Payroll tax issues mask a bigger problem

If a practice is non-compliant for payroll tax purposes, every doctor working there may have a personal income tax problem.

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It’s been another week of confusion and mayhem around the issue of practice compliance on payroll tax.

Update 1.25pm, Monday July 11: Correction: The Tasmanian Paradigm part of this article originally said that that the Tasmanian AMA letter did not identify who in the Tasmanian Department of Treasury the AMA had met with to get the advice contained in the letter. The letter states clearly that “AMA Tasmania met with the Secretary of Treasury and Finance”. That person is Tony Ferralls, although the Tasmanian AMA does not identify Mr Ferralls in their letter. We have corrected the article accordingly and apologise to the Tasmanian AMA for the error. We note that the letter does not contain any formal acknowledgement from the Tasmanian government that this is their position or advice, although we aren’t questioning that the AMA did not receive advice of the nature they have published. TMR is asking the Tasmanian Treasury department directly if they formally back the position put in the letter.

Update on the update: The Tasmanian Treasury responded that “the information provided was general information only, given at a point in time, and should not be considered as advice on any particular instance, as this would require detailed consideration of the specific issues in each circumstance”.

There was the RACGP’s 1 July publication via its news service of a position on how payments should flow if you are working as a contractor for a practice; then a bizarre Tasmanian AMA letter to its members on the issue (more on that below); and finally an awful end to the week when it was confirmed that Dr Thomas Jawahar lost his appeal against the NSW SRO in his precedent case (which we reported on here).

The RACGP position, which we also reported on last week, is here for reference:

“Where independent contractor doctors work at a practice, each doctor should have their own PRODA account and issue invoices with their own ABN (not the practice’s). If the doctor uses the practice’s PRODA account, that doctor may not be viewed as an independent contractor.”

Our article last week pointing out that this is the first time the college has put this position, and asking why now, set off a storm on the doctor socials, with the most dominant theme being denial.

Some of the denialists’ arguments included:

• The RACGP has updated its site and said it needs clarification, therefore the article is wrong (indeed the RACGP did post that they had updated their article and were seeking clarification on parts of it, but the above paragraph has remained in the article all week. Why? They haven’t clarified anything yet).
• The RACGP cut and pasted the article from a law firm blog, which you can’t trust (good point, who trusts a lawyer … but on the other hand, isn’t it lawyers who interpret the law for us … and, it was a pretty big law firm writing it so you’d think they’d have checked it pretty thoroughly themselves?)
• The RACGP article is just wrong.
• If the article is right then the government surely won’t proceed, as they would end up killing general practice and more (unfortunately tax law doesn’t play favourites).
• It can’t be right because how would a practice run its cash flow if the money first flowed to the contractor and they only took their services fee after the fact? (this is actually an interesting point, and another story, and problem, as practices are going to have to work out soon how to run on less cash flow as a result of Thomas and Naaz).
• Services Australia (aka Medicare) would not allow this to happen to us. This is a pretty common theme emerging in this debate, but we think we can nip it in the bud for everyone right here: it’s not Services Australia that is doing it. It is the state revenue offices and after that the ATO – we get to the ATO more below. Services Australia hasn’t got a red phone they can ring these departments up with and say, “hey, you are going to screw all our doctors  and the whole health system if you keep going”, and even if they did, the SROs and the ATO would ignore them. It’s tax, and it’s the law. They can’t make exceptions for doctors. They can’t make exceptions for anyone.

One enterprising commenter said they had contacted the author of the RACGP article directly and they had confirmed they had copied the article from a lawyer’s blog and not verified it. If so, you’d have to think the RACGP would have then taken the paragraph down until they had firmed up their position better. But they didn’t. Why?

The fact that Dr Thomas lost to Revenue NSW this week gives you a pretty good idea. His case pivoted around payment flows and payment flows is exactly what the RACGP paragraph was addressing, albeit from the contractor side, not the practice side. Regardless, the RACGP statement holds more than ever after the appeal failed this week.

The RACGP told us last week parts of it had come from “several sites, including the HWL Ebsworth page”. 

That they went to a few law sites isn’t the point. The point is, the RACGP felt they needed to say it, and when doctors started saying it was wrong and they needed to check, the RACGP did not take the statement down. 

Did they have some inside loop on the Thomas and Naaz appeal finding?

The college also told us it had previously had an article mentioning the issue (the payment issue specifically), which we checked, and it hadn’t.

We went to Services Australia and the ATO for clarification, and they told us there were “inaccuracies” in the RACGP story – they didn’t go as far as to say what they were. Neither department told us very much, but here’s what we think is the key quote from the tax office:

“The determination of whether a worker is an employee or contractor is based on common law. Doctors who are engaged under contract may be employees or independent contractors depending upon the nature of their working arrangement.

“Whether or not contracted doctors submit claims on behalf of the organisation rather than the doctor is insufficient on its own to form a basis for whether the doctor can be considered to be an independent contractor for tax and superannuation purposes. Employers need to consider the entirety of the working arrangement.”

Ostriches still have to pay tax

The collective reaction to the payroll tax situation, in which denial is featuring quite heavily so far, is wholly understandable. 

Why now, after literally decades of allowing such structures to evolve and exist, are state governments deciding to reject the premise of practice contractor and trust structures, take practices to court, and as some of the doomsayer commenters on social media are starting to assert, threaten the viability of the whole sector if they keep going?

There isn’t an easy answer to why this started, but it didn’t start in the last year. Several state revenue offices (SROs) have been testing the waters in cases for many years now. 

The breakthrough case for them really came nearly three years ago when the Victorian SRO won a case against Optical Superstore. That case had actually been going for a few years before the Victorian SRO got a decisive victory. Optical Superstore subsequently lost a few appeals and with that SROs everywhere had a basis to start going after similar structures. Most medical practices running contractors had versions of the same structure Optical Superstore had.

So in fairness to the SROs, they have been trying for a long time to blow up medical practices on payroll tax (that is meant to be facetious).

The thing is, post Optical Superstore, and more recently Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259, SROs have firm legal precedents to arm them for their witch hunts and they – particularly NSW, Victoria, WA and SA – have started hunting in earnest.

Hence the panic.

Hence also, the admission at an AMA national webinar on the topic a few months back, at which the NSW Commissioner for State Revenue was sitting as a panellist next to the president of the AMA, Dr Omar Khorshid, a panellist let slip that many NSW practices had the problem. 

Admitting this in front of a state tax commissioner was probably not a great tactical move on the part of the AMA. But given the breadth of the problem that started to emerge at this webinar, and shock (during the webinar various parties started to realise the actual stance and seriousness of the SROs) it is a wholly understandable reaction – “hang on, we all do this, surely you can’t do us all in”?

Well, yes, they can, is what came out of this and other public stances from various SROs. It’s tax law. Death and taxes, remember.

The Tasmanian paradigm

This week we saw the extraordinary spectacle of the Tasmanian branch of the AMA writing to the Treasury of its state government requesting clarification on the issue as a matter of utmost urgency. The letter is here if you want to read it. 

It is denialism writ large. 

The letter has been sent to all the Tasmanian members of the AMA, we guess, with some intent of allaying fears that the witch hunt will not be proceeding in Tasmania, thank you very much.

But the letter is simply a record of a meeting that the AMA apparently had with the Treasury department, and, we assume, the AMAs interpretation of what the department’s position is. 

It is not a formal position from the Treasury department (there is no written statement from the Treasury), and worse, the advice at this stage at least, does not appear involve any interaction with the Tasmanian SRO, which is a separate state government department, and presumably might be bemused by the interpretation the AMA has made for its members after its chat with the Department of Treasury.

According to HealthandLife principal David Dahm, TMR’s resident oracle on such things, the letter is irresponsible and potentially dangerous, not just for the Tasmanian AMA, but for all the doctors who got it.

“The letter is an interpretation of a meeting with someone in Treasury . There isn’t a formal position put by Treasury and even if there was, an SRO, as a separate department might well have a different view. Worst of all, the letter outlines an interpretation of certain cases and payroll tax law which simply doesn’t stack up. It is attempting to suggest an interpretation. Leaving some practices to think a couple of small tweaks could do the job. It is a lot more complicated. 

“That is a very dangerous thing to be sending to all your members because you are sending a signal not to be worried. Clearly the events of this week, including a statement from the RACGP on contractors payment flows within a practice and the NSW SRO win against Thomas, on payment flows, suggests that every doctor, whether a practice owner or contractor, should be seeking good medically experienced professional advice on their legal and tax setup. This includes how you actually run and present your practice to the public.

“What if some doctors in Tasmania take this letter as some sort of defence of not checking their situation? It’s not a defence. It’s an opinion. It is not something you can begin to rely on.”

According to the AMA in its letter the Tasmanian Treasury interprets Optical Superstore differently to  the rest of the country and therefore Tasmanian doctors can take it easy.  

If the Tasmanian Treasury did make this interpretation then obviously they haven’t been reading the same blogs as that pesky person from the RACGP, as they don’t think that Optical Superstore (and now this week’s Thomas and Naaz appeal) is relevant.

None of this seems likely. Treasury departments are pretty powerful entities, but they aren’t able to defy or make tax law and they don’t often provide formal interpretations of law in the manner the AMA is suggesting they have. 

Beyond that, tax law is tax law. Precedent is precedent. You don’t think you get on a ferry heading to the far south of the country and the law changes along the way.

The Tasmanian AMA may have unintentionally put all their members on a false footing as far as this major issue goes.

It’s tempting to think that the AMA letter will work and Tasmania might go it alone on payroll tax law. It’s unlikely due to the 2008 national payroll tax harmonisation rules but, the Tasmanian government is at liberty to take a political position on the matter and decide, case law or not, not to go after their doctors. If this does happen we might end up in the extraordinary situation where in one state you can have one set of practice structures, but in others you can’t. It might make Tasmania a great destination state for GPs in the future and fix any GP shortages in that state.

The bigger issue than practice compliance

Sorry to have waited so long into the article to talk about this, but there is a lot going on.

In the last few weeks, there has been a private case in Australia, which we alluded to last week, and which, unfortunately, not only reinforces Thomas and Naaz and Optical Superstore, but which points to a problem that I don’t think anyone has really thought about yet and which is – if you will excuse our rampant Chicken Littling – possibly a much bigger tax issues for doctors nationally.

That is, if you are a practice which thought you had a trust set up where you employed contractors, not employees, and you end up being non-compliant on payroll tax, then what happens to all your so called contractor doctors in terms of personal income tax?

The answer, according to Dahm, is that “your personal income tax returns for the whole period you thought you were a contractor, but which now a state SRO says you aren’t, may be all wrong.”

One of the most visceral components of the detail of this recent case was that the SRO, as apparently they have to do by law, notified the practice, that they may need to inform the ATO of their finding.

Dahm says he is aware SROs can and have contacted the ATO without the practice owner being aware.

One thing this SRO found was that for various reasons (which I’ll go into a bit more later this week), this practice was not operating its doctors as contractors but more as employees for more than eight years, and therefore, the SRO was due nearly $6m in back payroll tax, interest and penalties or $60,000 per FTE GP per annum multiplied by the number of years under investigation.

Taking that logic, doctors who worked at that practice over the eight years weren’t seen to be contractors.

And now the SRO is considering sending all the contractors’ details to the ATO.

What is going to happen now to those contractor doctors, who put in their returns in the firm belief that they were contractors? They probably all did this taking the practice at its word that it was all above board.

According to Dahm, that could end up extremely messy because as contractors, all these doctors likely submitted their personal returns as if they were a business, and as such made business deductions, and claimed back GST on various items of operation.

Potentially none of that would be applicable, says Dahm, and their returns would be non-compliant as far as the ATO goes. Dahm is aware the ATO is reviewing a number of independent contractors as a result of payroll tax investigations. 

What happens then?

Dahm isn’t sure, but for decades having followed the payroll tax issue unfold, first slowly, and now almost in an avalanche, he says that doctors should not start making any assumptions about what the ATO might or might not do.

“A lot of people understandably have found it very hard to get their heads around the idea that SROs would do what they are now clearly doing. And as a result, a lot of practices have not moved to get proper legal and accounting advice early. Some are now getting caught out because of that. It is a little late to clarify your affairs once an audit has commenced. 

“Logically, if a practice is allegedly found to be non-compliant, then immediately, it opens up the possibility for all its doctors  to be investigated for non-compliance in their personal returns. This is a really scary thought.

“Given all the fear going around on payroll tax I’m loathe to say it, but contractor doctors should do all they can to get on the front foot here, as not much has happened yet. Speak to your practice owners first. Get information in writing from your advisers.

“One thing you need as a contractor, is some sort of assurance that your practice has its structures and contracts right, and it won’t get caught in a payroll tax net. Or, at the least that your practice is looking at the problem and rapidly trying to fix it. 

“I don’t think this is happening yet.”

One thing Dahm is at pains to point out is that while things are looking very grim, and getting worse in some ways, that this is not the end of the world.

“All this stuff is preventable and fixable. It won’t be cheap and likely moving forward compliance is going to be more expensive and more of a hassle, but most practices and contractor doctors can, within a reasonable amount of time get, themselves set up in a way in which they aren’t in conflict with emerging interpretations of tax law.”

Dahm has seen practices use this as a recruitment and retention opportunity when practices can clearly explain their arrangements. 

“Given that the ATO has a core strategy of rolling out digital tax returns, which will almost certainly involve medical practices and individual contractor doctors having to comply one day with emerging government demands for e-invoicing protocols, the writing is on the wall anyway for doctors to make sure they are compliant, whether a practice or a contractor doctor.”

One horrible problem for contractors is that they likely won’t be able to blame their practice if they do get caught in a personal audit. In the end the responsibility for them being bona fide contractors/independent businesses running their own business, is theirs ultimately, not the practice’s. 

The way things have worked for a while unfortunately is that many practices hire a doctor as a contractor and tell them they will look after everything: they will look after payments, legals, contracts, all services, the lot. 

Ironically, such behaviour is indicative that the practice is acting like an employer from the start. The contractors aren’t actually an independent business because they are doing everything a practice says they should do, not what they, as a business, understands they should be doing. Independent medical business should be seen to be contracting the practice as tenant doctors and not the other way around.

Chicken Little mathematics

OK, let’s do some Chicken Littlemathics here. It’s pretty simple. 

Start with the AMA’s position in its recent webinar, and input from a few big medical practice advisories, and even off the record input from some software vendors on things like payment flows. Something like 80% of practices, GP and otherwise, aren’t set up as various state SROs and recent precedent cases on payroll tax suggests they should be.

What does that convert to in a ghost population of contractor doctors, who by default, are not actually contractors, and therefore might at some point end up with a personal income tax problem?

Chicken Little maths says a lot. An army of doctors who think they have been contractors but technically they aren’t, and therefore their personal tax returns could trigger an audit. Certainly over 50% of all doctors out there.

Jeez.

The denialism and campaigning directly to government to cease the madness is all pretty understandable. It does feel like madness. 

There is a way forward

During the week I’ve seen a lot of comment and had some direct discussions along the lines of “this is so big that the government will step in and stop it, and, this will ruin the profession if it keeps going and send everyone broke”.

You can definitely understand the sentiment.

But there’s a problem. It’s tax and law and doctors almost certainly can’t be excised from that law and be allowed to do what others paying tax can’t do.

Services Australia and the federal and state departments of health, as concerned as they might end up being over this issue, aren’t SROs or the ATO. They don’t talk to each other (much) and often don’t like each other. Even if they did get on and communicate well, we are all stuck with the rather immovable problem that we are talking about the law and the law applies to everyone not just doctors. Changing it, even if to save the health system, would not be practical. 

Unfortunately, doctors are going to have to change.

According to David Dahm, now that we have some certainty on the position of various SROs, and where the lines are drawn on structure though various public precedent cases such as Thomas and Optical Superstore (also in some cases private cases like the Victorian one this week where it is possible to examine the decision and understand other factors the SROs are looking at) it is entirely feasible for practices to clarify their arrangements and meet all the requirements which are now becoming clear.

“The tenant doctor paradigm is still the most efficient and practical way for most practices to operate,” says Dahm who warns that using the term “contractors” is even misleading.

“They just need to look at all these new rulings and spend some time on their contracts, their structures, and their payment flows, with a medically experienced good accountant and lawyer. It can be done. It won’t be cheap initially for some, but once it is properly done once, most of that sunk cost will be a one off. It might even be able to be amortised in some way so there isn’t too big a single financial shock to a practice.

Dahm has published various checklists over the past year that people can start with.

Dahm also talks about the terms “remediate, renovate and detonate”. 

Dahm says “remediate” probably is doing too little if you have serious departures in your structure from what an SRO is thinking, “renovating” might get you there depending on your starting point, and “detonating” is a last resort tactic that can be done if your situation is so poor that your best option is to blow up all your old legal structures and start again.

However, Dahm is not suggesting that you do anything that may be seen as tax avoidance as it may be struck down if this is your primary reason for making any changes. So it is critical you make any changes for the right reason.

Another useful starting resource might be our TMR Tax Webinar, which we held with Dahm and an apparently tuned in lawyer on the topic a couple of months ago.

Stay tuned

Next week we will delve a little more into the Victorian case we keep referring to here. It’s not public because at this stage the matter is on notice. But it is clearer what they are looking for. Some of what they refer to might help you fine-tune.

In the coming weeks we will also talk to various parties about the events of this week, get some responses on the Tasmanian AMA letter and the Thomas and Naaz appeal, the situation for corporates (which is a little different but still fraught in many ways), the importance of your patient management and other software in helping you through this, and look in a broader context at why ATO strategy – in particular their plans for digital tax returns and e-invoicing – means you would probably have needed to do some serious renovation regardless sooner or later.

Main message here might be: as awful and unfair as all this seems, it is all fixable and almost all practices will be able to get compliant if indeed they aren’t there yet.

But denying it, or thinking the government will somehow change tax law to help you? That is not going to happen.

Note: Not even sure why I have to say this, but no one at TMR is an accountant, and even though the odd one has a law degree, none of us practice law, and certainly not tax law. So go and ask someone about this stuff who really understands it. We might just be Chicken Little and full of chicken shit for all you know.