7 steps to prepare your practice for SFAs and Payroll Tax changes

Grow Community
26 September 2024
5 minute read

The recent changes to how the tax office interprets Service Facility Agreements (SFAs) and payroll tax could have serious implications for dental practice owners. It’s important that you understand how these changes may impact your practice and what you need to do to ensure that you are compliant from a legal, financial and marketing perspective. To help you to avoid the pitfalls of improperly prepared SFAs, we’ve reached out to experts within the Grow Community for their insights.  

What is an SFA?  

An SFA is a contract between a dental practice and a dentist who operates out of the practice. Unlike an employment contract, whereby the dentist works for the practice owner, under an SFA the dentist operates as an independent business who consults out of the practice. The practice then charges the dentist a fee for access to consulting rooms, equipment and administrative services, including patient billing. How the patient billing (flow of funds) is drafted in the SFA between the practice and dentists is critical from a payroll tax perspective.  

Why cash flows matter 

Under a correctly structured SFA, 100% of the patient fees should go to the dentist directly - not the practice. In most dental practices however, this is not the case and could expose practice owners to substantial financial and legal risks in a payroll tax audit. 

 “There is greater SRO audit activity than ever before because of these recent changes and interpretations - the dental sector is identified as a risk area because of the widespread usage of SFAs. Recent case law has turned focus onto these SFAs and whether they are actually being implemented as contractor relationships, which are, as such, caught within state based payroll tax legislation. There is potential for hefty penalties and tax payable if the SFA is implemented incorrectly and a practice’s historical flow of funds is assessed to be contrary to the current recommendations,” says Julian Whitehead, of Whitehead Legal.  

 Where does payroll tax come into it?  

Payroll tax applies to gross wages paid to employees and relevant contractors. The payroll tax threshold varies from state-to-state, but as an example, you would be subject to payroll tax in NSW if your business expenses wages above $1.2 million per annum.   

The risk for many dental practices arises if your SFA is not structured correctly and your flow of funds is not compliant with tax laws, meaning your practice might be exposed to payroll tax liabilities.  
 
How to protect your practice 

According to experienced Practice Owner Dr. Phillip Palmer, the days of ‘handshake deals’ and incorrectly structured SFAs between practice owners and the practitioner are over.  

“In some regards the entry of corporates have made the dental sector more professional, but in other ways they have created grey areas because the inclusion of terminology that implies control over the working conditions of practitioners (such as work hours, mandatory leave, etc.) make many SFAs appear to be little more than an employee agreement.”, Dr Palmer said.  

 This brings us to the problem of 'deemed control,' which is any rules set by the practice that restrict a dentist’s working conditions or limit their freedom to work elsewhere. Deemed control is a major concern for regulatory bodies - anything that could be seen as treating dentists like an employee and not an independent business can raise alarm bells. 

 The good news is that there are steps you can take to protect your business: 

Navigating SFAs and payroll tax law is both an accounting and legal issue. It’s also incredibly complex, so it pays to engage professionals with experience in SFAs for medical and dental professionals to ensure your business is compliant. 
 
Julian recommends, “the first question you need to ask your accountant is if you are above the payroll tax threshold for your state. If you are, then you need to review the terms of your SFAs and specifically how your practice is implementing the flow of funds to ensure that tax is being managed in accordance with relevant tax laws.”. 

It can also be wise to seek guidance from your accountant on alternative patient fee flows. 

Consult with your legal provider to review your current contracts and SFAs with practitioners. Begin by examining your existing SFAs; if they weren't created in 2024, consider improving them or drafting new ones, paying special attention to the following details: 

• Payroll tax thresholds in your state and potential payroll tax exemptions, which could safeguard you from an adverse payroll tax assessment; 

• How the practice is implementing the patient fee flow; 

• Ensuring there is no deemed control, including restraint clauses; and  

• Reviewing and removing any employee benefits (perceived or otherwise).  
   

 
Potential changes to flow of funds in your SFAs can affect your cash flow.  

 “If practices need to wait on their associate dentists to collect patient fees and pay their service fee portion, there is a lag time. So, you need to have facilities in place to ensure that your fixed expenses can be covered while you wait for income to come in from practitioners.”, says Teresa Nguyen, Finance Specialist at Credabl. 
 
Teresa recommends having a cash flow facility set up and says there are many options available, including secured and unsecured finance solutions to suit your needs.  
 
“Whether you use it or not it’s at your discretion, but what it gives you is peace of mind to cover your operating costs.” 

 
Chaz Puett, Regional Manager at Great Dental Websites (GDW), says, “It’s also important that you make sure that your website reflects how your agreements are set up with independent practitioners.”.  
 
Although there are no clear guidelines to ensure your website is compliant with tax laws, Chaz recommends exploring one of three options to clearly distinguish independent practitioners from employees: 

• Completely separating your independent practitioners from your website and creating a branded associate website for them; 

• Copywriting to create a distinction between employees and independent practitioners – but check with your legal team first; or   

•  Creating a whole new page for associates on your website.  

You should also check if your associates have their own website Chaz says, adding that, “These changes could have search engine (SEO) ramifications in how you and your associates show up online.”    
 

According to Julian, it’s also important that practices develop guidelines for their employees on how to deal with the practitioners operating underneath a separate SFA.   
 
“Employees need to understand why some dentists in the same practice might wear different scrubs or have their own website and educate their team about how practitioners should be treated.”, says Julian. 
 

 
Dr. Palmer says, “I recommend that all dental practices ensure confidentiality provisions within the SFA are watertight, and perhaps put some sort of database restraints or software security in place so that associates can’t take patient lists with them if they move to another practice.” 
 

 
To find out more, or to connect with any of the Grow Community partners, please contact us on info@growcommunity.com.au and a Grow Community Team Member will be in touch.  
 

5 tips for Associate Dentists to tackle SFAs and Payroll Tax changes  

Recent changes to how the tax office interprets Service Facility Agreements (SFAs) mean Associate Dentists must understand their legal implications and contractual rights. Julian Whitehead of Whitehead Legal highlights the importance of correctly structuring SFAs 

➡️Read full article here 

Webinar: Starting Your Dream Dental Practice 

We recently hosted a webinar with our partners, offering invaluable insights on starting your dream dental practice. Unlock your access to the webinar recording by clicking the link below. 

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