The day’s of a “Gentlemen’s agreement” (i.e. hand shake agreements not putting agreements into writing) are over….! It is time to finally take control and eat well and sleep well to this recurring problem! We are aware of practices that have been recently hit with payroll and contractor audits. This is a new warning bulletin to all clients and readers. The Tax Office has recently announced it will be extensively auditing contractor arrangements. The Tax Office has implemented a new computer generated data matching system (see below) which makes it simple and fast to detect practices and contractors that do not comply with the law. If you are not sure how to respond you may have a problem.
We quote from the Tax Office website…
“Contractor payments data matching program The ATO has announced that it will continue to acquire details of entities that receive contractor payments from other businesses for the 2013/14, 2014/15 and 2015/16 financial years. The data that will be obtained includes:
• Australian Business Number (ABN) of the payer business;
• ABN of the payee business (contractor);
• Name, address and telephone details of the contractor;
• Dates of payments to the contractor; and
• Amounts paid (including details of whether the payment included GST).
The ATO estimates that records for approximately 25,000 entities will be obtained each year, including the records for approximately 12,500 individuals. The purpose of this data matching program is to ensure that taxpayers are correctly meeting their taxation obligations in relation to contractor payments”
It is no longer if you get caught but when you get caught, how will you respond? If you get one contract wrong will it spread to other providers in the practice? The implications may have a serious financial and staff morale impact if not handled correctly. Despite there being a solution, unfortunately there are no shortcuts. The cost of doing nothing is seriously no longer an option. The ATO are getting smarter. Practices have been a common target and are low hanging fruit. The ATO is aware there has been a significant compliance problem.
The most common reasons for practices getting it wrong are:
1. Failure to understand and document arrangements correctly. The attitude is we leave this to our accountant. It is the responsibility of the practice manager and owners should that should understand implement these arrangements;
2. Wanting to avoid having a confrontation with powerful providers in demand e.g. doctors who might threaten to leave if you start to formalise things. Some may get offended as they may think you no longer trust them which is unwarranted; and
3. The “too hard basket” – the perception that the time and cost involved are prohibitive, until there is a problem with the provider or the Tax Office (which is a bit late).
The bottom line is that it is a bit late to do anything if the Tax Office has already made contact. The cost of up to $10,000 for external advice and a drawn out audit that could spread to other providers is simply not worth it and does not make sense if it is avoidable. The bigger the practice …the bigger the risk!
Unfortunately ignorance of the law and/or relying on your advisers is not an excuse or defence. Compared to not getting it right, the reality is that the issue is not as expensive or as complicated to solve as one may think.
Do you have anything to worry about?
Whether you are the practice/business owner, the employer or an individual contractor (i.e. not an employee), this issue affects you. Especially if you are involved in contracting arrangements that seek to avoid normal employee overhead costs. The good news is that there is a way to achieve this. However, it is sometimes poorly understood, and implemented by employers and/or their advisers.
What do you need to avoid?
From the Tax Office perspective a cleverly written legal agreement prepared by a lawyer may not be good enough. It is just the start. The Tax Office looks at substance-over-form and can deem your arrangements to be that of an employer and employee by simply ignoring your agreements if your actual arrangements are not consistent with your agreement(s). This means that any cleverly worded legal agreements can be easily set aside if you cannot demonstrate you walk the talk – which is fair enough. Practice’s need to go further and demonstrate that their business risk return model, tax returns, financial statements and administration systems reflect the arrangements in any written contractor agreement.
11 Common mistakes that may trigger a Tax Office audit:
1. Inconsistent engagement of providers. Some are engaged as contractors and the same type of providers are also employed. They either need to be all contractors or all employees or what we call tenant doctors with service agreements;
2. No separate banking of contractor income from the practice i.e. the practice should not bank money in the practice name;
4. Practice letterheads, they may be a dead give away if all practitioners are listed;
5. Financial statements prepared by your external accountant such as the annual profit and loss statement that clearly state “contractor”, “subcontractor” or “consultant” expenses. This includes book keepers that are not a genuine business and only work for you;
6. Financial statements such as the annual profit and loss statement that clearly state medical fee income in a service trust or service company;
7. The contractor charges GST to the practice;
8. The contractor has only one or a few clients. This is called the 80/20 rule under the personal service income legislation;
9. Paying employer super on contractor payments;
10. Agreements are simply not in writing and signed off; and
11. Agreements do not work if your business structure and administration system do not reflect the arrangements.
The above are examples of how suddenly your contractor arrangements can trigger an unnecessary full scale audit. This can lead to unnecessarily devastating financial consequences for everyone. This also includes a negative hit to morale.
Regulatory authorities can go back up to 5 to 7 years if they find something wrong. The problem is that it may not stop there. Below we report how both Federal and State agencies now talk to each other. This means it may trigger further investigations.
Do not open another can of worms!
If you are deemed a contractor/employee for tax purposes, this can also lead to you being deemed an employee under the Fair Work Act and Independent Contractors Act 2006. We have seen the implications of a contractor deemed as an employee are:
1. Australian Tax Office Pay as you go withholding tax – significant penalties and fines apply for failure to not withhold and remit money to the Tax Office.
2. Employer Superannuation Guarantee Levy 9.5% employer superannuation on contractor payments. Significant penalties and fines apply.
3. Negligence Claims – the employer is primarily liable for any malpractice claims even though the provider has insurance. Provider insurance only covers the provider not the practice. Additional premiums will apply.
4. The Independent Contractors Act 2006 – If you are deemed as an employee Independent Contractors Act 2006, then you may need to comply with the employee rights and obligations of the Fair Work Act
5. Fair Work Act – $51,000 fine per breach plus penalties for the following:
a. Claim for annual leave, sick and long service leave entitlements
b. Underpayment of wages pay if below the Award wage or statutory entitlements
c. Employment contracts must be in writing in order to avoid falling foul of any over award payments.
State Laws (in each State the laws may vary)
6. Payroll Tax Contractor payments attract payroll tax in each State ranging from averaging 6% of your payroll above the State threshold. Watch out for the payroll tax grouping rules in relation to practice companies and practice trusts. See our article new payroll tax risk see http://thebusinessofhealthcare.com.au/2014/09/14/tax-audit/.
7. Workcover – Workcover premiums and obligations apply on contractor payments if they are really employees.
Where to from here:
1. Obtain confidential second opinion immediately and at no obligation or cost.
We say it is important to ask the right questions rather than getting the right answers. To help you contact us at 1800 077 222 or email at email@example.com Health and Life – national Health Practice, Tax and Accounting Advisers since 1992. Alternatively visit our website at www.healthandlife.com.au.
We can review your strategy, financial statements and all your arrangements and provide written advice to you for your legal advisers to answer. Yes we are registered tax agents (we are not lawyers – so seek legal advice) and can do you annual tax and accounting work as well as provide sound advice. Please not we are not lawyers and you must seek independent legal advice on any of the above issues.
It is important to do this now because it is more expensive to restructure or fix up your practice in the new financial year commencing 1st July see our Why Restructure now article or see https://www.healthandlife.com.au/why-restructure/. Please consult us or your legal or professional adviser before acting on any information.
2. Purchase our template practice kits
Purchase and implement our cost effective employment kit and service agreements kit (for your contractors) or see https://www.healthandlife.com.au/what-we-do/services-peace-of-mind-solutions/specialised-services/products-for-medical-practices/templates/tenant-doctorproviderservicecontractor-agreements/.
3. Get your administration systems right!
A common mistake is that a practice does not accurately pay and calculate how they pay their providers by using the correct and accurate administration systems. Ensure your Excel spread sheets, MYOB, QuickBooks or Xero, data files that account for service fees correctly account for any GST as per your signed provider agreements. We have template charts of accounts you can purchase from Health and Life. Poor systems cause a bigger multiplier effect and make this a major problem by the end of the financial year. See our Doctors Pay Calculator https://www.healthandlife.com.au/what-we-do/services-peace-of-mind-solutions/specialised-services/products-for-medical-practices/doctors-pay-service-fee-calculator-tm/, overcomes this problem and automatically processes the practices and the providers BAS for them; and
4. Tax Audit Insurance – Purchase tax audit insurance.
There are some really good medical indemnity insurers that automatically provide this cover for both Federal and State laws.. Accounting and legal fees can easily mount up to $10,000 for one enquiry if your paperwork is not in order and the audit spreads to other providers because you did not answer their questions correctly.
5. Join our discussion on Linked In
Join us on Linked In for real time updates see https://www.linkedin.com/groups?mostRecent=&gid=5135205&trk=my_groups-tile-flipgrp for further updates or keep watching this space.
The bottom line it is important to eat well and sleep well!
Chartered Accountant, Chartered Tax Adviser, Registered Tax Agent, Former AGPAL Surveyor 10 years of service
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)
After a serious work related car accident in 1989, and nine operations later I continue to be a patient and provider advocate. I enter my third decade as a national Chartered Accountant for Medical and Healthcare practices in Australia. I am a former 10-year Australian General Practice Accreditation surveyor. I come from a medico family. I have served on the AAPM national Board and was the inaugural national Chair of the Certified Practice Manager CPM post nominal. I continue to provide accounting tax and practice management advice to many practices all over Australia.
You know who you are and I thank you for this real honour and privilege to serve you and your community through you. Note, I am not a lawyer please seek appropriate legal and accounting advice. This information is for general information and discussion only.