5 March 2022

One-off fixes may get you through the tax crackdowns

Comment KnowCents Tax

State and federal tax blitzes aren’t ideal, but they are not the end of days. The adjustments may be expensive, but they should be a one-off.


There has been a lot of last straws lately for the business of running a medical practice. 

The news that, on top of state revenue office crackdowns on payroll tax, and the ATO moving to tighten oversight of all transactions via e-invoicing (via PRODA – which we’ll come back to with a little mea culpa), the ATO has decided to significantly tighten how family trusts operate (retrospectively), has some speculating on the viability of the current medical practice model.

Soon after the AMA webinar on state payroll tax just over a week ago – in which the AMA somehow managed to admit to the NSW Commissioner for Revenue in front of everyone that “most practices” could find themselves non-compliant in a payroll tax audit – an AMA representative tweeted that 40% of medical practices might not be financially viable anymore.

So, it isn’t surprising that there has been a fair bit of panic since that webinar in certain circles, and a lot of discussion on social media about what is real and what is not, and what can be done about it.

One thing that is happening is that the state and federal tax bodies aren’t aligned in how they view employer-employee-contractor relationships, although the two are supposed to align. 

You can meet federal definitions, according to recent federal court rulings, but still not meet the requirements of a state revenue office in terms of contract construction and money flow between your doctors for the purpose of payroll tax. 

The fact that state revenue offices can share precedents on their state-based cases, or not, doesn’t help. 

States can pick and choose how they apply what. 

And if they go after a group, and can’t get anywhere because a group is well enough set up, you don’t hear about it, because such cases inevitably don’t proceed to court. So it’s hard for other practices to learn what the right current setup is (that is, the one that the state revenue office can’t crack open).

Don’t go to court if you can’t win, is a good policy of the state revenue offices, as you won’t want to end up advertising what the right setups are.

But when they do win, they end up with new precedents, and great PR for payroll tax compliance.

It is messy, no question. So, some fuss is warranted.

One good initial idea – to talk to the federal health minister and warn that the disconnect between the state and federal tax bodies might represent an existential threat to patient safety and the whole health system – is going nowhere fast.

AMA president Omar Khorshid  told the webinar he had already asked federal health minister Greg Hunt to think about the problem, and was told that payroll tax is a state issue, not a federal issue.

In any case, Hunt won’t be in the job in a few months whether the Liberals win the next election or not, and a ministerial changeover, particularly a party-based one, will take at least a year to settle. 

No one at the federal level is going to help, no matter how good you are at lobbying.

In any case, a health minister isn’t going to be ringing the ATO to say: “Hey, those new family trust interpretations are a bit rough on doctors, guys.” 

The new family trust rulings and guidelines are targeting everyone in the professional sector, not just doctors, and they represent a trend that GPs need to think about carefully anyway as they plan for the future. 

At some point, the covid government relief parties (think also about bushfire and now flood relief too) have to come to an end. And it’s not going to be a soft landing, by the look of things.

As that happens, governments state and federal are going to get nastier, not nicer, in their attitudes towards revenue collection.

Are you on your own?

Actually, no, you aren’t entirely on your own. 

As the family trust crackdown proves, government tax bodies are going to be equal opportunity hunters and gatherers across the spectrum of small-to-medium business as we move forward, most especially the professions, as they tend to be the cream of small-to-medium businesses in terms of revenue opportunity.

If you can move past shock, quickly work out the anger, because it’s not going to help. 

No amount of complaining and pointing out that this emerging perfect financial storm for medical practices (which includes covid in a manner far worse than most other professional services businesses) would in the end impact significantly on patients (it will regardless – read on) is going to help here. 

In 12 to 18 months, all governments are going to be in serious need of more revenue to start addressing the massive budget black hole that has been bushfires, covid and now floods. Governments have to find more revenue. Not something that’s likely to be an election promise in May.

Practices are simply going to have to adjust.   

Acceptance is pretty important here because with acceptance you can get on with a plan to make the adjustments that are likely going to be needed to survive and thrive into the future.

Some good news.  

Most experts think there is plenty of time to make the adjustments, and most think that although expensive in the short term, most of the expensive adjustments are going to be one-off.

The big question now for most owners and corporates is, “what adjustments precisely?”.

The cost of compliance

As far as family trust arrangements are concerned, that’s almost entirely on your accountant to start working out. It feels like in a lot of cases moving forward, more tax will be levied and paid as a result of these changes. 

Chalk up one big win for the ATO in its efforts to start getting more revenue to help fill that big black hole the federal government is currently ignoring in its attempt to win the next election. 

Most of the work needed from a practice perspective is going to be in setting up your business to comply with your local state revenue office on payroll tax, and then not get hung somehow at the federal level on the money flows you set up to protect yourself, as identified by the detail that will flow from e-invoicing once it is switched on (via PRODA eventually).

Experts aren’t agreeing on structure

One problem currently is that “the experts” aren’t quite settled on exactly what structure will be as close to foolproof as you can get. Between state and federal laws, there is quite a bit of devilish detail to navigate, and appears as if, until now, a lot of people haven’t bothered with said detail. 

In some respects, a lot of people whom you may have thought were experts probably are not. They haven’t needed to be because no one was checking and no one was pushing down on the detail. 

But they are now.

An example of a current debate, which is pretty important and not settled, is how money should flow in a practice set-up that treats its doctors as “tenants” only.

Some accountants and lawyers are saying that if you really want to be foolproof on the laws around payroll tax and Medicare, then:

  • A “tenant” doctor must have their own ABN-linked bank account and the money for their consult should first flow into this account. If the transaction is more than $75 (which it easily can be, especially in a mixed-billing situation), it’s actually the law that the doctor should issue the patient an invoice (although currently, this hardly ever happens).
  • Somehow after the fact of this transaction, a “landlord” practice has to invoice the doctor and take their “rent”, which is usually a commission, so somehow the practice has to see their “renters” business bank account and transact on it.

The problem with this foolproofing is that virtually no medical practice is set up this way currently, and to set up this way looks like it might be expensive, albeit a one-off expense. 

In the end, the cost is mostly in setting it all up, as software will probably automate a lot of it, going forward.

The problem of money flow is why the AMA admitted (publicly, somewhat strangely) to the NSW State Revenue Commissioner, in their webinar, that most of their members’ practices probably weren’t compliant. 

Can you imagine, by the way, what that Commissioner was thinking, sitting there in that webinar when the AMA representative made that admission? Think Looney Tunes cartoon $$ bubbles popping out of the head of Yosemite Sam randomly accompanied by machine gun rings of a cash register. 

It wasn’t the AMA’s best work, that’s for sure.

In one respect, at least everything was put on the table for everyone to see. 

Maybe it will prove a good thing in the end. 

The AMA has declared quite publicly that it thinks most of its members have a problem – in front of a state tax commissioner. 

Not much you can do now but make changes if they are needed.

Some parties are arguing that there is a technology banking solution to the problem that will mean a lot less cost for practices than that being spruiked by the purists – mind you, the law is the sort of pure you probably want to take some notice of. 

In this solution, accounting software such as Xero, which already integrates with most practice management systems, is guided by third party software to automatically process the income of “renters” on behalf of a doctor, using a banking solution of some sort (sub accounts possibly) that does not require “renters” to set up their own ABN-linked bank accounts and flow the money their first.

Some of the purists (lawyers in this case, after talking to some accountants) have pointed out that they aren’t entirely sure that the banks can have visited all the devil in the detail of the various laws, state and federal, guiding this madness. 

Again, none of it has been tested. So if it’s not the law, but it’s a big-four bank, are you thinking that if a big bank is doing it, it will be OK?

The Banking Royal Commission is still ringing in most people’s ears, so probably not. Banks aren’t infallible on the law, that’s for sure. Just because it’s a big bank doing it doesn’t mean a state payroll tax office will care.

At The Medical Republic, we aren’t lawyers, accountants or experts in any shape or form. 

All we know is that most practices are going to need to get their money flows legally compliant in time for state revenue office audits, and there will be some big one-off costs associated with making such changes. 

Other associated costs will probably be in reviewing and aligning all “renter” contracts with the compliant money flows. 

Given that e-invoicing is coming for everyone in the not-too-distant future as well – again, the ATO isn’t just picking on doctors – such money flows and arrangements are going to need to take into account how it all looks via e-invoicing, so you may as well get this aligned as you go.

Sorry, Services Australia – PRODA is OK

By the way, we may have been picking on Services Australia for PRODA just a little too much over the past few weeks. We were thinking of titling this piece PRODA IV, but the truth is, we rode the PRODA-is-naughty theme too far.

You have to sign up to, or re-register for PRODA. 

All your important information and transactions are available through it. All GPs will need it. And with cloud infrastructure, it’s going to be faster and more efficient in being able to deliver services overall.

E-invoicing is a service inside PRODA that you don’t need to tick now, but you will one day for one reason or another. 

When you do, you will need to be ready.

One poor sod practice owner recently ticked it like you tick all the “no’s” on your customs declaration coming back into Australia. Eeek. Don’t do that before you know what you are doing. I guess this was one reason we were a bit down on Services Australia. The e-invoicing tab probably needs a “handle with care” warning on it.

PRODA is PRODA.

We were picking on Services Australia and highlighting PRODA as problematic because there has been virtually no information or commentary around the e-invoicing tab. 

Services Australia told us that they don’t pass on any information provided by registrants of PRODA to any external parties, and that is true, but the e-invoicing tab is a direct link to the ATO, so while technically Services Australia doesn’t pass on information, that link creates the effect.

While we went a bit too far with our Devil meme last week (sorry), SA has been a little too cute in not explaining the ramifications down the track of e-invoicing, and that it’s a link to the ATO and not to them. 

Two other issues outstanding:

  • SA has been telling doctors that, if their patient management system (PMS) permits, they can use their PMS PRODA account to claim for Medicare, and we have been told this might not be legal as a doctor claiming Medicare needs to do it with their own ABN.
  • By re-signing up to PRODA, which you may have signed up for originally many years ago, you are informally saying (sort of), “yep, I’m compliant for tax” (when you may not be).

That being said, it isn’t really SA’s business if you are payroll tax compliant or not, or tax compliant for that matter. 

They are just providing a service and another link in their portal (which is very broad and functional overall) to another government body. They are in one way just being helpful.

Digital tax auditing is what the ATO is moving to. They love it. It’s pretty effective too. Everyone eventually is going to have to face up to it in Australia, not just doctors.

So, to wrap up

A quick summary of where things are at so far:

  • You are going to have a big one-off cost of adjusting to the new world. 
  • You have time to adjust, and you can adjust, so you should look at working on it soon with the right experts.
  • You are going to need some professional help and it might not be the help you currently have.
  • With that and things such as Family Trust crackdowns likely, your costs of doing business are going up in some sort of step change in the long term as well.
  • There isn’t any other way of making up this money but recoup some or all of it from patients. It’s not like most medical practices aren’t already battened down pretty tightly on costs and aren’t stressed by covid. Like any other business, if the government forces more compliance costs on you, it has to pop out the other end (consumers) or you might go broke.
  • It’s possibly important to recognise that medical practices and other professional services firms part ways in many respects on passing on costs to their customers. Doctors are bought big time into helping their patients, so putting the price up for their patients does not feel right. I don’t think law or accounting firms are thinking that way but their costs are going up too as a result of all this.
  • The hit to patients is going to contribute to inflation in the end, ironically enough, but you suspect it’s not something the Reserve Bank is seeing coming in its current input calculations, probably because they wouldn’t suspect the government would be so dysfunctional as to hit up doctors in the manner they are.
  • There is a lot of time to adjust, both for payroll tax compliance and e-invoicing, but you’d want to start soon.
  • Short term, it isn’t going to be all that easy but you should be able to amortise the cost of major compliance adjustment over 12-24 months

Major summary point: it’s not the end of days for medical practices. 

It’s an adjustment and a bit of shape shifting over time. 

There are lots of opportunities emerging for medical practices in aged care, better chronic care management in the community, and partnerships with hospitals and private health insurers, particularly with the trends in interoperable data sharing technology that are taking place.

It’s just change. 

Oh, how we humans hate to actually have to change. 

We’ll do anything to avoid it, mostly.

But my guess is that it will work out for the better in this case.

Deep-dive TMR webinar on payroll tax, PRODA and related compliance issues

Given there is so much confusion on the topic of this article, on 30 March at 7.30pm AEST The Medical Republic will be holding a webinar with key experts in the field who will take a deep dive into the various state and federal laws and tax regulations surrounding payroll tax, employee-contractor regulations, PRODA, e-invoicing and other related issues.

The webinar will feature a short presentation by David Dahm, a specialist medical practice accountant, and Lukasz Wyszynski, director of Parker Winston Eckhardt and solicitor at Hamilton Bailey.

After the presentation, Jeremy Knibbs, publisher of The Medical Republic, will ask questions of a panel that will include David and Lukasz, as well as a representative of the Australian GP Alliance.

The webinar is free to attend. You can register HERE.