The accountant who first cried ‘the sky is falling’ on payroll tax, and no one believed him, is back, but if you can believe it, this time it looks like things could be even worse.
Our founding editor of The Medical Republic, once the long-time editor of Australian Doctor, so a wise person, always had two unbreakable rules for us all: no dodgy doctor stories (“they’re just clickbait with no public interest, we don’t do that”, she would explain) and never ever say “should” to a GP.
If she were around today I wonder if she’d let us run any of David Dahm’s tax stories. They do tend towards being morbid, sensational and very hard to comprehend, all at the same time.
This week, the long-time practice advisory principal, who is both loved and hated for freaking everyone out about payroll tax before anyone was the least bit concerned or interested in the topic, has put his head above the parapet quite a way again, but this time on a new and potentially even more ugly angle on tax planning that could ruin a GP if they aren’t being careful.
He wrote an article on Thursday this week calling out the Victorian and South Australian revenue offices for misleading the GP sector and mindlessly herding GPs like lemmings over a new and far more scary tax cliff than payroll tax – one that involves ATO-administered GST and encompasses potentially crippling superannuation obligations.
Dahm’s enthusiasm for doing detailed research across state and federal tax laws, cases and rulings, and finding cracks in how people apply said rules and laws, especially from an accounting perspective, is likely why he tends to be hated quite a bit.
A lot of people mistake his enthusiasm for finding dysfunctional outcomes of tax rulings and law as enthusiasm for pursuing doomsday scenarios for the sake of publicity.
The problem with this assessment is that it was that his attention to detail during the unfolding paytoll tax crisis made him mostly correct.
He started proselytising about payroll tax very soon after the first negative court decisions on the issue were published more than five years ago. Back then a lot of people scoffed. Five years on it’s been a hell of a roller-coaster ride for nearly everyone.
Is he correct this time around though?
When people are faced with such starkly dark bad news a first instinct is always to feel like it just couldn’t be true. After that the variations of avoidance behaviour can become quite exotic. And they did in the case of payroll tax.
Which brings us to David’s new possible bad news for everyone.
Now that most of the states have ditched the idea of an historical audit on payroll tax and each has come up with their own unique and sometimes weird combinations of, mostly politically driven, solutions to assisting the GP sector through the problem, large swathes of the GP sector are now thinking that it should be okay to fall into line and pay the tax.
That or they accept that their business structures would normally attract payroll tax even if they aren’t going to pay it now, so they effectively accept getting on board with the payroll tax regime.
Why bother changing your structure if you don’t have to pay the tax anymore, or you won’t be paying enough of it now to make you, or your patients go broke?
Adding a lot of momentum to this line of thinking are signals from the various state revenue offices suggesting that there is no way around being outside the payroll tax regime anyway, whether you end up paying it or not.
In the case of Victoria, the revenue office told the AGPA and the RACGP bluntly in May this year “that it was not aware of a single GP contract in Victoria that would not be eligible for payroll tax”.
In March, the Revenue SA said something similar about all 283 applications for amnesty from practices in that state.
Both the AMA and the RACGP have patted themselves on the back for getting various state-by-state concessions (as eclectic as they are), which they did, but each has then failed to look upstream to what the implications of rolling over to the state revenue offices might mean.
That’s the detail that Dahm has pursued.
What Dahm says rolling over like this almost certainly will eventually mean is that (here’s the scary bit, sorry I took so long to get to it):
- If you accept that your business structure is such that you should pay payroll tax under state regulation and/or law, whether you pay it or not, then you are pretty cleanly establishing for the ATO that your doctors are not tenants but subcontractors.
- Subcontractor doctors could be deemed as employees by the ATO (emphasis on “could”, there is grey, see below).
- If they are deemed employees then the ATO might assess them as not being genuine businesses.
- If that happens then the practice would be liable for 11.5% superannuation for all payments to the doctor and PAYG tax.
- If the doctor has not been a running genuine business (because they are deemed employees) then they put at risk their GST registration and the ATO may cancel it.
- If the ATO does cancel GST registration on these grounds then the doctor would owe the ATO all the GST refunds they claimed over the years on their expenses, including any claims on their commission.
If you’re like me, when you first try to process this bit of logic, you immediately think, “hang on, that’s surely not possible, something has not been thought out correctly here”.
Imagine if all your subcontractor doctors earning more than $75,000 a year had to refund all the GST they have claimed over the years.
Remember, GST started in the year 2000, although likely the ATO would only go back five years.
Imagine now, if the practice had to square up that subcontractor going backwards and forwards on superannuation.
Don’t even try to do that math. It’s a horror show.
But if you spend a bit of time researching what Dahm has mapped out here – and you don’t have to spend too much time on the ATO and related websites – it seems like it all could be a feasible scenario.
Some advisors will likely argue that in this situation the doctors will be classified by the ATO as “independent practitioners” (contractors) and none of the above will end up applying.
Dahm describes this as “a dangerous middle ground”.
He says the problem with this assertion is that you are still admitting that they are sub contractors and under the new ATO rules you remain exposed to superannuation liability as a practice and, an even bigger problem, all the subcontractors should be charging the practices an additional 10% GST on all their earnings.
The ATO rules for subcontractors which Dahm thinks are relevant here were only published in January this year, so the possibility here is that a lot of advisors are missing this link in making an assessment.
If this problem is real, it would make payroll tax look like a pleasant summer rain shower.
Which makes you think it just couldn’t be true.
But we all thought that last time Dahm ran around like Chicken Little.
Related
The next place I went to in avoidance thinking about the implications of what Dahm has proposed here is, surely we would have already seen the ATO moving on the odd practice or sub contractor if this was real.
After all the ATO is hardly shy and retiring.
The answer to this might be perfectly logical:
- The whole employment status nature of doctors working in GP practices hasn’t really ever been in the spotlight before, but thanks to the peak GP bodies and the various state revenue offices’ high-profile fighting, it sure is now, and the ATO has been watching on quietly from the sideline as things have unfolded;
- The ATO has only really clarified its position on contractors, sub contractors and deemed employees in the last 12 months;
- If the above two factors have only really come together in the last year or so, and now, with various state revenue offices so obviously pushing GP practices into their payroll tax ecosystems, the status of GPs working in practices who opt to be in the payroll tax regime is only now becoming perfectly clear for the ATO to see. Worryingly, the various state revenue offices now share payroll tax status data directly with the ATO.
All of which suggests that this problem could start unfolding in the not-too-distant future.
If you find yourself still in typical avoidance behaviour pattern, which I do, you might then think that surely the federal government would quickly understand the massive damage that could be done to the healthcare system, and through that, political damage, if they let this very unfortunate series of events unfold the way that tax law looks like it could allow, and put a stop to it before it even started.
For that to happen, the minister for Health would need to call a meeting between the Prime Minister, the minister for Finance, the Treasurer and the head of Treasury, the head of the ATO and potentially every head of state revenue in the country bar WA, and ask them to provide some sort of ATO ruling on the matter just for GPs.
You’d love to be a fly on the wall of this meeting if it ever actually happens.
The easiest thing to do might be to convince the ATO stick with the status quo somehow and allow doctors to be sub contractors but don’t assess them like so many other deemed employee sub contractors are already being assessed in the country, because of the unique way they work within medical centres.
If this sounds a little convoluted and awkward it’s probably because it would be.
Ironically, it’s a similar political problem to what the states faced in trying to change payroll tax law just for GPs. Apparently, already a lot of other professions are getting angry in Queensland as to why GPs have been carved out for such special treatment.
Except in the case of the ATO and the federal government there are lot more professions with well funded lobby groups in Canberra who might get pretty angry at a carve-out of this nature.
If you’re a GP it’s not all bad.
After all, every state government had to warp their tax laws in very strange ways to try to accomodate you somehow because they are getting increasingly worried that the public doesn’t like how politicians are treating you. Of course most of them just tried to blackmail you to do more bulk billing and didn’t consider that by doing this they were denuding your financial viability more.
Now the federal government might have to consider doing something similar.
You’re that important at least.
