Practices are operating in a tax minefield – changing how you characterise the business is one step to avoiding the worst.
According to the latest tax rulings for taxation and medico-legal reasons, naming your practice a “Medical Centre” or “Clinic”or “Practice” may be a bad idea.
If you’re a practice owner, you should be promoting your doctors and your doctors should be actively promoting themselves on their own separate websites.
Recent rulings from the Queensland Revenue Office and the Australian Taxation Office mean that overnight, practices could find themselves paying not just payroll tax, but $7000 a month for a full time GPs PAYG, super, Workcover, insurance plus other employee on-costs – going back five years.
GP contractors could instantly lose their ABN and GST registration and their tax deduction on any service fees charged. They would have to nurse a big tax audit problem of their own.
Unsurprisingly, the most common thing I say to practice owners and practitioners who have contacted me about payroll tax is that their payroll tax concerns are not the real problem; but that it is the recent ATO contractors ruling.
It can be fixed in four steps.
1. Independent practitioners must have their own website and actively advertise
The High Court has ruled this is a key step to avoiding payroll and income tax problems.
2. Ensure you have an ATO service entity structure – rename your practice!
Ensure it meets the ATO service entity ruling that refers to the 1978 Federal Court Phillip Case. Unfortunately, over the decades the medical corporations have muddied these waters, which is why we have this problem today.
For many this may mean renaming or amending your practice on your website, logos, stationary and contracts as either a medical “complex” or “precinct” or “consulting suites”.
The name must signify that your entity is a destination point and not imply the provision of clinical services.
3. Revise your day-to-day management processes
We’ll come to this in more detail further down.
4. Do not attempt to DIY
Follow the AMA WA Chief Operating Officer Amit Vohra’s advice to their members, which is to seek legal and accounting advice immediately.
How do I choose the right adviser?
Obtain experienced medical and health legal and taxation advice from advisers who can actually sign off in writing on the 21 key areas of law and accounting that will help you comply with steps 1, 2, and 3. It is not enough to have a commercial lawyer to review your agreements; and you should obtain tax law advice from your accountant and a tax lawyer, who is familiar with your arrangements.
Here are a few questions you might want to ask:
- Have they won any relevant payroll or income tax cases? Can they provide examples?
- Do they have the technical competency and experience?
- Does their advice cover the new safe harbour rules and can they sign off in accordance with the draft ruling?
- Does their solution cover the evidence that the ATO and Payroll Tax Office will ask for?
You don’t have time to waste
Against the backdrop of recent rulings, the current national medical and allied health professional body advice to politicise the taxation of practitioners may do more harm than good.
This has only drawn more attention to the fact that there is widespread non-compliance. It is the tax office’s responsibility to enforce the law using evidence. This is what is new. The laws are not.
It would be unfair to blame the regulators and feel like a victim. Do something about it.
Do not be surprised if the authorities are building a tax audit workforce. In particular, I have received a lot more reports of audits and fines in Queensland, NSW, and Victoria. Many speak of having to liquidate their practices (go into administration) because they cannot afford to continue.
Remember, it is a criminal offence not to comply with tax laws. There are now clear High Court rules and public rulings.
Why does my accountant have to be involved?
The ATO has asked the accounting profession to keep an eye on their clients’ contractor arrangements. If you don’t have a lawyer sign off on your plans, you are automatically seen as a riskier business. Accountants would be held liable for being negligent if they did not ask more questions about your arrangements in future tax years.
Remember, the courts will rely mainly not on your lawyer but on your external accountant, who is a member of a professional body such as the CPA, and to a lesser extent, your practice manager and you as the owner.
What is the optimum arrangement – employee, contractor or tenant doctor (service entity)?
Since 1978, the tenant-doctor arrangement is the most viable and optimal arrangement in relation to commercial liability and taxation. Nobody wants to be sued for a practitioner’s malpractice claim or misconduct. Insurance will not always cover owners and if so the premiums and conditions can be eye-watering and or invasive.
Many practitioners dislike the additional oversight and pay decrease to compensate for the additional employee or contractor on-costs.
There are only three options when engaging a practitioner: as an employee, as an independent contractor, or in a traditional service entity arrangement as endorsed by the Federal Court and ATO, which we refer to as a tenant-doctor arrangement.
Due to the recent High Court decision, any independent contractor arrangement will be a significant tax and regulator target for years to come.
The tenant doctor arrangement appears to be the safest – however, depending how you set up and run the practice, from marketing to how the receptionist answers the phone, it can still get you into trouble.
The good news is that it can be fixed. To be sure you will need to find a lawyer and accountant to sign off under the ATO’s new safe harbour rules that they are not employees. Care needs to be taken not to call them contractors, as this seems to leave the door open.
Do not name your practice a ‘medical centre’
The QRO ruling has highlighted something that I have not seen before.
With a recent High Court ruling in its hand, the QRO has an alarmingly clear focus on whether your practice operates like a “medical centre” compared to a service entity that only provides facilities and support services to practitioners.
The ruling referred to the Healius Ltd v Commissioner of Taxation [2019] FCA 2011. This is an important case that is overlooked by legal and accounting advisers.
It concerns Ed Bateman’s Primary Health Care (legally known as Idameneo Pty Ltd) trademark case Primary Health Care Limited v Commonwealth of Australia [2017] FCAFC 174. The Federal Court here determined the characteristics of a “medical centre” that a payroll tax office may seek to rely on when prosecuting future cases.
In an appeal the court ruled (par 42A, emphasis added): “The primary judge erred by adopting an unduly narrow conception of the nature of the business conducted by Idameneo. The primary judge treated the business as the provision of administrative and other services to practitioners when in fact it involved the provision of medical services to the public from the Centres.”
Over the years, there has been a convergence of laws at play. In order to avoid a contractor income tax or payroll tax liability, two key recurring aspects are:
- Who is holding out i.e. advertising services to the general public; and
- How the centre is operated and managed.
So, who’s offering the medical and healthcare services, the centre or the treating practitioner?
It was argued that the centre was offering medical services to the public because of how it promoted the “medical” nature of the business in the business name.
If you are seeking a payroll and income tax exemption this is why we keep saying every practitioner should set up their own website.
Then, how is the centre operated? The court totally disregarded the expensive and clever contracts drawn up for this billion-dollar ASX-listed medical centre and asked what was really happening. Did the contracts do what they said?
The court heavily examined the accountant and referred to him as a member of the Chartered Accountants of New Zealand and a trusted witness. They questioned him about the workflow and operations of the practice, along with the practice’s owner and founder, the late Dr Ed Bateman, who is familiar to many readers.
After cross-examining the accountant, despite all the clever and expensive accounting and legal advice, the Federal Court struck down many common arguments used by tenant arrangements, simply because the business was not run the way it said it was.
The factual evidence provided from the daily operations contradicted Idameneo’s position.
These are my two key takeaways from the case:
- Your qualified external or internal accountant and or legal adviser is either an asset or a liability;
- If this describes how you run your practice you may have a big tax problem.
The court determined the applicant was a “medical centre” despite no clear signage at any of the Primary Health Care locations. This is consistent with the 2001 Hollis v. Vabu Pty Ltd. High Court independent contractor decision.
This is why I believe, based on my observations, that practices may need to change their business name and that independent contractors and sole traders need an independent website separate from the practices (i.e., a service entity). This should be correctly described on each website, in contracts, stationary financial statements, and tax returns.
Disclaimer: The author is not a lawyer and this advice is general in nature. Please obtain specialised legal and accounting advice before changing anything.
David Dahm is principal at healthcare advisory firm HealthAndLife. A the original version of this article, which contains a lot more detail on specifics like legislation can be found HERE
