the old system of end of month payments. Hence if their bonus is a bit late it is hardly a point for complaints!
At this point you will need the following:

  1. Your record of Net earnings since they started. e.g. ( Total Fee Income minus lab + other expenses) X Commission %
  2. MYOB report of payments since they started (this will show Wages (including tax) + tax + superannuation payments)
  3. MYOB report of entitlements owed
  • (Entitlements money you need to keep Z): Multiple their Entitlements owed by their hourly rate (minimum wage rate). Add 9.5% of that total to account for super that will be payable. This is the total amount that the practice should keep aside to pay for future liabilities (Z).
  • (What the practice really owes the dentist X): Calculate the total commission payment that they would have been entitled to since they commenced work (X).
  • (How much the dentist has already been paid V+Y): Use MYOB report of individuals total payments to see their total payments (make sure their most recent payment is included in this total). This will be all payments (V) + all superannuation (Y).
    Note: Find transaction for their card only shows what they were received with tax and super removed so be aware what you are looking at. REPORTS is the best place to source this.
  • Bonus = X -( Z + V+ Y) . Remember your Bonus Gross must include superannuation and tax. You can make a bonus payment by doing an individual employee pay run in MYOB. You will need to adjust (increase) the tax paid for this single payment, as MYOB will not work this out correctly. (hence you will need to adjust the actual bonus figure you place in MYOB)

b) Wage solely worked out on the commission only basis
MYOB can help with this way of working out payment and recording payment as well. It is important that your employee dentist receives a payslip clearly stating what pay was for e.g.  holidays and other entitlements. It is worth the time to get MYOB to generate a correct pay slip so there is no option for future disputes.
1. Set up MYOB for a Salary worker so holiday pay; Personal leave and Long service leave are calculate on a “hours” per year or month basis. You will need to set these up as separate new payroll categories as you can not change MYOB’s payroll categories per individual. Instead of new payroll categories you can use the hourly basis as above and pay wages rather than a salary but you will find you need to adjust the hourly rate each pay period.
Long Service leave : 32.9335 hours per year for a full time dentist
Holiday pay = 152 hours per year (4 weeks x 38 hours) or 12.67 hours per month (152 hours / 12 months)
Sick leave = 76 hours per year (2 weeks x 38 hours) or 6.333 hours per month (76 hours / 12 months)

While the dentist on a “salary” you will still need to make calculations to determine how much money to keep aside for entitlements. Your legal obligations are to pay entitlements for hours taken and not as a percentage of money earned.
You will need to record any entitlements taken on a hourly basis to avoid disputes of money owed.
MYOB (or equivalent) is handy as it will keep a total of hours owed and will be used to produce pay slips clearly stating entitlements paid out.

At this point you will need the following:

  1. Your record of Net earnings since they started. e.g. ( Total Fee Income minus lab + other expenses) X Commission %
  2. MYOB report of payments since they started (this will show Wages (including tax) + tax + superannuation payments)
  3. MYOB report of entitlements owing
  • Calculate the total commission payment that they would have been entitled to since they commenced work (X). Use MYOB report of individuals total payment to see their total payments (make sure their most recent payment is included in this total). This will be all payments(including tax) + all superannuation (Y).
    Note: Find transaction for their card only shows what they were received with tax and super removed so be aware what you are looking at. REPORTS is the best place to source this.
  • Calculate the total number of hours worked (including all sick and holiday time taken) this month (since the last pay) (A). Calculate the hours of entitlements remaining  (MYOB + current months figures) (B).
  • X – Y = Z (remaining money owed). The remaining money owed (Z) needs to cover this months pay (J) + any entitlements owing (K).
    Total hrs that need to be financed = Hours since last pay(Q)(including any entitlements) + hours of entitlements owed (M).
    Z divided by total number of hours = hourly rate (W). So payment this month would be hours this month Q multiplied by hourly rate W. This would be a gross payment which includes superannuation. (Q*W*0.913242 = payment without super. Super would be Q*W*0.095)
  • Make sure as you may double check what you are paying:
    1. Total that the dentist is due via commission since starting = (total paid out (including taxes and superannuation) + entitlements (including superannuation) that they haven’t yet taken.)

Public holiday pay
Employee dentists also need to be paid for public holidays. Neither system above using MYOB accrues public holiday pay but as both rely on monthly reconciliation of payments this amount will not greatly alter payments. If you wanted to be really accurate with retained liabilities then a MYOB payment category for public holidays would be added and the accruing rate would be similar to the sick leave payment. It will vary from State to State and depend on the actual working days of the employee dentist. As the long service leave liability only occurs after 7 years the practice owner will already be accruing a liability that may never occur (so you are retaining one week of pay per year for long service and you may never need it if they dont stay that long).

MYOB and Journal entries
While MYOB will not do calculations for you it is possible to keep a running tab of both total “commission due” and “payments made” to employee dentists in your profit and loss or balance sheet via journal entries. The logical place for money earned is the profit and loss while the running total of payments and remaining entitlement money is on the balance sheet. MYOB will do totals and subtotals to help with the running tab. The benefit of doing this is for clear reporting so excel spread sheets don’t need to be accessed by multiple business owners (but you will need them for easy calculations).

NOTE: If following my calculations you need to be certain that they work correctly for your situation and let me know if you find something incorrect so I can alter them. While both these options look more complicated than simply paying a contractor you will find they are manageable for whoever does your normal pays. Owners should, however check that the results are correct by returning to the basic total fee X commission rate and compare it to the total payments (including tax and super).

*Victorian Dentists Dec 2017. ADA Human Resources advice.