Employee vs Contractor vs Practice Owner
Doctors often argue about labels. The ATO looks at outcomes—because PAYG, superannuation, GST and PSI consequences depend on what actually happens, not what a contract is called.
This guide explains how doctors are taxed in Australia, using ATO-first principles and legislation-backed rules, with a practical lens for employees, locums and practice owners.
How is a doctor’s income taxed in Australia?
Most doctors' earnings are ordinary income and are taxed at marginal rates; deductions are allowed only for costs incurred to earn that income.
Most payments doctors receive for providing medical services are assessable as ordinary income under ITAA 1997 s 6-5.
Work-related deductions are only available where the expense is incurred in gaining assessable income, and is not private, domestic or capital, under ITAA 1997 s 8-1.
The ATO’s occupation guide for doctors and specialists remains the baseline reference for common income types, deduction categories and substantiation expectations.
How are employee doctors taxed?
Employee doctors are taxed on salary and wages with PAYG withheld, and deductions are limited to substantiated work-related expenses.
What an employee doctor looks like
Employee doctors are integrated into the hospital or practice business. The employer controls rosters, systems, and leave, and bears most of the commercial risk. The contract label is not decisive—the reality of the work is.
Tax treatment
Where a doctor is an employee, the payer generally must withhold PAYG from salary and wages under TAA 1953 Sch 1 s 12-35.
The doctor claims work-related deductions under the standard s 8-1 rules, with apportionment for any private use.
Practical implication:
Employee doctors usually have simpler compliance—no ABN or BAS obligations just because they are doctors—but fewer structuring options.
How are contractor or locum doctors taxed?
Contractor and locum doctors return invoiced fees as business income, but correct classification drives PAYG, super and reporting outcomes.
What contractor or locum arrangements look like
Locum and contractor doctors often invoice for services, work across multiple sites and carry their own insurance. However, being labelled a “contractor” does not determine tax treatment—the ATO looks at control, risk and substance.
Tax treatment
If genuinely contracting, income is generally returned as business income (and may still be personal services income, depending on the facts). Deductions remain subject to the same s 8-1 principles.
ABN, GST and BAS considerations
Many medical services are GST-free, but GST registration is driven by GST turnover, not whether GST is charged.
Where registration is required, ABN, GST and BAS obligations follow—this is a common compliance gap for locum doctors.
Learn more about Key ATO due dates →
Can a contractor doctor still be entitled to super?
Even when invoicing as a contractor, doctors may still be super ‘employees’ if the contract is mainly for their labour.
Under SGAA 1992 s 12(3), a person working under a contract wholly or principally for their labour can be treated as an employee for superannuation purposes—even where they invoice through an ABN.
Why this matters:
Many medical practices assume “contractor = no super”. The superannuation rules are broader than employment law and frequently catch medical arrangements.
How are practice owner doctors taxed?
Practice owners are taxed on practice profits, and the structure used affects how profits flow and how closely the ATO scrutinises them.
Practice owners usually operate through one or more of the following models:
A) Sole trader or partnership
Practice owners may operate as individuals or in partnership, with profits flowing directly to the owners and taxed at their marginal rates. There is no automatic income splitting simply because a practice exists. The commercial and tax implications of these models are outlined in our guides to the sole trader and partnership structures in Australia, including how liability, profit sharing, and compliance differ between the two.
B) Company or trust structures
Companies and trusts are commonly used in medical practices for commercial, asset-protection and succession reasons. However, the ATO focuses on whether these entities are being used to redirect the economic benefit of a doctor’s personal labour, rather than to support a genuine business structure. This distinction is explored further in our overview of company structure in Australia, including when corporate structures are commercially justified versus when they attract closer ATO scrutiny.
Part IVA may apply only where there is a tax benefit obtained and a dominant purpose of tax avoidance, not merely because an entity structure exists. For practice owners, cash flow, tax and funding decisions are interconnected, which is why forward-looking tools such as a three-way forecast become increasingly important as practices grow or restructure.
When do PSI and Part IVA rules affect doctors?
If income mainly comes from your personal effort, PSI rules may attribute it back to you, and Part IVA can apply to profit diversion.
PSI in plain terms
Personal services income (PSI) is income mainly generated from an individual’s skills or efforts.
Importantly, PSI does not prevent a doctor from operating a genuine business. Instead, it primarily limits income splitting and certain deductions when income is earned through companies, trusts or partnerships.
Where PSI rules apply, income earned through an entity may be attributed back to the individual who performed the services.
Why the ATO’s PCG guidance matters
The ATO has publicly signalled increased scrutiny of professional income arrangements—particularly where profits are diverted away from the main service provider. Passing the PSI tests does not automatically make income splitting defensible.
This is where proactive tax planning well before year-end—becomes essential.
The ATO’s core question remains:
Who actually creates the income, and who ultimately benefits from it?
What is a service entity arrangement in a medical practice?
Service entities can be legitimate when they charge arm’s length fees for real services, not to extract a doctor’s labour income.
Service entities commonly provide rooms, staff, equipment and administration to medical practices. The ATO accepts these arrangements where:
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Services are genuinely provided
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Fees are commercially priced
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Charges are properly substantiated
Arrangements become high-risk when service fees serve primarily to strip a doctor’s personal income rather than to pay for real services.
Practical checklist: reducing ATO risk
The ATO examines contracts, workflows and money flows—evidence of control, risk and services delivered is critical.
Key areas to review
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Worker classification: control, risk, delegation and integration
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Invoicing and payment flows
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ABN, GST and BAS position
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Superannuation exposure for contractors
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PSI and Part IVA risk in entity structures
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Service agreements and pricing methodology
The common thread is consistency between documents, day-to-day behaviour, and where profits actually land.
Specialist accounting support for doctors
Doctors face unique tax and structuring risks because their income is closely tied to personal effort, regulation and ATO compliance focus.
At 42 Advisory – Accountant for Doctors, we work with GPs, specialists, locums and practice owners to ensure tax outcomes align with how the practice actually operates—without aggressive structures or unnecessary risk.
This article is general information only and does not constitute personal tax advice. Individual circumstances matter.