6 April 2021
ATO practice audits and avoiding that ‘C’ word (Part I)
You will often hear a practice manager, doctor, or doctor owner say that “their doctors” are “contractors”.
In terms of tax and employment law, it can be a very loaded statement, and one that sparks the interest of the sniffer dogs at the ATO.
Even a practice website that states “Our Doctors” can trigger interest from the ATO, depending on what construction a practice has for its doctors in terms of work.
In this article we cover the top five common errors we see practices make in respect to employee and contractor relationships with respect to the law and tax arrangements.
Many practices will end up getting a call from the ATO. How you respond is the key.
(This is part one of two. Part Two will cover practical court case examples of what I commonly see practices get wrong.)
If I’ve worried you just a little but you are not interested in reading about the devil in the detail you could try our national 70 point practice self-audit Employee v Contractor v Tenant Provider tool. It is designed to help you score yourself on how safe you are, and depending on that, what you might do next.
Employee and contractor arrangements are a highly contested area of law and tax regulation in Australia.
Many practices prefer non-employee arrangements due to medico-legal, Fair Work, employee on cost, recruitment and retention issues. The default is often to then refer to doctors on site as “contractors”. But they are much better described as and managed as “tenant doctors” or “tenant providers”.
Compliance is a serious science now
There are two main reasons why a medical practice gets caught up in stressful and expensive Employee v Contractor, Medicare, Fair Work, Payroll Tax, ATO or superannuation audits.
- Practice disputes over pay or when you are buying or selling your practice
- ATO or statutory digital audit
In many of these cases we read more and more where practices are being unexpectedly investigated based on contractors/tenants being deemed employees with employee entitlements. Having your service arrangements reclassified in this manner can lead to significant issues with PAYG, Super, payroll tax and even new GST obligations. We have seen contractor arrangements subject to the recent Department of Health’s pathology excessive rent investigations and Medicare Shared Debt rules.
A “gentleman’s handshake” is no longer good enough when it comes to avoiding disputes and meeting your compliance requirements.
No matter how big the company or clever your lawyers and accountants are, the tax and Fair Work authorities have been aggressively pursuing small and large businesses which haven’t been expressly clear in their contracts and compliance documentation what they are up to.
You will note over the past year or so that some of the biggest companies in Australia have been reported in the media for underpaying their staff. Even the lawyers who are advising them had been getting it wrong. Some GP employers feature in the list:
Underpayment of wages cases since 2019
- Top-tier law firm clocks up $290k underpayments bill
- ABC underpaid staff $12m
- SBS running list of Australian businesses that have underpaid staff in 2019
- GP corporate admits it underpaid staff by $15 million
- Idameneo (Healius) back-pays workers over $15 million
- SBS running list of Australian businesses that have underpaid staff in 2019SBS running list of Australian businesses that have underpaid staff in 2019
The ‘explain it to me in simple terms’ test
If you cannot explain your structures and your numbers without your accountant and lawyer in the room, you may have a problem. The role of your adviser is to help you to simply and holistically understand and explain your arrangements. Initially, you should not need them in the room to answer a simple question.
Can your adviser explain it all simply to you so you quickly understand? If not, you are likely in bad territory.
And if you ever find yourself in some sort of audit net, and you haven’t ever asked your adviser to do this simple thing for you, as a sort of quick test, then you can’t really blame them later on.
It is not uncommon, by the way, that an adviser can’t explain your set up simply and logically to you.
I have found that it is rare that a practice owner or their advisers can explain why they have a certain set up in place, beyond a tax reason. This is the next big warning sign. Tax advantages cannot be the only reason.
If in doubt, don’t start trying to explain stuff
If you do end up seemingly trapped by authorities and pressured to answer the phone or email you should probably stop first and think: do I actually know what I’m talking about and how to answer these specific questions? You can’t obstruct authorities, but you have every right to seek advice before dropping yourself further into a rabbit hole by responding under pressure in uncertain terms. You can very quickly make that rabbit hole run very deep.
It is very hard to unsay things. And you probably do not know what you are actually saying that can never be unsaid.
Stop, think, collect yourself and get advice.
Investigators can and will talk to everyone from your doctors and staff to your accountant. They can ask to see your contracts and will always check out your website for telltale signs of what they think they are chasing. They want to see if everybody understands and is on the same page. It is not a happy time for anyone. It is worse than accreditation because you get to foot the entire bill regardless of how well or not you have set your practice and its worker arranagements up.
Do not wait for an audit. Most people will eventually get one.
What are regulators really looking for?
Today, the ATO and their friends are looking at the overall “character” of your practice arrangements. To many advisers’ surprise, they take a holistic view. No single contract, system or well-intended advice in isolation is a panacea to your concerns.
The missing pieces of the jigsaw puzzle must be found and put in place.
A simple example is a practice being investigated due to a contract dispute. They are facing a million-dollar payroll tax bill. The official reason given is their website said “our doctors” (implying a employee relationship) and they are an “AGPAL accredited general practice”. This means nearly every practice in Australia may have the same problem!
That’s where we got the idea for a national 70 point practice self-audit Employee v Contractor v Tenant Provider tool. It’s a comprehensive checklist you can use to help assess your compliance health on employee vs contractors issues which includes detail like what your website should say, record keeping and contract basics.
It can provide an automated rating and summary of key issues to help you start the conversation with your team and your advisers.
The five biggest common practice errors
- Not having an up-to-date signed agreement – you may be accused of fraud. Lawyers have advised me that without a signed agreement such as a tenant doctor arrangement where you are collecting money on their behalf it may be a criminal offence to deduct money from a doctor’s billings without consent. Due to COVID-19, if you are thinking about increasing the practice percentage for a jab, make sure you have this in writing!
- Employee-like contract terms. Off-the-shelf templates are only a good idea if your lawyer and accountant is fully aware of your structure and arrangements. Often we see self-incriminating contractor agreement terms that state:
- Restraint of trade clauses
- Restrictions to delegate work
- Money not held in trust
- Practices insisting that complaints are handled by the practice
- Guaranteed minimum hourly (top-up) rate e.g. $50 per hour or 50% of gross billings whichever is higher.
These types of terms or language may deem your contractor as an employee.
- Website referring to “our doctors” or “our team” and/or “our accredited general practice” listing providers who are not employees or subcontractors. If they are tenant doctors/providers they should be listed and treated like tenants in a Westfield shopping centre.
- Using the same single Xero, MYOB or accounting ledger and bank account to record medical fees and paying administrative staff. Not using systems to clearly separate practice service entity, landlord and tenant activities is a recipe for trouble.
- Piecemeal professional advice. Advisers only give advice in their area of expertise. Sometimes they fail to advise or be aware of the shortcomings of their advice. A big mistake is not having their advice in writing. Start with a holistic approach that covers all areas such as your business structure, income tax, payroll tax, Fair Work, commercial or medico-legal issues. All these things are intimately related and if you think about the holistic approach the ATO is taking to audit, you need to think that way with your advisers. Advisers with particular expertise that can’t communicate with other advisers can you leave you adrift. Ideally you need a co-ordinating adviser who understands the whole compliance ecosystem.
Advisers: you get what you pay for
Let’s face it, paying for advice is a grudge purchase – like going to the dentist.
What makes this worse is you cannot see the immediate benefit. This makes it harder (next to impossible) to justify.
People are happier to pay for a cure than to prevent a problem that they can’t easily perceive as a threat. It’s a similar psychology to young people and superannuation.
The more profitable high performing practices we see make it an annual strategic objective to review all of their compliance and done this way makes the process far more affordable and doable. It increases practice certainty for them.
Being an honest and ethical fool is not a defence.
Facebook network groups are a popular way to get free advice. But in the long run, they may do more harm than good. They lack context and they often aren’t great with confidential information and data. You cannot rely on the advice you have received if it is not professionally experienced or qualified. It’s advice that has no context and is often trend and influencer directed. It’s not professional and suitable.
Off-the-shelf legally prepared agreements are a slightly better option, but only slightly. Many are implemented on a piecemeal basis and again, they lack context and overview. It’s DIY without any real expertise for reflection. I have seen with a recent client it can make your situation systematically worse especially if everyone has signed off on a dodgy agreement.
Does my accountant and lawyer have the right experience?
Any accounting and law firm can state they “specialise” in medical practices.
In the end, these are all care but no responsibility disclaimers.
They should demonstrate they do more than a lot of doctor tax returns and not just sell you insurance and loan products that you may not need.
An experienced qualified registered accountant and legal adviser should be at least 10 years full time in your area of work. The fact the local accountant does the tax work for Elon Musk is a warning sign not a pitch.
Firms which specialise in healthcare and medical do it for a reason: it’s very complex, so there is a business model for such firms.
To find out how medically specialised a firm is, find out if they are in the medical or health media and for how long. Ask them if they know what a SIP or a PIP, SWPE or outpatient clinic is. If they can’t answer this, then seek a second opinion with someone who can. Some of us have been AGPAL accreditation surveyors for many years.
We even know what a Bowie-Dick test is.
Verbal professional advice
Verbal advice is only as good as the paper it is written on.
Like the courts, start with a holistic approach. Most importantly make sure you receive and act on up to date advice at least every two years. Medical magazines like The Medical Republic and Australian Doctor are a useful starting point.
What are the real chances of an audit of some sort?
Historically the chances of getting caught have been low.
Some senior doctors will make comment to me along the lines of “We have never had a problem in 30 years so I am not too concerned”.
However, the new digital data matching and sharing era across government departments changes everything. For the government, it is now much cheaper and easier to find targets.
But we are too ethical to be doing the wrong thing!
Being a medical practice that saves lives at the front line is of no concern to the ATO. A government won’t lose votes pursuing a profession that average punters think are making a mint.
Tax agent profiling
Another new trend from the tax office is profiling tax agents and their clients. If your low priced malleable tax agent has been accused of systematically not doing a client’s books correctly by giving you deductions that the competition will not, this may potentially expose you vicariously.
Robo audits are real!
Together with new tax rules, the ATO can paint a picture of your affairs from many different data sources.
Plan for a please-explain, especially when your tax return income does not match up to your lifestyle expenses. These may include your house (they know how to use Google Maps and realestate.com.au) or when your Maserati appears on Facebook.
Data sharing across state and federal agencies has now arrived. Examples include the new global and local government Digital Business Plan.
The new and controversial mandatory E-invoicing laws will affect how you issue tax invoices to your providers and patients. The ATO data sharing (using the myGovID and RAM relationship authority), Single Touch Payroll and Company Director Identification – Director Identification Number (DIN) requirements are linking up all your related entities together. This will help identify excessive remuneration or profit-sharing to lower tax-paying family members or entities such as “bucket companies”.
With a potentially debilitating domino effect, it will not take much to trigger an investigation.
We all live in an unprecedented permanent digital audit trail in which you can’t reinvent the past. Tightening the screws on any loose arrangements is psychologically difficult, but entirely logical.
Are you likely to face a practice dispute?
Unhappy people aren’t very predictable.
Maintaining a good culture and staff morale has probably never been more difficult and never more important to help avoid additional issues. We use an inexpensive tool called Officevibe. It only takes one disgruntled doctor to trigger a bigger problem.This can be over fair pay or buying or selling a practice.
A current example: charging providers a higher service or management fee due to COVID-19
In general practice, the low balling of the general practice Medicare COVID-19 immunisation rebate has thrown the cat amongst the pigeons for owners, providers and their staff.
Based on that rebate it will be difficult for a doctor to get full informed consent. The only way for the government to get this up is to exploit the goodwill of doctors and practice owners.
Practices need to combat the medico-legal risk of cutting corners, burning out staff or going broke.
The money pressure can breed contractual disputes within the practice and amongst providers.
To remain viable, practices are being forced to charge higher service fees, up to 50% of gross billings to their GP providers. The federal Health Minister’s threats against charging fees for the vaccine are concerning.
Many practices who are billing on behalf of their providers may not be aware that to lawfully deduct this or any amount they will need an agreement in writing with their tenant or run the risk of being criminally accused of systemic theft.
This will add more pressure on practices to do things properly.
Immunising your practice from investigation
Firstly do not use the word “contractor” when trying to describe how you engage your doctors and providers. Most practices have what can be described as a Landlord and Tenant relationship. They and sometimes their advisers unwittingly do not realise it. The characterisation of your relationship is critical in dodging an unnecessary audit.
“Contractor” usually raises more questions than it answers. We prefer our clients to construct and describe the relationship as tenant doctor or tenant provider.
Language is important.
Using commonly used words in front of an investigator or staff tends to imply something else that you may not have intended. This could have serious unintended consequences. This is especially true from a legal and taxation point of view.
Try and conduct your affairs as if you will get audited.
This is just scaremongering, right?
You need to decide yourself.
The following case and tax initiatives provide some real world context and explain what the government is looking for.
Medical and allied health industry businesses often fall within one of two types of business models:
- An employee or contractor model. In this structure, a practice entity carries on the medical services business and contracts with its patients. The practice entity then separately engages either employees or contractors (or both) to provide the services the practice entity needs to serve its patients.
- A service entity model. In this structure, practitioners carry on their own business and contract with patients directly. The practitioners pay a fee to a services entity for the provision of administration and other support services, and often the right to occupy the premises to carry on their business.
The two models have very different PAYG withholding, superannuation and payroll tax consequences.
I have been working with barristers on a number of recently high profile cases that affect medical and healthcare practices. The legal opinion is clear. Your entire practice ecosystem needs to be compliant. As the Super Optical payroll tax case has shown, charging consumables and guaranteed minimums with rosters from the wrong entity can attract attention.
A holistic top down approach and not a just a bottom up piecemeal approach makes a difference. A well written service agreement is not good enough. You have to prove you are doing what your service agreement says you are doing.
When you cannot explain your arrangements without your accountant or lawyer in the room, you become an easy target. Healthcare practices with fragmented structures and systems and poor documentation are easier to prosecute.
Practices need to make sure of four things:
1. Clear business model (is it a true service trust arrangement?)
2. Legal documentation and compliance
3. Financial accounting and administrative systems
4. What your staff and doctors understand their arrangements to be.
It is common to see practice invoicing that does not match banking, accounting and legal documentation. This immediately increases any income tax, GST, superannuation and payroll tax risk.
The auditors look for substance over form. To the contrary they may unnecessarily compromise a practice in an audit.
In these examples since the early 1990s, used by small to large corporate practices, the most popular arrangement is more appropriately described as a tenant doctor arrangement .
The practice acts as a landlord and the doctor a tenant. They have a service agreement akin to a rental contract for support services e.g. premises, nurse, rent and practice systems.
The practice agrees to charge a doctor GST based on a percentage of the doctor’s gross billings for the week or month.
For tenant doctors, many practice accountants are not aware of the need to set up a separate billing trust or medical fee clearing account arrangements. The main reason this happens is that is not usually part of processing your practice’s annual financial statements and tax returns. Furthermore if you do not ask your advisers, they often will not tell. Or worse, they may not even know.
Too many time-consuming journal entries and reconciliations
Why does a practice have so many complicated monthly journal entries in the practice entity to do the weekly or monthly pay?
Many practices unwittingly do these journal entries to reverse out these transactions each month or year to make them look like tenant doctors. This is not a good look.
It would be analogous to Westfield collecting and banking Woolworths money on their own books or ledger.
To be commercial, there needs to be a clear separation between provider and practice income activities including a separate trust bank account. Recognising it is the practitioner’s money and not the practice’s is a good starting point.
New service fee calculation software
Software that can automatically calculate service fees and other data live (via the cloud) can be very powerful in practice management, particularly for larger practices, but take care to check that it is set up correctly, and that your accountant understands how it has been implemented. As with any software processing algorithms, “garbage in, garbage out” can occur.
Of course, software companies are not your accountants. They do not sign off on your tax returns. Ultimately you or your accountant is responsible.
Tenant doctor arrangements
Despite a radiology practice arguing it had a tenant doctor arrangement in the Winday payroll tax case it was found to be liable for payroll tax.
This happens when a service entity incorrectly reports on its financial statements and tax returns how it records doctors’ medical fees. It might put them all under the heading “Medical Fees or Patient Fees” in the profit and loss statement, and continue to report all of the payments remitted to the medical practitioners as a “Contractor” expense in the same entity ledger and bank account.
Recent legal cases including the Uraidla Physio contractor case have clearly established it is not enough to have a well-written contract. It is important to show your practice can walk the talk and not be taken out of context.
The Australian Taxation Office
From 1 July 2021 there are new ATO profit allocation rules that affect doctors and healthcare practices with a personal services business or who have a service trust or entity that income split to family members or entities that pay a lower marginal rate of tax.
Recent successful employee v contractor court cases and investigations reveal that it takes more than just a well written legal agreement to defend yourself. You need to be across all parts of your practice arrangements not just specific parts that might seem more important.
It would be naive to assume that a single well written and expensive practice legal agreement from a reputable law firm will be the silver bullet that saves you. Recent Australian court cases reveal the contrary is true.
I will give practical examples and case law of common mistakes practices make in our next Money & Medicine issue on 21 April. (But if you can’t wait, click here.)
I am a registered tax agent, former AGPAL surveyor with 10 years of service, and a chartered accountant for medical and healthcare practices in Australia. I served on the AAPM national Board and was the inaugural national Chair of the Certified Practice Manager CPM post nominal. I continue to provide accounting tax and practice management advice to many practices all over Australia.