28 February 2022

Payroll tax blitz to hit patients, not just practices

Tax

Payroll tax audit fear is spreading faster than Omicron. A recent AMA webinar provided little comfort.


In an effort to stem growing fear over payroll tax cases with medical practices, the NSW AMA held an online webinar on payroll tax and medical practices last Thursday with Commissioner of State Revenue Cullen Smythe, facilitated by national AMA president Dr Omar Khorshid.  

That 740 people tuned in is some indication that payroll tax and new tax laws are starting to loom large in the mind of a lot of practice owners and managers. 

At the event, the commissioner admitted the only reason there had not been more audits this year was Omicron.  

The event itself may have been intended to allay fears but had the opposite effect.  

Every indication from the webinar is that state revenue bodies are gearing up to go after practice structures with a view to levying payroll tax based on structural setups, retrospectively up to five years where they can.  

According to the AMA, there is no immediate political appetite to assist medical practices at a state or federal level. 

An emerging systemic threat to public safety? 

In my 30th year nationally advising medical and health practices, I have never seen a greater manmade systemic threat to public safety. The last one I witnessed was when prime minister John Howard intervened in the 2002 medical indemnity collapse. Now would be a good time for a similar response or the government will see bulk-billing rates plummet overnight. 

Many of you have read my views on this matter. But this is worse than I thought.  

The bottom line: only a fool would ignore the commissioner’s payroll tax warning in this webinar.  

And it is likely that all practices in Australia are affected, not just those in NSW. 

It is feasible that many practices will be sold or wound up, if nothing else, due to the undue stress and financial uncertainty this trend is starting to cause.  

Patients will bear the brunt of it with higher medical bills and reduced access if practices begin to close. 

Key takeaways from the event are that: 

  1. 75% medical payroll tax liability strike rate 

Prior to covid-19, Revenue NSW had an impressive table showing it had been doubling the number of medical payroll tax audits. This year it has achieved a whopping 75% medical liability strike rate on all (12) medical related audits conducted. This includes allied health. (Admittedly only 12 practices due to Omicron were audited.)  

The successful GP payroll tax decision subject to appeal Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (3 September 2021) may encourage practices to prematurely settle.  

  1. Your practice may be in their sights  

Panellists confirmed during the seminar that “most practices” would be affected. The tax commissioner sat back with a wry smile. 

  1. Independent contractors: expect a pay cut or reduce bulk-billing now 

Many practices would have to increase how much they charged independent contractors to meet this new financial levy. But if this is not done carefully, according to panellists, it would fall foul of the new income splitting ATO rules passed on 17 December 2021.  

  1. The devil is in the detail 

This is an actual quote from the commissioner during the webinar: “the devil is in the detail”.  

This is how people are getting caught. Generally, people do not like reading the details. This includes professional legal and accounting detail provided by advisors. The detail now matters and all practices should be having reviews with their advisors around the matter to make sure they are structured correctly. 

There is no quick fix: no software program or bank can provide immediate 100% protection. It is not that simple and depends on the totality of your arrangements. 

The commissioner made clear it was more than a contract or a banking arrangement that would get you off the hook. He even provided an example.  

The real challenge for practices is to ensure their work/funds flows, business models, and signed contracts are aligned and up to date, and that they consistently operate according to any submissions made to the tax office.  

Verbal understandings where there are no contracts is admissible evidence. It is not enough to simply change your bank account. Anti-avoidance provisions apply. 

  1. Fragmented care 

The government has been focusing on team care arrangements between GPs, specialists and allied health. The practice plays a central coordination role in this strategy. The panel agreed payroll tax rules are a threat to workflows and work practice.  

  1. Similar rules apply across Australia 

There maybe be some small differences, but similar rules apply across all states and territories. It is irrelevant that Fair Work or the income tax office does not deem your providers as an employee. Payroll tax is far broader. It looks at other “obligations”.  

  1. Don’t use mum and dad lawyers and accountants 

Interestingly the commissioner emphasised early in the webinar the use of “qualified” accountants and lawyers who specialised in medical practices. Concern was expressed that inexperienced practitioners were creating a problem. He advised not to seek a private ruling and to seek appropriate advice from accountants and lawyers who are familiar with the profession. 

  1. Start early: Do not panic 

The commissioner said there were limited exemptions. 

The panel concluded doing nothing was not an option unless you can afford to defend an audit and pay up to five years’ worth of back taxes.  

  1. NSW Commissioner advisory 

In 3 weeks, a Commissioner Practice Note (CPN) from NSW revenue office will be released with regards to payroll tax in general practice clinics. 

  1. There is little political empathy for front liners 

National AMA President Omar Khorshid said he had discussed the matter with federal Health Minister Greg Hunt and was told it is a state matter. The states have not shown an appetite to address this issue to date. 

What was not discussed in the webinar? 

In the last two weeks, we have seen two major High Court rulings on employee v contractors.  

Furthermore, there is a new attack on family trusts and income splitting to your children and or “bucket companies”.  

Finally, Services Australia has forced all practices by end of the financial year to move to their new PRODA web services online.  

This would complete the digital revenue regulation loop in real time. Do not be surprised to if we start seeing new robo-tax audit activity.  

All of this information needs to be addressed by your advisers. 

Legal precedents 

Practices need to make sure their contracts correctly set the rights and obligations of an independent contractor.  

The leading cases are CFMMEU v Personnel Contracting, ZG v Jamsek and Workpac v Rossato

Payroll tax rules do not naturally follow the High Court rules that deem employees as contractors. Other obligations can deem a practice liable for payroll tax, whose rules are broad.  

Also, PAYG and Superannuation Guarantee obligations may arise out of any deemed contractor arrangements.  

Proda data matching your bank details to the tax office 

Due to mandatory e-invoicing commencing with Medicare from 1 July 2022, the ATO will have the capability to data match all your taxation and payment arrangements in real time without having to ask your accountant.   

The Medical Republic article Proda II: The Great Big Practice Reset covers this new problem. 

What happens when your contractor accountant gets it wrong? 

A recent out of court payroll tax settlement alerts us to the possibility that if your independent contractor’s accountant does not complete their own tax return correctly, the provider can lose their payroll tax exemption.  

Practices will have to mandate an oversight on how their providers set up their own arrangements. This will need to be specified in all contracts. New accounting and integration systems will need to be set up to prevent practice fraud where doctors engage in separate banking from the practice.  

Why not simply make everyone an employee?  

At first glance, this may sound like a great idea.  

But this can be problematic. Often owners and practice managers complain you can’t tell a doctor what to do. They do not like somebody looking over their shoulder. If you do, you may risk losing them. Once they are an employee you are obliged to supervise them. The employer is totally on the hook should anything go wrong. 

Aside from new Fair Work, payroll tax, super, Workcover obligations, once you make the change do not be surprised if you receive an expensive please explain letter from a number of these regulatory agencies.  

Set a healthy budget for legal and accounting expenses before and after making the change. 

The main reason why practice owners do not like employing doctors is that it is risky employing someone you have no control over. Using a tenant or contract arrangement is not done to get out of employment-related costs, which may be an incidental benefit.  

Once the employer relationship exists, the employer becomes instantly responsible (vicariously liable) for any medical or health-related mistakes. The employee’s MDO is funded to sue the employer. You may or may not be able to get employer insurance or it may become too expensive.  

Furthermore, this is also bad for succession planning.  

People do not like buying practices that may have a cloud of litigation hanging over their heads. A patient can have up to 25 years to litigate a doctor or their employer. 

If you are an employer of doctors, make sure you have natural asset protection arrangements in place. Have a tenant doctor arrangement. Employer Directors should avoid owning any assets in their name. Think about setting up a family trust. 

Seek comprehensive professional advice. Do it properly and watch out if you have the spouse’s name on the family home.  

It is not the end of the world 

If you own a practice, you should budget for continual compliance changes as the rules keep being modified by regulators and Court decisions. It is the cost of doing business, like paying for your car to be serviced regularly.  

The detail matters from here on in. Many practice for decades have not addressed the details. Some will have more work to do than others.  

Expect more audits if you do not carefully review business models, systems, practice agreements and what staff and websites say. That is where the fun begins. Auditors will look for the slightest of inconsistencies.  

In recent months, we have successfully been involved in securing many payroll tax and income exemptions.  

Where the regulator believes they do not have a watertight case they will usually settle. It would be uncomfortable if a new precedent was set. It is understandable why practice owners settle, to bring an end to the trauma and eye-watering costs of having your doctors and staff investigated. However, the public misses out on seeing what it takes to successfully defend a claim. 

State revenue bodies will generally go after low-hanging fruit. 

Practices usually fail when they do not follow advice to the letter to save on costs. It is not a cheap process, but the benefits do outweigh the costs. Avoid piecemeal legal and taxation advice and make sure your advisers are aligned. “You did not ask so they did not tell” is not a defence. Do not rely on social media, your well-intended friends or software vendors (it is not a software problem). This is a complicated issue.  

Seek comprehensive medical and health experienced legal and accounting professional help.  

One final point. Many accountants do offer payroll tax insurance. MDOs appear to have pulled out of this cover so check your policies now. 

Some practices may no longer be viable 

This trend has the potential to systemically destroy many practices. General practice lives in a fragile and critical social infrastructure that all of us and society depends on. Many practices will face serious compliance costs – up to $5000 per doctor – solvency and succession-planning problems.  

In order to survive patients may have to wear a 10 to 20% hike in inpatient gaps. Practice costs are already increasing at 6% per annum. 

Practice owners, you are not alone 

Do not think the bigger practices or corporates have got this under control.  

I can assure you they have a bigger problem. In fact the smaller you are the smaller the problem.  

The problem is solvable, but you have to take steps now or face a perilous future that will harm your ability to recruit and retain doctors.  

People hated the GST, but they soon embraced it.  

Remember, patients will ultimately have to foot the bill or go without timely and less expensive care. It is better to leave a legacy and not a liability.  

This is an edited version of an article Dahm published on his website HERE

David Dahm is CEO and founder of the national medical and healthcare chartered accounting firm Health and Life and global Founder and CEO of the not for profit project the International Healthcare Standards and Ethics Board (www.ihseb.org) 

Disclaimer: Please seek specialist medical accounting advice tailored to your case.