Beware of the payroll taxman…
As reported in a recent interview in the Medical Republic paying doctors or providers incentives may attract payroll tax that many are unaware of. A checklist based on this recent case is below so you can test how safe you are from an audit.
We have recently received a number of reports of Tax Office audit activity especially in relation to payroll tax applying to providers who are paid on a percentage of fees generated. As a result, many medical practices are facing significant penalties and back pay of taxes up to 5 years totalling in some cases excess of $2m. Small and large practices are affected. Workcover, PAYG and Superannuation audits may also be consequently triggered.
Recently, a decision was handed down in the Victorian Civil & Administrative Tribunal (VCAT) (The Optical Superstore Pty Ltd & Ors v Commissioner of State (Review and Regulation) (Corrected)  VCAT 169 (9 March 2018)) which highlighted the issues associated with the applicability of payroll tax within medical practices.
There were four key issues in this case relevant to how payroll tax is calculated. By way of background, the Victorian Commissioner of State Revenue (the Commissioner) made a determination that Optical Superstore Pty Ltd (Optical Superstore) had failed to pay payroll tax related to various optometrists operating within Optical Super Stores. Optical Superstore had the matter referred to the VCAT challenging the determination of the Commissioner.
The basis of the challenge were; firstly, that the optometrists were engaged by Optical Superstore under a tenancy contract and not an employment agreement or contractor arrangement. Secondly, the payments made under the tenancy contract were occupancy fees and remittances from Medicare owed to the optometrist for the provision of medical services whereby neither of these payments amounted to ‘wages’ attracting payroll tax and further any additional payments made by Optical Superstores were an incentive under the tenancy agreement (referred to as a location attendance premium). Thirdly, the payment of remittances was a return of funds held on trust by Optical Superstore for the benefit of the optometrists and therefore not to be classified as a ‘wage’. Fourthly, the Commissioner should apply the legislative exemption requiring payroll tax on the basis that the services provided by the optometrists are services being provided to the public generally.
The Tribunal found as follows:
- The payment of occupancy fees and remittances were not ‘wages’ and therefore did not attract payroll tax.
- However, the incentive payment (location attendance premium) was indeed a ‘wage’ and payroll tax was payable on that component. The Tribunal also noted that just because an agreement was titled ‘tenancy agreement’ did not mean that it could not be construed to in fact be a contractor arrangement.
- The payment of the remittances was a return of funds held on trust by Optical Superstore but the Tribunal did not come to this conclusion easily as the funds had not been separated from other funds within the general operating accounts.
- The Tribunal found that where there was an absence of arrangements with other optical stores the optometrists could not be classified as providing services to the public generally.
The outcomes of the decision suggest that a medical practice could be at risk of a payroll tax audit investigation in circumstances where the practice has:
- poor or unclear tax, trust or corporate structures;
- failed to maintain separate provider banking arrangements particularly in the area of trusts e.g. clearing account;
- poor separate provider ledger accounting and audit trail documentation; and
- poor systems which fail to clarify whether service providers could be deemed as employees or contractors.
Please note the issue as to whether maintaining separate bank accounts when operating trusts is of critical importance is subject to appeal and will be heard later this year.
This decision affects all practices. The message is, no matter how small or large your practice is, you must review your arrangements urgently.
However, the recent payroll tax decision may provide some clear and significant opportunities to reduce this practice overhead and risk. Don’t be tempted to cut corners. If you fail to put in place the correct structures and agreements, it may lead to an expensive tax audit by state revenue government departments or the ATO. A disgruntled staff member or an ill-informed adviser may put you at risk in this regard and it can become an expensive process to defend.
It is important to work with experienced practice advisers, lawyers and accountants. Do not cut corners. Your practice is your (and the community’s) most valuable investment.
Depending on your structure and arrangements payroll tax may or may not be payable on payments made to ‘relevant contracted’ doctors or providers.
Providers who are paid on a percentage of gross fees may be at risk of being required to pay payroll tax. The burden of the tax will depend on the practice agreements.
We have become aware that the various State Payroll Tax Offices have charged payroll tax on the net amount paid to practitioners after deducting Gross Fees from any service fee. They are also applying payroll tax on any guaranteed minimum arrangements. For example if an individual practitioner (regardless of whether they practice as a self-employed person, company or trust) is billed and receives a patient fee of $100 GST free, and then the practice takes out a 40% plus GST service fee from a clearing account, then the payroll tax office may treat the $56 payment to the provider like a payroll taxable salary.
So for example in Victoria payroll tax is charged in the following way:
Victoria – From 1 July 2017
Rate: 4.85% metropolitan or 3.65% for regional employers
Therefore assuming the practice has exceeded the threshold because it, for example, employs a practice manager, nurse and receptionist costing greater than $52,084 monthly then an additional payroll tax applies of $2.76 i.e $$56.00 net receipt paid to the doctor x 4.85% metro rate.
This does not sound like a significant amount, however if the average GP bills $20,000 per month this represents an additional $970 per month in practice overheads per GP or $12,000 p.a.
Getting it wrong may run into the millions depending on what your arrangements are especially with your contractor doctors or providers.
The fundamental issue of concern is that, on the net amount paid to a practitioner (i.e. their gross fees received, less service fees and a guaranteed minimum arrangements) – payroll tax may be payable. This will have significant and possibly crippling implications where PAYG, Superannuation and Workcover may also be payable.
2018 Payroll Tax Checklist
|Key areas||Key Department||
Key factors to watch out for*
Yes/No/ Not Sure
|*This is not a comprehensive list of factors||Please seek your own independent legal and taxation advice or contact us at firstname.lastname@example.org|
|1||Legal Structure||Practice Structure||Not clear on what type of structure you have e.g. partnership, company, service trust or company. What is the real reason and purpose beyond “my accountant told me”. Does it help with succession planning and promote a sustainable business model?||Ask your advisers to explain. Consider obtaining written confirmation. Consider the appropriate legal arrangement i.e is it a landlord and tenant relationship and if so make it clear it is not an employee or contractor arrangement. If still not clear contact Health and Life and our experienced independent legal team will assist you|
|2||Individual Structure||Regardless of whether it is a company or trust payroll tax is payable if it is deemed a “relevant contract” pursuant to the recent VCAT decision.||Ask your advisers. Consider the Employee v Contractor test, (-note this is not a guarantee that it is not subject to payroll tax, however). Consider obtaining written confirmation. If still not clear contact Health and Life and our experienced independent legal team will assist.|
|3||Legal Agreement||Do you have current signed legal agreements? Are they employee, contractor or landlord v tenant agreements? Does it clearly state the relationship, how money is held in trust and accounted for?. What are the Practitioner rights and obligations related to plant and equipment and ownership of records?. Who takes on the big risks e.g. litigation? -Who is liable for medical and public indemnity, Workcover, PAYG, Payroll Tax, Super and GST? Are there any guaranteed minimum hourly rates e.g. 50% of gross fees or $50 per hour whichever is greater. Who has control? Can they sub-contract out and set their own appointments and who is ultimately responsible to the patient. Does the practitioner only get paid on what they bill?||Ask your advisers. Consider obtaining written confirmation. If still not clear contact Health and Life and our experienced independent legal team for help. Consider purchasing legally vetted template agreements from Health and Life. Seek external legal and accounting advice.|
|4||Guaranteed minimums||Does the practice offer guaranteed minimums e.g. 50% or $50 per hour whichever is greater? -Or is the fee arrangement simply that the provider retains 60% of earnings, regardless of how many patients they see – there are no guaranteed minimum earnings – if you see no patients, you receive nothing? Is it based on hours worked?||Ask your advisers. If still not clear contact Health and Life and our experienced independent legal team will assist you. Consider purchasing legally vetted service agreement template from Health and Life that complies with your accounting and bookkeeping system. Seek external legal and accounting advice. See our Doctors Pay (Service Fee Calculator)for ideas on how you can properly track payments.|
|5||Practicing at different locations||Are there any restraints of trade that may infer an employer or employee arrangement? Ensure it is clear that practitioners can see any patients directly of their own choosing at any practice.||Consider removing employer type restraints. Seek external legal advice.|
|6||Workcover registration||Is the registration for the practice under ‘General Administration’ or Medical and Health services? If the latter, then it could be held you are running a medical and health practice and not a service entity i.e. landlord tenancy arrangement.||Consider updating the registration. Make sure insurance coverage for practice staff is not compromised. Seek external legal and accounting advice.|
|7||Legal, Accounting and Practice Business Advisers||Have you used experienced legal and accounting advisers in setting up and operating medical and healthcare practices? Many accountants advise on tax returns and financial statements only. More extensive knowledge of healthcare awards, PIP’s SIP’s, Care plans, Homecare, Rural grants, SWOPE, vaccines and Medicare rebates etc where the minute detail of payment arrangements are understood in the context of your arrangements and how they interrelate and are implemented in practice.||Ask your advisers. Consider obtaining written confirmation. If still not clear contact Health and Life and our experienced independent legal team will assist.|
|8||Business Model||The purpose of your structure||Can your advisers explain the purpose of the business model of the practice and how this entity can be valued for succession planning purposes? Does the service trust or company provide any services to patients (over and above the medical or healthcare services provided by the providers)?
The primary structure could be used to sublease at a premium rent e.g. pathology,pharmacy, consumables, receive practice grants and other provider service income e.g. allied health rent.
|Ask your advisers. If still not clear contact Health and Life Accounting and Practice Advisers and our experienced independent legal team. Consider purchasing legally vetted template agreements from Health and Life that complies with your accounting and bookkeeping system. Seek external legal and accounting advice.|
|9||Accounting||Financial Statements, Tax Returns and BAS||Do your financial statements include medical or practitioner income or only service fee income? Avoid income related to employees existing in a service trust or company. The practice does not treat any of the monies (other than the service fees) as its income or as its assets. Other than the service fees, the monies are not included in the practice’s activity statements. How is the amount in the separate account treated in the financial accounts of the practice,? if at all?||Ask your advisers. If still not clear contact Health and Life Accounting and Practice Advisers. Consider purchasing an accounting chart of accounts that complies with your accounting and bookkeeping system. Seek external legal and accounting advice.|
|10||Separate Provider Bank Account from the Practice operating account||Each practitioner signs a form directing Medicare to deposit fees into a separate bank account e.g. a clearing or billings trust accountant that is not the service trust or company bank account that pays practice administration staff and practice overheads e.g. rent, IT and utilities. Only the earnings of the practitioners are deposited into this account – and other than the payment of service fees, the monies in the account are not used for any purpose other than to be returned to the practitioners at the end of the period. Are there any documents which expressly state that the monies held in the separate account are held on “trust” for the practitioners. Is there interest earned on the monies in the account? If so, who receives that interest? Can practitioners have audit access to this account? Are practitioner EFTPOS and merchant facilities link to the Practitioner and not the Practice Bank account?||Ask your advisers. If still not clear contact Health and Life and our experienced independent legal team for your advice. Consider purchasing a legally-vetted service agreement template from Health and Life that complies with your accounting and bookkeeping system. Seek external legal and accounting advice.|
|11||Bookkeeping||How are the various deposits into the separate account identified – ie- how are the deposits tracked against the various practitioners who provided the services? Does the practice maintain separate MYOB,QBooks or Xero ledgers for the practitioners account and Practice account? Is it reconciled daily or regularly?||Implement Health and Life’s 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/ and customised MYOB, QBooks or Xero Trust Ledger accounts and procedures.|
|12||Provider Tax invoices||Tax invoice issued by the practice to a practitioner for the service fees. Remittance (monthly or fortnightly) from the practice to a practitioner showing the amount returned (less the service fees)||Implement Health and Life’s 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/ and customised MYOB, QBooks or Xero Trust Ledger accounts and procedures.|
|13||Admin||Rosters||Can the providers select their own appointment times and choose their own patients?||Practitioners should be allowed the freedom to choose how they operate their practice.|
|14||Policy and procedures manual||Do they consistently validate the land lord tenant arrangement or does it imply a contractor or employee arrangement?||Ensure the substance of the contract is greater than the form. It is not sufficient to only have appropriate legal agreements. The right systems and audit trail must support the agreement.|
|15||Marketing||Letterheads||Does a legal disclaimer state that the provider is responsible for all conduct? Is only the treating practitioner name on the document? Does it imply the practitioners are contractors and or employees?||Print out and check documentation. Seek an independent legal opinion. Ensure only the treating practitioners ABN appears on the documentation|
|16||Website||Does a legal disclaimer state that the provider is responsible for all conduct? Does it imply the practitioners are contractors and or employees?||Ensure each practitioners’ speciality interest and ABN appears on the website and patients can choose their provider.|
|17||Appointment cards||Is only the treating practitioner’s name on the document?||Print out and check the documentation. Seek an independent legal opinion. Ensure only the treating practitioners ABN appears.|
|18||Practice brochures||Does a legal disclaimer state that the provider is responsible for all conduct? Does it imply the practitioners are contractors and or employees? Does it state they are independent practitioners co-located on the site?||Print out and check the documentation. Seek an independent legal opinion. Ensure only the treating practitioners ABN appears.|
|19||Telephone Messages on hold||Does a legal disclaimer state that the provider is responsible for all conduct? Does it state they are independent practitioners co-located on the site?||Print out and check the documentation. Seek an independent legal opinion. Ensure only the treating practitioners ABN appears on the documentation.|
|20||Waiting room signage||Does a legal disclaimer state that the provider is responsible for all conduct? Does it imply the practitioners are contractors and or employees? Does it state they are independent practitioners co-located on the site? Only the ABN of the practitioner appears and not the Practice.||Print out and check the documentation. Seek an independent legal opinion.|
|21||Patient Tax invoices||Is the tax invoice issued in the name of a practitioner to a patient? Does a legal disclaimer state that the provider is responsible for all conduct? Does only the ABN of the practitioner appears and not the Practice.||Print out and check the documentation. Seek an independent legal opinion.|
|22||Staff||Practice staff and providers||Can they consistently verbally describe the working relationship of all providers being self-employed and free to choose session times and patients they want? This also includes how the complaints handling process is managed and determined by the treating practitioner. Are the staff clear they are independent practitioners co-located on the site?||Ensure the substance of the contract is greater than the form. It is not sufficient to only have appropriate legal agreements. The right systems and audit trail must support the agreement.|
Where to from here?
We can help if you are not sure.
Please note at Health and Life, we are accountants and practice advisers, not lawyers.
Please seek specific legal advice in relation to your own circumstances. We cannot be held responsible for any errors or omissions in this article. This article is for discussion purposes only. We work closely with Peripheral BLue Legal an independent law firm familiar with these issues which can assist you if required. We can confidentially assist with your initial inquiry at no charge or obligation and make sure you receive the right advice.
We thank the independent law firm Peripheral Blue for their assistance in preparing this article.
Contact David Dahm at email@example.com or 1800 077 222 for further information.
We thank Peripheral Blue Legal for their assistance with this article.
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.