Don’t use the “C” Contractor Word! – Part Two

This is Part Two of the article “Don’t use the “C” (Contractors) Word”. I cover practical examples and key court cases that best illustrateGL check common mistakes many practices make. 

This is Part Two of a two-part series. Part Two of this topic covers practical court case examples of what I commonly see practices get wrong. If you missed Part One, click here.

With this in mind, if you are not interested in reading the devil in the detail try my latest free, national 70 point practice self-audit Employee v Contractor v Tenant Provider tool. This is here to help you score yourself on how safe you are and what to do next. 

Key Independent Contractor Court and investigation cases

The bottom line is to determine what are the main characteristics of your arrangements. Do your arrangements lean more towards an independent contractor or an employee? If your intention is to be an independent contractor then it is important to put this in writing in an agreement and walk the talk. 

The following cases illustrate this point and may further indicate where you need to tighten up any loose areas. 

  1. Payroll Tax

For practices who are not employing or subcontracting doctors and are using the Tennant Doctor provider model discussed should ensure the following:

1.1 Do not sell items such as consumables that becomes your primary purpose of business

In the Super Optical payroll tax case they had lost their appeal and the practice remained liable for payroll tax. Unfortunately, the taxpayer lost. We understand there are now general practice payroll tax audits being conducted in Western Australia, New South Wales and Victoria as we write. 

1.2 Do not assign income 

On a positive note, Dr Simon Halliday, a medical practice owner who had endorsed our approach had won most of his case in the Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue July 2019 decision. It was alleged his doctors were contractors and not employees for payroll tax purposes. Their billing arrangements were a key to their success. It was established each doctor “had not assigned” their income to the practice. For payroll tax purposes, there were no relevant contracts taken to be wages.

It was noted they did have to pay payroll tax on a guaranteed minimum top-up hourly rate work.

1.3 Make sure your website does not state “Our Doctors” 

The following wording triggered a $1.2m 5-year payroll tax investigation. 

On the General Practice website it stated: 

‘In the ‘Our Doctors’ section of the website, it is stated that “the Practice has a highly skilled team of doctors able to assist with the management of all general medical concerns.” 

“Our general practice is accredited with the Australian General Practice Limited”

Your website should not imply it is providing general practice services. This is akin to Westfield the landlord not representing that it sells Woolworths fruit and vegetables for them. 

It is essential to check the tone of your website’s text so that it sounds like practitioners are not employed. They need to be seen and treated as co-located tenants, just like a Westfield store. 

To use another analogy it should be no different to an independent accountant and lawyer operating on the same building floor. They should not be seen as the same service under one trading banner or name when holding out their services to the public.  

 2. Fair Work Deemed Independent Contractor an Employee 

The Uraidla Physio 2017 independent contractor case best illustrates all the key areas in law that could be used against a practice to deem their contractors as employees for Fair Work, income tax, super, PAYG and payroll tax purposes. 

This case reveals many mistakes we see in practice. Below, I have substantially quoted highlights from the case. It clearly explains the key characteristics a Court would look for to deem your independent contractors as employees. The same criteria could easily apply in any income tax or payroll tax jurisdiction. 

A physiotherapist who lodged an unfair dismissal application with the Fair Work Commission (FWC) was found that he was an employee and not an independent contractor. 

Throughout the course of his relationship with Uraidla Physio, Mr Mitchell also provided services through his own physiotherapy business, as well as at another established practice. At the commencement of his relationship with Uraidla Physio, Mr Mitchell was asked by Ms Schultz whether he would prefer to be an ’employee’ in which case he would receive a set hourly rate, or a ‘contractor’ being paid a percentage of his billings. Mr Mitchell opted to work as a contractor. 

After Ms Schultz wrote to Mr Mitchell in December 2016 advising him that his services were no longer required, Mr Mitchell contended that at the time of his dismissal he was actually an employee for the purposes of the Fair Work Act 2009 (FWA). 

Employee or contractor? 

There was no written contract in relation to his engagement, the only conditions discussed with Uraidla Physio were in relation to hours of work and the method used to calculate his payment; 

Uraidla Physio exercised both discretion and control over the nature of work that he performed;  

He believed that he was working in the business of Uraidla Physio rather than conducting his own business alongside that of the Respondent;  

Uraidla Physio exerted control over the hours that he worked and he had an ongoing expectation that these hours would continue;  

Uraidla Physio bore the risk in relation to the work that he performed;  

He wasn’t able to nominate another physiotherapist to perform his hours of work;  Uraidla Physio provided all the stationery, software and equipment he needed; 

and there was a general arrangement that he was paid fortnightly, as he provided invoices sporadically at best.

The personal nature of the services provided would not tend to create goodwill for Mr Mitchell’s business.

The ruling and general law on employees v contractors 

The question to ask when determining whether a worker is an employee or contractor is ultimately whether the worker is a servant of another in that other’s business, or whether the worker carries on a business of his or her own account. 

The answer to this question comes from an examination of the relationship as a whole, in this case by reference to the factors noted above. 

It was found the arrangements were not formalised. The FWC noted that some of the types of transactions (such as the reliance upon invoicing and payments with consideration given to GST) that typify an independent contractual relationship were conspicuously absent in this case. 

When viewing the relationship as a whole, the FWC was satisfied that Mr Mitchell was an employee within the meaning of the FWA. 

  1. Substance over form matters

The terms and terminology of the contract are always important. However, the parties cannot alter the true nature of their relationship by putting a different label on it. 

In particular, an express term that the worker is an independent contractor cannot take effect according to its terms if it contradicts the effect of the terms of the contract as a whole: the parties cannot deem the relationship between themselves to be something it is not. Similarly, the subsequent conduct of the parties may demonstrate that the relationship has a character contrary to the terms of the contract.

On the other hand, where there is a high level of control over the way in which work is performed and the worker is presented to the world at large as a representative of the business then this weighs significantly in favour of the worker being an employee.

  1. Whether the worker performs work for others (or has a genuine and practical entitlement to do so).

The right to the exclusive services of the person engaged is characteristic of the employment relationship. On the other hand, working for others (or the genuine and practical entitlement to do so) suggests an independent contractor. The key areas to focus on are:

  • Whether the work can be delegated or subcontracted.
  • Whether the work involves a profession, trade or distinct calling on the part of the person engaged.
  • Whether the worker creates goodwill or saleable assets in the course of his or her work.
  • Whether the worker spends a significant portion of their remuneration on business expenses.

If a practitioner is free to work anywhere, is a member of the profession, can set their own fees and pay a substantial  fee in running a business they provide directly to the public at large, it is more likely that they are not an employee and an independent contractor. It is important to distinguish that independent practitioners (contractors) are in fact contracting the practice to provide support services. 

To the contrary, it would mean they were offering their professional services to the practice to on-sell to patients like a subcontractor. It is important to be clear about your working relationship. 

  1. A separate place of work and the advertising of the service

The location of the work should be considered in the context of the nature of the services provided. Mr Mitchell provided services using the room rented by Uraidla Physio and the room operated under the banner of that practice.

Written records, accounts, business cards and exchanges with patients took place using the letterhead and banner of Uraidla Physio. Accordingly, the services were provided under the umbrella of the relevant trading name of Uraidla Physio and were generally advertised and delivered in that context. This is more consistent with an employment relationship.

  1. The entitlement to delegate or sub-contract work

If the worker is contractually entitled to delegate the work to others (without reference to the putative employer) then this is a strong indicator that the worker is an independent contractor. This is because a contract of service (as distinct from a contract for services) is personal in nature: it is a contract for the supply of the services of the worker personally.

Given the absence of any real formality in the relationship, this entitlement is difficult to ascertain. It is, however, apparent that the arrangement was a personal one and it would be a reasonable inference that Mr Mitchell could not delegate or sub-contract the work at Uraidla Physio.

The need for the work to be undertaken by Mr Mitchell personally is an indicator more consistent with that of an employment relationship.

  1. The public presentation of the workers (uniforms and other badging)

The service was provided under the banner of Uraidla Physio. There was no uniform and the patients were seen by a professional physiotherapist and accounts were issued under the letterhead and accounting system of Uraidla Physio whilst referencing (where relevant) Mr Mitchell and his provider number. On balance, this consideration is more consistent with an employment relationship. 

To be treated more like an independent contractor, a practitioner should have their own letterhead and invoice with their own ABN and a disclaimer stating the treating practitioner is responsible for all conduct.

  1. The provision of invoices/periodic payment of “wages”

At some stage during the relationship, invoices were sought from Mr Mitchell by Uraidla Physio. The requirement for invoices, if such represents a bona fide business transaction expected by the parties, is more indicative of an independent contractual relationship. However, invoices were not provided by Mr Mitchell and ultimately were not required as the payments continued to be made based upon the billings issued for work performed by Mr Mitchell. The provision of invoices was not therefore a fundamental element of the arrangement and it could, and did, readily operate without such. In the absence of invoices, the proper treatment of any GST is unclear and the evidence tends to support the notion that neither party took GST into account as part of their transactions.

This is why I recommend the Doctors Pay Calculator to resolve this concern. 

Paying on a cash receipts basis than on billings is critical

There was, in general terms a fortnightly payment to Mr Mitchell, however, this was generated based upon the performance of actual services and billings issued arising from his work in that period. This is not generally consistent with the notion of a wage, however, I note that subject to any minimum award conditions to the contrary, there would be no reason that an employee could not be paid on such a basis. The fact that these payments were based upon billings, and not upon payments actually received by Uraidla Physio, is more consistent with the work being performed for the practice rather than Mr Mitchell.

  1. The creation of goodwill and other saleable assets

I have found that after the termination, Mr Mitchell could continue to provide services to at least one or more of the clients that he saw whilst at Uraidla Physio. Indeed, Ms Schultz facilitated such and this is a factor indicative of the personal nature of the services and that the work had some personal ongoing value for Mr Mitchell. This is an indicator more consistent with the notion that Mr Mitchell was working for himself, at least to some degree.

However, the fact that the services also took place under the umbrella of Uraidla Physio, and involved bookings being made by and with that practice, is a factor that tends to militate against the capacity for Mr Mitchell to generate any form of goodwill, in the sense that it could be valued or sold to another person or business. This aspect is more consistent with an employment relationship

  1. The proportion of remuneration on business expenses

There is no direct evidence about the proportion of remuneration that Mr Mitchell spent on business expenses. This would also be somewhat problematic given that Mr Mitchell was clearly conducting a business with respect to the other practices in which he was involved as the proprietor. In relation to the work performed with Uraidla Physio, other than the small investment made in bringing some minor equipment with him, he did not need to expend money to undertake any real administration of his business affairs as he was using the system provided by the respondent and being paid as a result of the billings generated through that system.

The non-payment of superannuation for most of the contract, and more importantly, the absence of any expectation that this would be done under the arrangements agreed by the parties, is also more consistent with the notion of an independent contractual relationship.

When it comes to independent contractor contracts – you cannot put lipstick on a pig

The courts have made it clear you cannot simply write a contract and your problems will go away. This is analogous to putting lipstick on a pig of a problem. You have to review your entire ecosystem from business models to structures, administration and accounting systems, marketing and staff training.

This should also be considered in light of the decision of the Federal Court in Roy Morgan Research Pty Ltd v Commissioner of Taxation. The Full Court endorsed the approach as “a matter which must yield in its significance to the nature of the whole relationship”. 

In Cai v Do Rozario, the Full Bench also confirmed the following:

● The object of the exercise is to paint a picture of the relationship from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another.
● The ultimate question remains whether the worker is the servant of another in that other’s business, or whether the worker carries on a trade or business on his or her own behalf: that is, whether, viewed as a practical matter, the putative worker could objectively be said to be conducting a business of his or her own of which the work in question forms part?
● If the result is still uncertain then the determination should also be guided by “matters which are expressive of the fundamental concerns underlying the doctrine of vicarious liability” including the “notions” referred to in paragraphs [41] and [42] of Hollis v Vabu

Conclusion

Determine what the main characteristics of your arrangements are. Do your arrangements lean more towards an independent contractor or an employee? Now is a good time to fix it once and for all. It is possible to have an independent contractor arrangement more aptly described as tenant doctors ™. 

For more information on contractors visit our blog.

About me: David Dahm BA (Acc.), CA.,FCPA,CTA, FFin, CPM, FAAPM, FAIM, FGLF.

Registered Tax Agent, Former AGPAL Surveyor 10 years of service

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 before acting on this information. This information is for general information and discussion only.

Don’t use the “C” Contractor Word! – Part One

This article was first published by the Medical Republic on the 6th of April 2021.

 

When a practice manager, doctor, or doctor owner says “our doctors are contractors” without realising it you may be opening a whole can of worms for your practice. Even your website that states “Our Doctors” could trigger an audit!

In this article, we cover the top 5 common errors and why it is more likely than not you will get caught. How you respond is the key. This is Part One of a two-part series. Part Two of this topic covers practical court case examples of what I commonly see practice get wrong.

With this in mind, if you are not interested in reading the devil in the detail try my latest free, national 15 to 20 minute practice self-audit Employee v Contractor v Tenant Provider tool. This is here to help you score yourself on how safe you are and what to do next. 

Employee and Contractor arrangements are a highly contested area of law and tax in Australia. Both have serious legal and tax consequences. Many practices prefer non-employee arrangements due to medico-legal, Fair Work and employee on cost and recruitment and retention.  I like to use a more apt description called Tenant Doctor ™  or Tenant Provider ™ arrangements.

All levels of Government are becoming desperate for money to pay for the pandemic. 

Setting up and running a practice is expensive. The devil is in the detail. Understandably, some tasks may have taken a lower priority. Unfortunately, compliance is not a choice, it is a necessity. The practices that do it well reduce uncertainty and are up to 200% more profitable than the average practice.

For medical and healthcare practices, there are two main reasons why you may get caught up in a stressful and expensive Employee v Contractor, Medicare, Fair Work, Payroll Tax, ATO or Superannuation audit.

It may be due to a practice dispute over pay or when you are buying or selling your practice. Alternatively, your arrangement may be picked up by an ATO or statutory systemic digital audit possibly from different angles. 

Every day we read more stories about practices where doctors or healthcare contractors are being unexpectedly investigated and/or deemed as employees with employee entitlements with PAYG, Super, payroll tax or GST obligations. We have seen contractor arrangements subject to the recent Department of Health’s pathology excessive rent investigations and Medicare Shared Debt rules. 

A “gentleman’s handshake” is no longer good enough when it comes to avoiding disputes and meeting your compliance requirements. It is not a choice.

No matter how big the company or clever your lawyers and accountants are, the tax and Fair Work authorities have been aggressively pursuing small and large businesses. Fancy letterhead and titles will not save you.

As a case in point below are some of the biggest cases and organisations in Australia reported in the media for underpaying their staff. Even the lawyers who are advising them are getting it wrong.  They include some of Australia’s biggest medical, law and accounting firms.

Underpayment of Wages cases since 2019 

  1. Top-tier law firm clocks up $290k underpayments bill – Australian Financial Review (17th July 2020)  
  2. ABC underpaid staff $12m 
  3. SBS running list of Australian businesses that have underpaid staff in 2019
  4. GP corporate admits it underpaid staff by $15 million
  5. (Healius)Idameneo back-pays workers over $15 million
  6. SBS running list of Australian businesses that have underpaid staff in 2019SBS running list of Australian businesses that have underpaid staff in 2019

Sleep better…you can do something about it.

If you cannot explain your structures and your numbers without your accountant and lawyer in the room, you may have a problem. The role of your adviser is to help you to simply and holistically understand and explain your arrangements. Initially, you should not need them in the room to answer a simple question. This one tip can significantly help avoid drawing more attention to yourself. 

The bigger problem is when your adviser cannot simply and holistically explain your arrangements to you, or you do not ask. This is not uncommon. Very rarely when I talk to practice owners can they or their advisers properly explain why they have their arrangements beyond a tax reason. This is a big warning sign.

It is understandable (and it may not be fair) that both State and Federal government agencies are going after the easy targets. Medical practices make for a good public hanging of our most morally abiding and trusted citizens. 

It can send a gut-wrenching fear that you could be next! If you feel this is you, if you feel nervous every time you get your own mail, understand this is a choice.  You can do something about it.

Feeling entrapped by authorities and pressured to answer the phone or email quickly is not a good idea. The opposite is true if you do not know how to respond correctly, this can only encourage more questions.

It is hard to unsay things, once you have let the cat out of the bag. 

Investigators will talk to everyone from your doctors, staff, your accountant and ask to see your contracts and website. They want to see if everybody’s understanding is on the same page. It is not a happy time for anyone. It is worse than accreditation because you get to foot the entire bill.

Start now (trust me, it is never a good time) and be clear on your own arrangements. Do not wait for an audit. 

What are regulators really looking for?!

Today, the ATO and their friends are looking at the overall “character” of your practice arrangements. To many advisers’ surprise, they take a holistic view. No single contract, system or well-intended advice in isolation is a panacea to your concerns.

The missing pieces of the jigsaw puzzle must be complete. A simple example is a practice being investigated due to a contract dispute. They are facing a million-dollar payroll tax bill. The official reason given is their website said “Our Doctors” and they are an “AGPAL accredited general practice”. This means nearly every practice in Australia may have the same problem!

In Australia, I have reviewed over 1,200 practices over three decades.  I am yet to see a practice get it right. I am yet to give $500 for my have you got your practice arrangements right.

With this in mind, our latest free, national  15 to 20 minute practice self-audit Employee v Contractor v Tenant Provider tool is here to help you score yourself on how safe you are and what to do next. 

We hope you will find this as a useful way of protecting your practice. 

This comprehensive checklist is based on many decades of experience in disputes, working with lawyers, the ATO on court cases and new laws. 

It will walk you through the key areas of your practice that you may need to tidy up. They range from your website, accounting and administrative records, software systems, through to your legal agreements. 

It will provide an automated rating and summary of key issues to help you start the conversation with your team and your advisers. 

Do not be afraid, you may find all you have to do is make a few small cost-effective tweaks such as fix your website and stationery. 

In the end, it is cheaper than an expensive government audit or an embarrassing dispute with a disgruntled provider. Providers can also use and share this tool to help the practice location they work at.

The five biggest common practice errors!

The five biggest errors we see practices make are:

  1. Not having an up-to-date signed agreement you may be accused of fraud. Lawyers have advised me that without a signed agreement such as a tenant doctor arrangement where you are collecting money on their behalf it may be a criminal offence to deduct money from a doctor’s billings without consent. Due to COVID-19, if you are thinking about increasing the practice percentage for a jab, make sure you have this in writing!

  1. Employee-like contract terms. Off-the-shelf templates are only a good idea if  your lawyer and accountant is fully aware of your structure and arrangements. Often we see self incriminating contractor agreement terms that state: 

  • Restraint of trade clauses
  • Restrictions to delegate work
  • Money not held in trust
  • Practices insisting that complaints are handled by the practice
  • Guaranteed minimum hourly (top-up) rate e.g. $50 per hour or 50% of gross billings whichever is higher.     

These types of terms or language may deem your contractor as an employee. 

  1. Website referring to “Our doctors” or “Our Team” and/or “our accredited general practice” listing providers who are not employees or subcontractors. If they are tenant doctors/providers they should be listed and treated like tenants in a Westfield shopping centre. 

  1. Using the same single Xero, MYOB or accounting ledger and bank account to record medical fees and paying administrative staff. Not using systems like the Doctors Pay Calculator to clearly separate (practice service entity) landlord and (doctor/provider) tenant activities. 

  1. Piecemeal professional advice. Advisers only give advice in their area of expertise. Sometimes they fail to advise or be aware of the shortcomings of their advice. A big mistake is not having their advice in writing. Start with a holistic approach that covers all areas such as your business structure, income tax, payroll tax, Fair Work, commercial or medico-legal issues. It is not uncommon to find your local or specialist medical accountant is not aware of many of these areas and are simply outside their depth.

Do nothing is not an option – start asking the right questions

To maintain the status quo is no longer an option. For real progress, you must seek it out. Start asking for a helicopter view. When you do not ask, the ‘we did not tell you defence’ is common. It puts you in a difficult position. The checklist helps you start asking the right questions which are more important than the right answer. 

Finding the right adviser

Relying on well-intended free advice is a suboptimal solution

Nobody likes paying for legal or accounting advice. Let’s face it, paying for advice is a grudge purchase is like going to the dentist. 

What makes this worse is it is intangible; you cannot see the immediate benefit. This makes it harder (next to impossible) to justify. 

People are happier to pay for a cure than to prevent a problem. Sounds familiar? Even if it is free, is a 20-minute chat that can save your livelihood worth anything to you? For many, it is simply not a priority when every day you are saving a person’s life. It never seems to be a good time. For others, it is in the ‘too hard’ basket.

For the more profitable high performing practices we see, they make it an annual strategic objective to review. It is affordable and doable. It increases practice certainty for them. Many fail to realise this.

Needless to say, being an honest and ethical fool is not a defence.

Like vaccine hesitancy, you need to get over it. Ultimately, it is your responsibility and not your accountant or lawyer. Advisers do have a role and have bills to pay. Unfortunately, there is no Medicare equivalent for advisers. The good news is that good quality advice does exist and it is affordable. 

Social media

Facebook network groups are a popular way to get free advice. But in the long run, they may do more harm than good. They lack context unless you like pouring all your confidential information and secrets on the net. You cannot rely on the advice you have received if it is not professionally experienced or qualified. Like BBQ advice, you may end up getting burned. 

Off-the-shelf templates

Off-the-shelf legally prepared agreements are a better start. However, they may suffer a similar fate. Many are implemented on a piecemeal basis. I have seen with a recent client it can make your situation systematically worse especially if everyone has signed off on a dodgy agreement.

Does my accountant and lawyer have the right experience?

Any accounting and law firm can simply state they “specialise” in medical practices. 

In the end, all care but no responsibility disclaimers do not cut it. You really should test out their gloss credentials. There is a simple way. They should demonstrate they do more than a lot of doctor tax returns and not just sell you insurance and loan products that you may not need. 

An experienced qualified registered accountant and legal adviser should be at least 10 years full time in your area of work. The fact the local accountant does the tax work for Elon Musk is a warning sign not a pitch. 

We only specialise in medical and healthcare for a reason. Healthcare has become too complex. Being a jack of trades and a master of none is not a healthy approach. Advisers should be able to quickly identify and solve your problem.

To find out how medically specialised they are, find out if they are in the medical or health media and for how long? Ask them do they know what a SIP or a PIP, SWPE or outpatient clinic is? If they can’t answer this, then seek a  second opinion with someone who can. Some of us have been AGPAL accreditation surveyors for many years. We even know what a bowie dick test is. They do exist if you look.

Verbal professional advice

Receiving professional verbal advice is only as good as the paper it is written on so think again about how you engage on this issue. Like the courts, start with a holistic approach. Most importantly make sure you receive and act on up to date advice at least every two years. The newspapers of business medical journals like The Medical Republic and Australian Doctor are a useful starting point. 

Procrastination and denial

Setting a time and a budget aside to seek appropriate and timely advice now will make your accountants and legal advisers’ invoice look cheap, should you get hit with an expensive dispute. As a minimum, contact them by email for some advice. 

No, you do not need a Rolls Royce to deliver pizza’s but it really depends on how much you value your practice. It is important to eat well and sleep well. Play the long game. Most practices find the certainty will provide a silver lining. You will become more profitable and sustainable by doing the right thing the right way.

Will I get caught?!

If you get caught is a choice. Rightfully, some senior doctors would say to me “David, we have never had a problem in 30 years so I am not too concerned”. Historically the chances of getting caught have been low.

However, the new digital data matching and sharing era across government departments is a new game-changer. For the Government, it is now cheaper and easier. 

We are too ethical to be doing the wrong thing! 

Often ego and ignorance can be the real enemy.

It would be most unwise to rely on being a medical practice because you save lives at the front line. Rightly or wrongly, it may give you very little if any special immunity from prosecution. Playing the devil’s advocate (and I come from a medical family) I can only imagine what someone in the Government may be thinking. 

The average punter may think, doctors are highly intelligent, resourceful and ethical people. They already get enough special treatment. They must be making a mint on the vaccine rollout and hiding it with their clever accountant! They should know better. Right?! This will be a vote winner! 

I know this may be hard to swallow. For some, despite the COVID vaccine rollout, you may have to walk and chew gum on this issue.

If you are at this point you may be thinking it is a good time to sell out or sell down your practice while you are ahead. If so, read my article How much is my practice worth? 

Tax agent profiling

Another new trend from the Tax Office is profiling tax agents and their clients. If your low priced malleable tax agent has been accused of systematically not doing a client’s books correctly by giving you deductions that the competition will not, this may potentially expose you if you fit that profile. 

Robo audits are real!

Together with new tax rules, the ATO can paint a picture of your affairs from many different data sources. 

Plan for a please-explain, especially when your tax return income does not match up to your lifestyle expenses. These may include your house (they know how to use Google Maps and realestate.com) or your when you go to buy a luxury car or when your Maserati appears on Facebook. 

Data sharing across State and Federal agencies has now arrived. Examples include the new global and local Government Digital Business Plan. The new and controversial mandatory E-invoicing laws will affect how you issue tax invoices to your providers and patients. The ATO data sharing (using the myGovID and RAM relationship authority), Single Touch Payroll and Company Director Identification – Director Identification Number (DIN) requirements are linking up all your related entities together. This will help identify excessive remuneration or profit-sharing to lower tax-paying family members or entities such as “bucket companies”.

With a potentially debilitating domino effect, it will not take much to trigger an investigation.

We all live in an unprecedented permanent digital audit trail. No longer can you afford to re-invent the past. It is time to tighten the screws on any loose arrangements. 

Are you likely to face a practice dispute?

Unhappy people may dob you in!

I recommend monitoring your staff morale every day. We use an inexpensive tool called Officevibe. It only takes one disgruntled doctor to trigger a bigger problem. We have seen a provider get investigated. Their accountant had triggered an expensive million dollar payroll tax investigation with the practice going back 5 years.

Practice disputes could trigger a cascade of problems. This can be over fair pay or buying or selling a practice

Gaslighting: Charging providers a higher service or management fee due to COVID-19

In general practice, the low balling of the General Practice Medicare COVID-19 Immunisation Rebate has thrown the cat amongst the pigeons for owners, providers and their staff. Based on the current COVID19 Medicare rebate it will be difficult for a doctor to get full informed consent. The only way for the Government to get this up is to exploit the goodwill of doctors and practice owners.

Practices need to combat the medico-legal risk of cutting corners, burning out staff or going broke. 

The money may become a virulent breeding ground to trigger a major contractual dispute within the practice and amongst providers. 

To remain viable, practices are being forced to charge higher service fees up to 50% of gross billings to their GP providers. The Federal Health Minister’s threats not to charge vaccinated related fees for the vaccine are concerning.

Many practices who are billing on behalf of their providers may not be aware, to lawfully deduct this or any amount they will need an agreement in writing or run the risk of being criminally accused of systemic theft. 

This will add more pressure on practices to do things properly.

How can you immunise your practice from further investigations?

Firstly do not use the “Contractor” word when trying to describe how you engage your doctors and providers. Most practices have what can be described as a Landlord and Tenant relationship. They and sometimes their advisers unwittingly do not realise it. The characterisation of your relationship is critical in dodging an unnecessary audit. 

Like a red rag to a bull, the Contractor word only raises more questions than it answers. We prefer our clients to use the word Tenant Doctor ™ or Tenant Provider ™ and not even the words Independent Contractor. 

Language is important. Using commonly used words in front of an investigator or staff tends to imply something else that you may not have intended. This could have serious unintended consequences. This is especially true from a legal and taxation point of view.

Try and conduct your affairs as if you will get audited. It may be due to a contractor pay dispute they or their accountant may report you or when you are trying to sell part or all of your practice. 

Alternatively, there are the new mandatory tax or fair work rules that are automating audits at an unprecedented rate, that may flag an instant and expensive multi-agency robo debt like desk audit(s).

From a legal and tax compliance perspective…

For those who may feel I may be scaremongering, the following cases and tax initiatives go further to explain what the Government law enforcers are looking for. You decide for yourself.

There is a clear convergence and harmonisation of employment, contractors laws and investigations. Our biggest and most powerful law firms in the country, even they are getting it surprisingly wrong. Here is proof the devil is in the detail. 

  1. Make sure you have the correct structures and systems that back up your contracts the correct business model

Medical and allied health industry businesses often fall within one of two types of business models:

  1. An employee or contractor model. In this structure, a practice entity carries on the medical services business and contracts with its patients. The practice entity then separately engages either employees or contractors (or both) to provide the services the practice entity needs to serve its patients.
  2. A service entity model. In this structure, practitioners carry on their own business and contract with patients directly. The practitioners pay a fee to a services entity for the provision of administration and other support services, and often the right to occupy the premises to carry on their business.

The two models have very different PAYG withholding, superannuation and payroll tax consequences. 

I have been working with the barristers and QC’s on a number of recently high profiled cases that affect medical and healthcare practices. The legal opinion is clear. Your entire practice ecosystem needs to be compliant. As the Super Optical payroll tax case has shown, charging consumables and guaranteed minimums with rosters from the wrong entity can attract attention. 

Substance over form matters. A holistic top down approach and not a just a bottom up piecemeal approach makes a difference. A well written service agreement is not good enough. You have to prove you are doing what your service agreement says is what you are doing. Avoid taking short cuts.

It is a delicate ecosystem of legal, tax and commercial your practice needs to navigate through. No problem exists mutually exclusive of another. These issues are subtle and more complex than they first appear. 

When you cannot explain your arrangements without your  accountant or lawyer in the room, you instantly make yourself an easy target.

Healthcare practices with fragmented structures, systems and poor documentation are easier to prosecute.

Practices need to make sure of four things: 

1. Clear business model (is it a true service trust arrangement). 

2. Legal documentation and compliance 

3. Financial accounting and administrative systems 

4. What do your staff and doctors understand their arrangements to be. 

It is common to see practice invoicing does not match banking, accounting and legal documentation. This immediately  increases any income tax, GST, superannuation and payroll tax risk. 

The auditors look for substance over form. To the contrary they may unnecessarily compromise a practice in an audit.

In these examples since the early 1990’s, used by small to large corporate practices, the most popular arrangement is more appropriately described as a tenant doctor ™ arrangement . 

The practice acts as a landlord and the doctor a tenant. They have a service agreement akin to a rental contract for support services e.g. premises, nurse, rent and practice systems.

The practice agrees to charge a doctor GST based on a percentage of the doctors gross billings for the week or month. 

For tenant doctors, many practice accountants are not aware of the need to set up a seperate billing trust or medical fee clearing account arrangements. The main reason this is not usually part of processing your practice’s annual financial statements and tax returns. Furthermore if you do not ask, they will not tell. Then again you may reasonably ask how are you supposed to know if they do not.

 Too many unnecessarily complicated and time consuming daily journal entries and reconciliations.

A common example is when complicated monthly or journal entries to remove tenant doctor income or payments from the practice ledger. 

My key concern is why does a practice have so many complicated monthly journal entries in the practice entity to do the weekly or monthly pay?!

Many practices unwittingly often do these journal entries to reverse out these transactions each month or year to make them look like tenant doctors. This is certainly not a good look. 

This would be analogous to Westfield collecting and banking Woolworths money on their own books or ledger? 

I used to audit shopping centres and trust accounts like real estate, solicitors and accountants use. This is certainly not how it works in the real world. 

To be commercial, there needs to be a clear separation between provider and practice income activities including a separate trust bank account. Recognising it is the practitioners money and not the practices is a good starting point.

Be wary of new service fee calculation software that automatically compounds your problems

Before implementing a new automate spreadsheet in the cloud make sure your accountant approves in writing. No matter how attractive automation may look the old adage rubbish in and rubbish out holds true. 

Finding a more efficient way to process your doctors pays is a good idea. However you need to be careful. Remember Software companies are not your accountants. They do not sign off on your tax returns. Many accountants are not aware of this area. Worse if you are fee sensitive it is overlooked because it is not part of your routine tax return compliance.

For a new client, I recently reviewed a new automated practice service fee calculating software program. It systemically and erroneously recorded all doctor income and payments into one chart of accounts. To compound the  problem their new fully integrated software automated journal entries had made it very complicated. It was next to impossible to reconcile for the time poor practice manager.

Implementing a doctors pay solution requires a little more careful professional legal and accounting thought than a piece of software.  If you want to avoid an end of year bill shock ask your accountant first.

Using one bank account and ledger to track and pay a doctor

This is another common example. Despite a radiology practice arguing they had a tenant doctor arrangement in the Winday payroll tax case they were found to be liable for payroll tax. 

This happens when a service entity incorrectly reports on their financial statements and tax returns how they record doctors medical fees. 

Mistakenly they record all of the fees they collect on behalf of their medical practitioners in the service entity’s  profit and loss statement under the heading “Medical Fee or Patient Fees”. Furthermore they continue to report all of the payments remitted to the medical practitioners as a “Contractor” expense in the same entity ledger and bank account. 

Recent legal cases including the Uraidla Physio contractor case have clearly established it is not enough to have a well-written contract. It is important to show your practice can walk the talk and not be taken out of context. A good example is the use and implementation of the Doctors Pay Calculator to overcome the above systemic problems. Now is a good time to review your agreements, policies, procedures and systems. 

  1. High Profiled Fair Work Under Payment of Wages Investigations 

Unprecedented high profiled under-payment of wages and admissions by Australia’s top law firms and their clients such as the ABC, Woolworths and Bunnings is proving even the big guys and their clients are finding it difficult to get it right. Since 1st July we have seen unprecedented data sharing technology and coincidentally we have seen successful systemic successful lawsuits by the State and Federal Government for the underpayment of wages.

Even the lawyers who are advising them are getting it wrong.  They include some of Australia’s biggest medical, law and accounting firms. 

Underpayment of Wages cases since 2019 

  1. Top-tier law firm clocks up $290k underpayments bill – Australian Financial Review (17th July 2020)  
  2. ABC underpaid staff $12m 
  3. SBS running list of Australian businesses that have underpaid staff in 2019
  4. GP corporate admits it underpaid staff by $15 million
  5. (Healius)Idameneo back-pays workers over $15 million
  6. SBS running list of Australian businesses that have underpaid staff in 2019SBS running list of Australian businesses that have underpaid staff in 2019

     3. The Australian Taxation Office (ATO) 

Commencing 1st July 2021 I have written extensively on the new ATO profit allocation rules that affect doctors and healthcare practices with a personal services business or who have a service trust or entity that income split to family members or entities that pay a lower marginal rate of tax. 

Recent successful employee v contractor court cases and investigations reveal the devil is in the detail. It takes more than just a well written legal agreement. You need to be across all of it and not just parts of your practice arrangements. 

It would be naive to assume that a single well written and expensive practice legal agreement from a reputable law firm will be the silver bullet that saves you. Recent Australian court cases reveal the contrary is true. 

For Part Two of this article practical examples and case law of common mistakes practices make click here.

About me: David Dahm BA (Acc.), CA.,FCPA,CTA, FFin, CPM, FAAPM, FAIM, FGLF.

Registered Tax Agent, Former AGPAL Surveyor 10 years of service

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 before acting on this information. This information is for general information and discussion only.

How much is my practice worth?

This article has been published in the Medical Republic 9/3/2021 – Find article here

I have been asked this question more times than I have had hot dinners.  This has increased in recent times given GP practice acquisition race is on again and eye watering prices are being paid! !

If you own a General Practice and you have been reading the recent national newspaper headlines, you would have noticed  the amazing prices paid for general practices. You would think you had just hit the jackpot. It may have triggered an inkling of curiosity to know more and ask how much is my practice really worth?

For practice owners, this article may help you contextualise a practical ‘call to action’ and save you significant time and money. 

The first step is to treat your practice like an investment and not a job or a liability. Everyday what you do will determine your final destiny and its final value. 

When I meet a new client, the first thing I say “it is my job is to fire you”. You need to work on and not in your practice. It should be a choice. Practices that rely less on their owner’s for income are worth more due to their intellectual property and have balance sheet value.  Those that rely on their owners have profit and loss (EBIDTA) value. They are worth less because when they go so does the practice.

There is never a simple answer to valuing your practice. It all depends on how you treat it and where you sit on the above two extremes.

There are a lot of myths circling around the nation on this topic. I will attempt to confirm and dispel these myths. In the end you should be able to  judge  what you think your practice is really worth or at least know how to work it out or find out. 

If you do not have time to read this, do not complain if you feel you keep working harder for less reward. This is about setting your priorities right. You can afford to become a better doctor for your patients and the community you serve. You can be fairly rewarded for working smarter and not harder. 

In the late 1990’s, the well-run and bigger flagship practices in your local area commanded high prices. This encouraged many more practices to join the bandwagon. As a result, as more practices entered the market the corporate offers fell off the cliff from an EBITDA of 6 to 8 times to 1 to 2 times. Then in the last 12 months, we have seen prices for general practice skyrocket beyond 10 times at the height of COVID19. 

Many practices are going for a bargain whereas others are going for an eye watering sum. In responding to the COVID19 vaccine roll out, aging practice owners are facing a serious dilemma. Do I renovate the house (practice) to meet the requirements?  With new COVID immunisation laws, is simply doing nothing an option? Should I sell the house at renovators delight prices as the feeling of “it is getting all too hard and I am tired of this #$%#” feeling settles in? 

Am I throwing in good money and time after bad? 

Recent articles such as New GP vaccination items don’t add up and Patients should be free to choose even if the vaccine is not free can spook even the most courageous of practice owners to invest more money and time in these uncertain times. You need to have a long game plan.

Right now many practice owners are expected to dig deep into their retirement funds so they can lead the COVID19 fight. At the same time many are rightfully asking – to what end? 

The real truth is that certain parts of General Practice are enjoying a mini boom. Patients are now more health conscious. It is a new environment. We need to get used to living through a perennial flu season for at least the next couple of years. Some have been able to take advantage of this but many are reluctant to do so.

Practices that can sustainably manage COVID19, technology, competition, staffing demands and new laws are simply worth more!  

During my long career, I have often heard doctors talk down practice ownership to other doctors. It is sold as an unsolvable financial and mental burden.   

For the optimist, with much uncertainty comes many new opportunities. Fortune does favour the bold. 

Practices that can eat ‘change management’ for breakfast and remain sustainable are very attractive to buyers. 

Practice owners who take the time out to think carefully. 

How you and your practice ends up is a choice (after you have got the banks off your back). No one is immune to cognitive dissonance. 

Just remember that after the day you retire, many patients would have moved on and may have even forgotten your name. You are not as indispensable as you think. If you accidentally seriously hurt your patient they want to see your face on the 6 o’clock news. Instantly it becomes irrelevant how many years of dedicated service you have provided them or their family.

Ultimately, your loved ones will either thank you or hate you for it. They will have a long time in retirement to nag you for all those times you were saving your patients lives at the expense of family dinners, holidays and financial security. Owning and running a practice comes with a level of responsibility and cost that often cannot be quantified. It is a worthy challenge.

What is my practice worth? 

It would be easy to give you a simple number or formula to work out how much your practice is worth.

The media would report high profile healthcare transactions with numbers thrown left, right and centre, yet many people simply have little understanding or context of what it ACTUALLY represents.  Private, unlisted transactions are unregulated and media reports are often based on hearsay or ‘street talk’ without any context. Needless to say all of this makes for a great talking point at the family BBQ or local doctors meeting with a charismatic entrepreneur! 

In reality, this is often a difficult question for practice owners to contemplate. Complex structures, poor financial literacy and a lack of comparable public information makes it hard to assess. Just anecdotal variable sales evidence. 

Today’s fast moving environment is far more sophisticated and complex. The new digital footprint age makes it near impossible to recreate a more favourable past or transaction. Whether it is the tax office or a disgruntled buyer, it is much easier for your past to instantly catch up with you for better or worse. There is a lot to be said in engaging honestly with potential buyers. Your professional reputation and legacy is often on the line.

Adding to this complexity is when your own financial adviser cannot simply explain your numbers back to you.

Accordingly, it is important to understand and explore the context of ‘practice value’ before we can ask our advisors the right questions. 

Just another vanity metric?

Growing up, each year my late father would invite a real estate agent to inspect the family home and tell him how much it was worth. Concerned that we were about to sell our beloved family home, I asked him why he kept doing this with no intention of selling? It seemed like an embarrassing waste of time with the real estate agent. 

For financial security reasons, he felt safe knowing what the family home was worth. Born in India, in 1947 at the age of 17, his family lost everything due to the partition of Bengal. With only their suitcase, they had to leave their homes, furniture and my grandfather’s legal practice behind. 

Every time you check out the local online real estate section, subconsciously you may be guilty of the same thing my father used to do with real estate agents. I am certain that many of you can relate to my story. Such needs are no different if you own a practice.

Beyond greed, we all have our genuine personal reasons for seeking to regularly take stock of our financial security. You should not feel guilty or be put off from making inquiries. Like a regular annual health check up, it is a prudent approach. Your practice should be treated like an investment and not an overhead, read my interview Your practice as an investment Medical Journal of Australia.

Practice values vary widely

Prices do vary widely for a variety of reasons. Unlike buying or renting a house, it is not possible to make a meaningful comparison of your practice on the internet.

For a buyer, a value is based on what a bank is prepared to lend or for an investor what they are prepared to invest. Some practices you simply could not give them away. Others are offered a rare and breathtaking amount of money. Overnight, your general practice may be worth double to 10 times more than you think simply by ensuring your practice is presented in a way that follows generally accepted principles (whether that be accounting, governance, clinical etc.) 

COVID19 has added more complexity beyond your solid track record. Your future potential and needs to make strategic street sense. Not everyone is bullish, many are nervous of a local outbreak and its impact.

Healius and Medibank last year forked out hundreds of millions to purchase general practices throughout Australia. They proved there is a healthy appetite for certain types of general practices that are a strategic fit to their operations.  

The headlines have certainly moved a plethora of new and existing practice owners to reconsider how  or when they should exit. This will fuel an unprecedented demand and invigoration of new re/investment and competition into the GP marketplace. It is my hope that this can be met by a future generation of doctors.

The pragmatic world is surrounded by well intended but savvy bankers, lawyers, accountants and advisers. They may have an influence on the final price paid for your practice.

Advisers and bankers are less concerned by how the selling practice owner feels. It remains a practical assessment of risk and numbers for them. Advisers are often transactional, but you have to live with your decision and commitment. They do not want to risk being sued for not asking the tough questions. So what can you do? Be confident and ready to answer. Potential purchasers and future practice owners can be easily put off by the smallest of details e.g. unsigned employment or provider agreements and unclear financial statements.

In the hope a corporate or any potential owner will simply write you a big cheque, think again. It is a process and not just an event. Your practice has to always be ready for sale. 

You never know when you have had enough, when you need to strategically secure a new doctor or when you suddenly fall sick or ill and can no longer work. 

How to value your practice?

Warning if you are not into detail it may be a good idea to refer this to somebody who is. It is really not that complicated so it is worth a further read.

Back to the coffee mug. 

Times have changed, when it comes to putting the price on your general practice. Due to the increasing regulatory and technological sophistication It goes beyond the book value plus goodwill. More sophisticated and accurate tools are being used by buyers, advisers and banks.

The above formula on the cup with exception to the Bushfires and the Coronavirus has been a long held traditional business valuation tool used by business valuers and our legal system.

The future maintainable earnings approach is the most popular method to value any business using a multiple of earnings. This is euphemistically referred to as the EBITDA approach in the industry.  EBITDA stands for future Earnings Before Interest, Depreciation and Amortisation (EBITDA). This number comes from your net profit in your profit and loss statement. It is then adjusted for future years based on average expected earnings usually over a 3 to 5 year period. 

The value is then calculated based on your EBITDA x multiple (no. of years).

By multiplying the EBITDA over a number of specified years for this particular investment ( the practice) a singular value for the practice can be established. The multiple or multiplier is used to express the number of years and investment will pay back in full.  Using a multiple of say 1, this means 1 year, it can be as many years as the buyer expects to generate a full return on its investment. For general practice the number is between 1 to 5. I normally see 3 to 4 for general practice.

(Disclaimer:This is a ‘quick and dirty’ overview. Please seek professional advice before acting on this information. It should provide you with a starting point for discussion).

A crude back of the envelope example if you project an annual investment rate pre-tax return of 30% (3.3 multiple or 3.3 years) to 10% (10 multiple or 10 years) based on your estimated future maintainable profits say EBITDA $100 p.a. then the value of your practice may be $330 to $3,000 on sale (i.e. $100/30% or $100/10% respectively). The lower price is due to more risks being involved in the acquisition. 

This methodology is a commonly used GP practice corporate valuation tool often quoted in the national financial newspapers.

A big warning if a practice has a profit sharing agreement. Joining as an owner if you are subject to that agreement’s profit sharing arrangement. For example if you can only share in the costs of the practice entity and you keep 100% your billings outside this entity, then the value of the entity is only worth as much as your share entitles you to in the profit sharing formula. If the financial statements are not showing a net profit or a constant loss,  then it may be worth very little. You would not be expected to pay much for an ongoing liability. In this case joining the entity may be a permanent liability. It would be hard to  sell, unless a radical change to the profit sharing arrangements was pre-agreed to prior to the purchase. In the early 1990’s this type of associateship expense sharing arrangement was in place. This led to an significant undervaluation of general practice. 

Smart medical corporates, bought many practices on the cheap for this reason. Many owners did not understand what they really had or what it was valued at. They were wooed by the flashy letterheads, dinners and charismatic billion dollar doctor founders. Many did not want to pay for independent legal and accounting advice, not realising they sold their practices on the cheap like pathology rents.  Corporates put these business models and numbers into a more logical and understandable model for others to buy into for a premium.

By the late 1990’s when the corporatisation of Australian General Practice had begun I would see 8 times multiples for flagship practices. Dominated by the major players, these multiples dropped in the early 2010’s to 1 to 3 times. 

Last year this number skyrocketed with some new players on the block. Purchases beyond 10 times your estimated future practice earnings. 

Who you are planning to sell to and timing is everything.

So what is the true market value of my practice?

For some cynics you could be forgiven for thinking all this talk about  EBITDA and multiples is frankly a load of rubbish. You would be right and wrong for one simple reason. 

The true market value of anything is based on a simple principle.

“Business valuers in Australia typically define market value as:

the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length.”

Source: Meaning of Market Value, ATO 17th February 2021

To find out the true value of your practice you have to be a willing seller and require no less than two genuine competing buyers. The final price is what the winning buyer agrees on. 

The EBITDA approach assists in determining what price a person is prepared to pay for certainty. Being aware that this methodology is commonly being used helps you understand how to better price your practice to a willing buyer beyond a gut feeling.

A number of key  factors affect the value of your practice

Understanding these key factors can help you improve the value of your practice. It starts with the right attitude. Treat your practice  like an investment and not a liability. 

Wealthier people are healthier! This includes the financial health of your practice

Look after yourself first, so you can help others.

Flight stewards always say in an airplane emergency you should put your oxygen mask on first or you will not be able to help the person next to you. The same applies when it comes to owning and running your practice and your personal investments. The real message is that self-care is important and often overlooked.

Poverty breeds ill health and ill health breeds poverty. 

Many studies prove the wealthier you are, the healthier you are to help others. GP practice owners are expected to donate their time to service the unviable new MBS COVID19 item numbers. Unless you are financially strong and prepared to donate financial resources, you may not legally be able to meet this expectation. Insolvent trading is a criminal offence in this country under the Corporation Act 2001. It is not a discretionary choice, so think carefully beyond your moral and ethical duties. Can you afford to commit to programs that may not be financially viable? How will this impact the value of your practice or your retirement nest egg? Does it even really matter?

Your practice is not something you can take ‘upstairs’ with you. It should be treated and looked after like an active investment. It is like looking after a child. It can make you or break you depending on how they are nurtured. 

For many practice owners, looking after this ‘active investment’ is meant to make up for not having “employee superannuation” and “long service leave” when you retire. It is your biggest and most significant life investment you have made.

The old school 

My late father was a Do It Yourself (DIY) practice owner. He sold his medical practice for nothing. In fact, he never tried. He passed away in 2006, ten days after he retired. He was old school. Ignoring good advice offered, he left the farm (practice) empty-handed. He had a do nothing or minimalist approach when it came to running his practice. 

He was never a great believer in spending money on lawyers, accountants or advisers. With the best of intentions, he was a DIY doctor. Selling never crossed his mind. There is nothing wrong with that.

Selling down some or all of your practice is a choice. It is this decision that is the primary reason for seeking out how much it is worth. 

Like my father, if you have no intention in selling, then finding out its value may be of little consequence. The only exception is if you are heavy in debt and the bank is asking or you are simply curious what it could be worth.

I have a client whose 10 GP owners had a $12 million turnover. At the time they said  it was worth nothing. To test them I offered $1 for it. After simply explaining what it was worth and why, they immediately rejected my offer. With a better understanding of why they treat their practice like an investment and it has experienced remarkable success. 

Your practice could be worth more than the value of outstanding liabilities, written down plant, equipment book value plus 15% of the turnover as goodwill if you can simply understand and present your financial books correctly and in a logical manner. 

You owe this to yourself and your loved ones to read on.

The two main reasons practices owners sell below their price expectation

  1. The Practice Owner(s) are not financially literate. 

Owners do not understand and regularly monitor their key numbers, the bottom line and how they work or fit into a practice owner investment portfolio. They make the fatal mistake of leaving it to their accountant (some less ‘medically experienced’ financial advisers struggle to simply explain their numbers to their client). The blind unknowingly ends up leading the blind;

  1. Succession planning is an (reluctant) ‘afterthought’. Not a ‘planned-thought’. This is the most common mistake overlooked when setting up a practice. 

Unfortunately for most people, your accountant and lawyers are used only for tax returns and not succession planning purposes. Often, the way a practice is structured can instantly dilute the value of the business. These initial cost savings you may have asked for, usually do more harm than good in the long run. 

It is not unusual to see a practice owned by a tax driven family or a unit trust. This can create significant but avoidable difficulty and cost at the time of sale. Especially when the numbers and business models do not make sense. I have seen many sales lost due to a lack of openness, transparency and ownership transferability.

From day one, practices MUST be built on commercial grounds that embrace what you want, so you can successfully stay open, monitor and eventually be easily saleable whether you are ready or not. 

Your business structure and models should be investment friendly, tax friendly, family friendly, and succession planning and asset protection friendly. This is achievable!

Ensuring you understand (without having to always ask your lawyer or accountant) that you have the right structures, practice agreements, systems and people in place is a useful start. It is not hard. It is a big mistake to bury your head in the sand and then complain later. 

Ultimately, it is your responsibility. You cannot blame anyone else. If you want to, then you should probably resign as an owner for legal reasons. Being an honest fool is not a legal defence, especially when it comes to not acting with a duty of care. Negligence can be a criminal offence.

A good GP holistically educates their patient on their health, similarly your advisers should be there to educate you on your wealth. If you still do not understand your numbers you may have a serious problem/opportunity. New ‘cloud’ technology platforms and services have made understanding your numbers and business much easier to achieve in a manner that is cost-effective and easily accessible. 

Valuing your practice is like valuing a child who should stand on their own feet

A high valuation is driven by a number of key “feet standing factors”.

For practice owners, significant blood, sweat and tears are involved in setting up and running a successful practice. Wanting a child to grow up fast can be an emotionally and financially draining exercise. In the end, the process may either hurt or impress you. Ultimately it is something you want to feel proud of and feel a sense of satisfaction too.

To be of value, your practice must demonstrate that it can continue to make a profit without you. It is the ultimate recognition. It is your way to leave your mark and legacy when you are able to pass it to the next generation in at least a ‘going concern’ position. The price should be fair and should reward you for the fruits of your labour and allow those that succeed you to continue your vision. Some of my single site clients have been operating continuously for over 60 years with the intention and vision of continuing indefinitely.

The right practice focus is key

Ultimately, a medical practice owner’s clinical workload should be a choice by design and should be enjoyed. It should set a good example to encourage aspirational owners to buy into and encourage the next generation of young doctors to pursue a pathway in primary care

Practices where owners earn while they sleep are highly sought after and valued. The GP owners should not be living hand to mouth.

They should not be solely relying on seeing that one additional patient just to meet their overheads.  A Ball and chain approach drowning in red tape is not attractive. 

Practice owners should encourage and mentor other providers to help out, not fight for patients. There is plenty of demand around. Practices with more than one owner and providers are worth more. The banks and investors love the shared security of multiple GP owners who put their own houses and livelihoods on the line should one fall ill or die. A lower flight risk of practitioners and patients increases the value of the practice.

In my experience, it is easy to spot the smart ones. These owners make time to research and work ON their practice and not just IN the practice. One day a week to be precise. They have a strong and committed management team. They see being penny wise but pound foolish is not where the smart money is. They understand, there is no point the patient survives but the practice dies. Everyone loses at that point.

They use their time wisely. They are not busy just chasing high-volume consults and saving patient lives. They know that it is not sustainable in the long run without risking burnout, a Medicare audit or one serious medico legal problem that could wipe them out! 

Smart owners are hungry to see and act on the bigger picture. They are in control and want to shape their own future, with a smart internal and external team. They play the long ‘infinite’ game, leverage their time and strategically invest in doing things the right way the first time.

By working smarter and not harder, they can focus on the practice’s future and not just their own. Ultimately, it is about responsibly handing over the baton for the next generation to take over in a safe, sustainable and financial responsible manner. 

What should I be doing now?

Should I be doing anything now as a practice owner? The answer is ABSOLUTELY!.

Always be ‘ready to sale’ should you ever have to. Selling your practice for a fair value is a long term (3 to 5 year) process. It is not just an event. If your practice is in dying, you will not realise its full value.  Nobody wants to buy tickets to the Titanic. Everyone wants to watch a movie with a happy ending. 

Ask the right questions, then ask for the right answers in writing! 

When it comes to business arrangements and talking to your accountant/lawyer, push your advisers a little harder for some holistic and not just piecemeal advice.

Unfortunately, in my experience, I often hear from advisors “you did not ask me, so I did not tell you or you were on a budget so we did not address that”. This may feel frustrating and overly unhelpful. You thought that was part of their job. This is made even harder as you do not know what you don’t know. Donald Rumsfeld famously spoke of the “known unknowns” and “unknown unknowns”.

Be clear about what you need and want

In my experience, I have seen a desperate practice owner give away their practice to a GP on a family holiday trip. The new GP owner did regret taking on!  

Some need to get rid of their practice to pay off debts, others sell because they want to retire or strategically secure a new doctor. 

At short notice, you should be able to quickly take out and show future doctor owners a solid practice owners agreement along with financial statements that speak for themselves. The documentation should align with your business model and structure. Most owner agreements and structures are fragmented, poorly drafted and inconsistent, so if you are organised, you are already ahead of your competitors. Most purchase offers are time sensitive so you need to be organised

The practice agreement is like preparing your living will. It should set out the buy in process, decision making procedures, profit sharing and exit arrangements. It should address those tricky issues upfront. It is easier to make an agreement when you are friends and it is impossible if you become enemies.

I often tell my clients that going into business with someone is comparable to marriage. Remember after marriage, the second most important decision you make in life is who you go into business with. Both are expensive in a divorce!  These days the process is much easier with templates combined with experienced and qualified advisors. It should pay for itself. 

In my experience, it is impossible to negotiate a good deal on the 11th hour especially when you have to change your structures as a result of horrendous tax and legal consequences. It takes time to coordinate your team and advisers. 

The process will pay for itself even if you are not planning on selling. You will immediately add more value and create a more sustainable and attractive practice.

Key factors that affect the value of your practice

There is a large difference in the price of a general practice. 

If you are still reading this, we are about to enter into some hopefully easy to understand high level key internal and external factors that drive the value of your practice up or down. 

Before jumping into those magical valuation formulas, it is important to understand the context and basic principles that drive the value of your practice up or down. Practice value is quantified by these formulas. 

The higher the risk and higher the return and less value your practice is worth

Often doctors feel ripped off when they are made to pay for goodwill (which is hardly fair) and are more prepared to pay for the tangible assets. The reality is any practice that enjoys a reputation where both their patients and their providers keep returning to their location, then the practice is most likely worth more than the second had equipment being bought in the sale. If you can guarantee patients will be in the waiting room on a Monday morning, this is a real intangible value that is bankable.

A fundamental principle in investing and determining the value of your practice or any investment is risk. If the buyer perceives a higher risk the buyer expects a higher return and will offer a lower price for your practice to compensate for any unforeseen financial loss. The hardest bit is to know what risks do and do not exist. The more open and transparent the seller is the lower is the risk.

Practices that are able to simply explain their future value to a potential buyer can expect a higher value for their practice. Like buying a house off the plan, there is little or no money on offer if you have no plan. 

People are prepared to pay a higher price for certainty

Hoping somebody will buy you is not a strategy. Wishful thinking will most likely leave you bitterly disappointed. It is not really a choice unless you want to leave a liability and not a legacy behind. Practice owner’s will have to walk and chew gum on this issue.

It is your choice to decide on what strategy to use in order to drive up fair value for your practice. From “do nothing expect nothing” approach to “do everything the right way” approach. There is potentially no limit to what your practice could be worth. The recent eye watering Healius and Medibank prices paid for general practices are a case in point.

Practices with financially scaleable intellectual property are hard to find. They are worth a lot more than a traditional practice that does not have a clear vision or strategy, less systemised and engaged with all their stakeholders. Your job is to explain this point of difference clearly to a potential buyer.

The greatest risk to buyers is the retention of doctors and the impact of a change of ownership. The aimis to reduce this uncertainty and secure a higher value for your practice.

Know your potential buyer

Is it a corporate, a doctor, a practice manager or non-medical investor? 

The capacity and appetite to pay more for your practice will depend on the purchaser’s background. Know what they want first. Surprisingly, doctors are more likely to pay a higher price for other reasons such as control/influence.

For example, corporates generally like larger group practices greater than 8 doctors with room to grow. In my experience and according to corporate financial reports, the optimum size is 12 FTE GP’s per site. Value is increased for multi-disciplinary practices with on-site pharmacy and allied health. 

For smaller practices sometimes it is easier and better to look under your nose and simply mentor and sell to your enthusiastic registrar who will rope in their friends. You only need one to set off a chain reaction. Make sure they are a strategic fit and can add value, avoid offering ownership just because they are a high biller. A low billing trusted doctor who teaches and has regular contact with registrars is strategically worth more than a higher biller.

This is why I love teaching practices. You can offer a future and not just a percentage. It is cheaper and the easiest way to recruit and retain quality doctors. Recruitment companies can be useful but come at a cost. Focus solely on recruiting the right culture of owners that share your vision. 

Be clear and upfront from day one, put it in writing and you can attract a higher premium on a partial or full sell down of your practice.

Future profitability matters!  

Your practice value is based on the future expected profit (earnings) adjusted for unexpected costs. Start with your accountant’s annual profit and loss statement. Where it says net profit, it should be positive and ideally it should increase  in accordance with your one pager strategic plan. Certain costs like excessive wages rents paid to related parties like the wife or property trust needs to be adjusted to market value. This may improve your practice value. A low profitability is not always a bad thing.  If it can be seen this may lead to higher profitability such as an IT upgrade such as implementing the Doctors Pay Calculator as a new way to recruit and retain doctors.  

Future risk matters!

Other hidden costs include but are not limited to pending long service leave, liabilities (e.g. debts and reinvestment required) and litigation risks. My personal favourites are the underpayment of staff wages, payroll and tax office “employee v contractor” risk and pathology rent compliance due to out of date or non-existent documentation. No matter how big or small you are they are poorly understood and implemented correctly in Australia. This is a buying opportunity and not a problem.

Buyers will factor in a $10,000 or up to $1m or more upfront discount depending on how serious your problems are, until it is not worth it. So expect any offer to decrease based on any problems you were aware of or did not attend to prior to a sale.

Ultimately, the basic formula usually stays the same but the number can dramatically change depending on certain material factors as suggested above. 

Your valuation numbers are adjusted down or up for a given level of future risk. This is based on an overall risk rating or multiple of earnings for items that cannot be particularised. I call it the gut feeling multiple. I will illustrate this point later.

The bottom line?

In order to secure an accurate value it is important to look at these material factors first as different buyers will use a different multiple to vett any discount offer to mitigate any downside risk.

These are the critical intangibles considering that will enable a practice to secure a premium on sale. Whether it is a sell down or sell out it is a critical provider recruitment and retention strategy

When is the best time to buy or sell?

Finally when is the best time to sell?

If you are a buyer 

You know what you are doing and have a good business model you can implement rapidly. The best buys are in debt and divorce.  As a minimum make sure you are a good strategic fit beyond money. Can you grow the pie? 

If you are a seller 

You are ready to sell and let go of total control. Either the new owners are a great strategic fit or you are about going into full retirement mode. 

A big tip for registrars is to buy from a doctor who trash talks owning any practice.  You will get a bargain if you can make them a good offer. Remember they need you in order to sell to the next generation, you are their link. 

Conclusion

Due to increasing complexity, there are increasing natural barriers to entry. The demand for quality established practices is high. Due to regulatory and technology reasons,  practices are becoming more complicated.  Assessing tangible factors such as the building, plant and equipment with intangible factors such as systems and goodwill is increasingly becoming more difficult. 

Intangible factors play a greater role than they used to in an increasingly digitised GP world. This is why we see such a large disparity in practice values.

Smart buyers need a good set of financial statements, well documented systems that clearly substantiates your business model. Increasingly this is critical when convincing a potential owner, corporate or a bank manager to pay a fair premium for all your hard work.

If you choose to do it properly, you can become a price maker. You can set your own price. If you choose not to, you become a price taker. Expect buyers to low ball a price by picking out holes in your practice.

When it comes to valuing your practice, understand your business model and structure. Simply explain it. Then you will be in a better position to sell your practice for what it is really worth.

Best of luck to all of you.

Please seek professional experienced and qualified advice and do not act on this information alone.

About me: David Dahm BA (Acc.), CA., FCPA, CTA, FFin, CPM, FAAPM, FAIM, FGLF.

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.

ATO raises the bar on income splitting and related entities

This article has been published in the Medical Republic on 9/3/2021 – Find article here

 

Doctors and practices that use medical practice companies and trusts to bill their patients predominantly for labour services to reduce their tax are likely to be impacted by a new ATO ruling that starts later this year.

Commencing 1st July 2021, the latest Australian Taxation Office (ATO) Allocation of professional firm profits – ATO compliance approach ruling sets a higher and more complex bar for doctors and their medical practices for income splitting to family members or related entities that pay a lower amount of tax.

Doctors and practices that use medical practice companies and trusts to bill their patients predominantly for labour services to reduce their tax are affected by this ruling.

Budget for an increase in your accounting and legal fees. This is certainly a wake-up call. Ultimately, the new robot data matching using STP and E-invoicing by the ATO is making it easier to automatically audit practices.

Being an honest fool is not a legal defence so blaming it on your accountant is off the table, especially if you don’t ask the right questions in writing.


To protect yourself you personally should be able to clearly explain the commercial reason (not just a “tax reason”) for setting up your structures and show the relevant business models and documentation.

If your accountant cannot explain the commercial reason behind your structure, it may be time to change your accountant or at least get a second opinion from an experienced lawyer or accountant who solely specialises in this area.

Unfortunately, many doctors naively trust their accountants to set them up in the right structure without really understanding why or how it works. My first rule of thumb is if you do not understand something, ask more questions or do not do it. 

Ultimately, you will be responsible for any problems, and it may be too late, too hard or too expensive to blame your friendly accountant.


Source: AFR ARO complaints a bit rich

The devil is in the detail. This is not a Do-It-Yourself job. Tidy things up while you can. Do not leave any stone unturned that may lead to more awkward questions being asked by the tax office.

What must practises and doctors do now?:

  1. Review the purpose of your medical practice companies, family trusts and service trusts structures and agreements. Clearly establish their underlying purpose beyond tax savings;
  2. Be prepared to prove your arrangements are not solely tax-driven. Prove they are commercially driving your medical practice or your service entity;
  3. Profit-sharing arrangements – formalise and get them signed before the end of the tax year; and
  4. Make sure your business systems reflect points 1 and 2 above. Pay attention to the details.

I will elaborate later.

On the positive side, you can legally and ethically enter into arrangements

On the contrary over many decades, the ATO has lost many high profile court cases that have allowed for a genuine commercial reason for these various structures to exist. See ATO Service entity arrangements.

Today, the ATO wants to refine and increase their scrutiny of what they consider to be a high-risk arrangement. 

For many practices, the new ruling may mean a simple tweaking of existing arrangements, and for others, something more may be involved.

The good news is that if you do not cut corners and do it properly, some of these arrangements may do more good than harm. The use of service entities e.g. a service trust is still a legitimate way to succession plan and pay the right amount of tax. 

The benefits still outweigh the costs when a service trust is set up and administered correctly. 

Why now?


Due to the pandemic, the looming national and state budget deficit make professionals such as Do-It-Yourself type high earning doctors, easy low hanging fruit targets.

Whether deliberate or not, a set of high-risk factors as detailed in the latest ruling are in play. Specifically, they are targeting non-commercial arrangements and tax structures that are solely there to save on tax.

The new ruling continues to reaffirm a long-held Australian Taxation Office (ATO) concern that professionals like doctors who primarily earn their income from their personal labour are using various tax vehicles to unfairly reduce their tax bills.

This renewed attack is designed to target medical and other healthcare and non-healthcare professionals.

For decades I have publicly and privately been involved nationally in these types of reviews. The ATO and various State Tax Offices are certainly getting better at fine-tuning their audit activities, see ATO complaints a bit rich

This is not an issue to be ignored. It should be addressed immediately.

Dodgy practice arrangements?!

How have some doctors reduced their tax bill?


For some time, the ATO has maintained that any income earned by professionals predominantly due to their own labour should be declared 100% in their own name. The courts have found this is neither fair nor realistic.

Practice Companies and Trusts

It is quite common to see sole practitioners operate through a family trust or company. This is then used to channel income to lower taxpayers, such as a family member. This can range from the entity employing your spouse at a higher than market value rate or distributing profits to a lower taxpayer. This could be a child over 18 attending University. If this is not available, some use a practice company that does not pay out dividends and allow the profits to be taxed at a maximum rate of 30% in the dollar. 

I certainly do not recommend any of these strategies. At times, I hear advisers tell doctors to use a company to avoid payroll tax. Needless to say, a more thorough holistic and less piecemeal approach is needed.

Service Entities e.g. Service Trust or Company

For the reasons given above, if a doctor owns their practice the only real legitimate way to income split is to use a service entity. 

Practitioners have incidentally been able to reduce their tax bill by up to $20,000 to $30,000 p.a. 

Some key questions to ask yourself about your taxation arrangements


As a doctor or practice owner: 

  • Am I paying a family member an excessive amount of remuneration e.g. for bookkeeping or managing your practice? Am I using market rates?  
  • Am I transferring money to another entity or person to simply reduce my tax bill? Do I know why and how? Are they more than just journal entries the accountant does, is it real? 
  • Am I using a practice company, trust or service entity like a service trust or company (aka ending with “Pty Ltd” after my practice name) to divert income to lower tax-paying family members or entities like a company that pays a maximum tax rate of 30%?

Without a sound response to these questions together with this new self-assessment ruling, you may risk facing an expensive audit and a hefty tax bill with penalties. 

Remember, saying “my accountant told me will not be a defence” and being an honest fool is also not a defence.

The next step – ask your advisers the right questions and don’t just look for the right answers

Ask your advisers in writing whether the  Allocation of professional firm profits – ATO compliance approach ruling affects you, how it affects you, and what you should do next. 

Where do doctors, practice’s and some advisers start to go wrong?


It takes more than getting the right legal agreement or arrangements from a high-profiled, glossy brochure law or accounting firm. 

Quite a number are concerningly taxation driven as this is a primary concern for many practitioners. 

Many arrangements do not begin to address important issues the new ruling seeks to address, namely:

  • Commerciality i.e.investment rates of return on their business arrangements;
  • Succession planning;
  • Legitimate income splitting arrangements; and
  • Asset protection. 

This is where many doctors and practices start to go wrong. Matters tend to snowball when a piecemeal and not a holistic approach has been taken. 

On the contrary,  the practice is at risk beyond tax issues. Often, this includes unnecessary medico-legal exposure.

Structures tend to look more like a patchwork of well-intended ideas with little attention paid to the many devils in the detail. 

It is not a matter of if you get caught, but when.

Especially with the ATO new data matching and sharing capabilities and mandatory laws such as Single Touch Payroll and E-Invoicing. Robo-audits are becoming a reality. 

Due to new technology and specialist experienced medical firms, this is no longer the case, 

How to Defend Yourself from a Tax Audit

Firstly, just keep it commercial. This is the predominant test in the new ruling. The primary defence in the Income Tax Act is Part 4a. 

If the predominant reason you entered into the arrangements was commercial, you jump a number of big hurdles. Without this reason, you leave yourselves exposed to an expensive audit. 

If you are employing related parties such as a family member (e.g. a spouse who is a practice manager), it is important to benchmark their salary to a practice managers salary or lose a legitimate tax deduction.

If you are using a service entity, set a commercial service fee to run a viable business. My clients use monthly national practice benchmarks and the Doctors (Service Fee) Pay Calculator to reduce scrutiny. It is a bit late to start addressing these issues if the tax office is knocking on your door. 

It is important to prove and provide an independent, arms-length audit trail for the Tax Office. 

Change your attitude – budget and plan for it.  

Do the right thing the right way. Due to complexity, you have to invest money to get it right. It will provide benefits for a lifetime. It is a relatively cheap, once-off investment that requires minimal maintenance.

This is not a Do-It-Yourself exercise. Seek qualified, experienced medical/healthcare specialist help. Glossy brochures and vanity titles will not save you from a stressful and expensive tax audit. 

This should be on the top of your list.  Ask how many years and what their specific experience with practices is beyond a tax return. 

Get their advice in writing or you will have very little to rely on. Anybody can give free phone advice, but it will not save you if you are hit with an audit.

Start asking the right questions and don’t just seek the right answers.


The ATO is looking for substance over form. 

Starting from the top, these are the key areas to watch out for. These could be questions for your accountant and legal adviser.

Can you prove your arrangements are in place and are working? What business structure, documentation, systems and procedures do you have in place. Can key staff and advisers provide a simple explanation to validate your arrangements?

Types of business structure

Ask why you have the structure(s) in place and what is their primary purpose?

Sole Trader: Sole Trader/ Practice Company/Trust 

A common mistake is a sole trader practitioner owned by a family discretionary trust or a practice company with a pty ltd at the end of its name. The ATO takes a dim view of this. This ruling serves as another reminder.

If you are a sole trader practitioner operating out of a Practice Company or Trust with a corporate beneficiary (aka “Bucket company”), ask why are you not operating as a sole trader? You may save on a lot of unnecessary accounting fees and headaches.

An explanation must go beyond reducing one’s tax. I normally recommend new clients to remove such arrangements.

Service Entity: Landlord Service Trust or Company  and Tenant (sole trader) 


Many practices use a service entity arrangement. Commonly, this entity is a trust but it can be a company.

A big focus is on why your entity exists? What are their roles, i.e. is it more than tax avoidance? Service entities are another key focus of the new ATO Profits Allocation ruling. 

For many medical practices with a service entity, the service entity owns all the site goodwill of the practice, intellectual property, plant and equipment, and employs non-medical staff. It takes on a traditional landlord and tenant relationship with its doctors/providers. As a landlord, the practice charges a service/management fee (like rent for a serviced office). For example, 35% of gross billings to a self-employed doctor to use the practice. 

This is a legitimate way to income split. For more information, see ATO service Entity Arrangements and Doctors Contracts Explainer video

The key issue missed here is what is the purpose of the entity beyond the traditional “asset protection” argument. The ATO new ruling which may come as a surprise clearly states they will not accept this as a primary defence anymore.

In other words, they are questioning the entire legitimacy of your structure. What other value does it bring?

Using the correct type of entity structures and relevant practice agreements builds a strong case for arguing succession planning does exist. 

This should override any concerns from this latest ruling. This is a commonly overlooked opportunity. It is great for your practice regardless of the ruling if you have recruitment and retention problems.

Template agreements and arrangements exist that can make this easier for practices to execute.

Service trusts and family trusts together with a bucket company for succession and estate planning continue to have a legitimate role. The planets all need to line up correctly for this to work. Careful and thoughtful consideration is required.  All arrangements between entities from minuted pre-fixed profit distributions, trustee minutes and bank transfers should be properly documented and signed off for. 

Any taxation benefit should be incidental and not the primary reason for the arrangement. The benefits do continue to outweigh the costs beyond tax. Do not let this ruling weaken but use it to strengthen your current arrangements.

Practice agreements


Another common mistake is non-existent, out of date, or unsigned practice agreements. Well executed agreements provide excellent evidence in the event of an audit. 

Spouse Contract:

Where is your spouse’s employment contract? Do they really do what the contract says they do? What is the commercial market rate for their services? 

If you can produce this information at a moment’s notice this always provides an impressive first-mover advantage. Another one is practice service agreements and ownership agreements (which include profit-sharing arrangements).

Doctors/Provider: Contractor/Service or Employee Agreements:

Do you have up to date and signed service agreements with your providers that name your key business structures?

If you are not able to clearly answer this question, other more awkward questions may pop up, including but not limited to:

Do you really engage contractors and subcontractors or employees? Why is there no consistency in your arrangements? I.e. If all doctors are contractors, why do you employ registrars in your service entity? 

Practice Ownership Agreements (which include profit-sharing arrangements):

Do you have an agreement that pre-agrees how profits are shared? Does it fairly reward risk and return consistently amongst owners? I use a set template formula that is investment and succession planning friendly. This may reduce the ire of the Tax Office concern. 

Profit-Sharing and Income Splitting


Payments to Relatives

Are your payments to your spouse or relatives not considered excessive from your practice company or trust? What do you normally pay a practice manager? Many of these arrangements can be struck down and deem any tax deduction not deductible

As mentioned earlier, if you are employing related parties such as a family member e.g. a spouse who is a practice manager, it is important to benchmark their salary to a practice manager’s salary or lose a legitimate tax deduction.

Profits are artificially increased in the service entity for the sole purpose of reducing tax

Are the service fees charged by your service entity commercial? Why are some service fees higher than others? Why is a guaranteed minimum or hourly rate offered to a doctor?

Some naughty practices artificially increase their service or management fees via the service entity. This can give them an immediate tax benefit. However, it is risky without appropriate justification. 

The current ATO service entity ruling allows GP’s to use a service fee of up to 45% of gross fees they bill to a patient in the service trust. This can be legitimately used to income split. 

The key issue here is some practices are using a higher service fee than the ATO recommends. This can be legitimate.

For example, owners may use a 60% rate instead of the ATO guidelines rate of 40% for metro GP practices and 45% for rural GP practices. See ATO Service Entity Arrangements

On the contrary, some practices use a lower rate of 35% which may cause a solvency problem.

Provided these arrangements are commercial, this income can be legitimately channelled to lower taxpayer entities for commercial purposes such as succession planning.

A case in point as detailed below, I have successfully argued both publicly and privately that practices can charge up to 60% of GP patient billings as a service fee. This may be a surprise to many traditional accountants. 

Good commercial reasons such as the freezing of Medicare rebates and comparable live monthly national benchmarks provide a formidable argument. 



Source: Service Fee Burden BRW article 

I was involved in this 2007 national tax ruling. We did successfully argue when asked by the Federal AMA that a percentage approach be used for medical practices. We had won that argument because we could prove listed companies were using this same approach. We have secured in recent times a private tax ruling for a 60% service fee for a general practice. Anything is possible if you can prove your argument. 

Tip: A commercial service fee is one where the practice will not become insolvent i.e. you can pay your debts as and when they fall due. The bottom line is to charge a commercially realistic management or service fee to owners and non-owners that is commercially consistent with the level of service and risk involved.

 Many practices do not have commercially clear and signed profit-sharing agreements

Between the owners, are there pre-agreed signed profit-sharing agreements? Or is this causally determined at the end of each year to keep one’s tax bills down?

Can you justify why you direct income to a family member, corporate beneficiary (“bucket company”) from your practice or family trust? Should this income really be declared in the doctors or providers name at a higher rate of tax?

These can be difficult questions to answer. However, some careful thought needs to be taken now while you have the time.

Systems and Administration


Other factors that may strike down the legitimacy of any arrangement is when a practice does not walk the talk. It is hard for the Tax Office to accept that your doctors are not independent sole traders when you and your staff refer to them and their stationary makes them look like employees or subcontractors. 

Incorrect website and stationary listing of doctors and providers

The most common example includes having all doctors listed under “Our Doctors” or “Our Staff” when they are supposed to be independent sole traders or tenant doctors co-located on your site?

Another example is using the service entity ABN and letterhead to bill patients and not the individual providers for vaccinations and professional services?

Paid out of the wrong bank accounts

Why are doctors paid out of the same bank account as medical receptionists when you have declared the doctors are independent contractors or tenant doctors?

If you have a service trust, why is the same Xero or MYOB ledger and bank account used to pay doctors and staff? Why are they not separate?

Regular complicated/confusing journal entries

Why does your Xero or MYOB ledger have many automated and confusing journal entries that appear to reverse out or negate the actual arrangements in place, such as doctor payments? 

Why can you not easily reconcile or explain them? Why do their income and banking not reconcile to your practice management system, such as Medical Director, Genie or Best Practice? 

Conclusion

It is not if you get caught, it is when! 

These are some of the many uncomfortable questions you need to be prepared for. When you get one bit wrong, as a former auditor, I used to get a little more excited and start asking more tricky questions. In this new digital environment, with the ATO’s new STP and E-invoicing looming, it is getting harder to unsay or reinvent the past. Data collection and cross-agency sharing is creating a ticking time bomb for practices who keep this on the back burner. 

BBQ (unwritten and unqualified) advice from friends, family or fools or what another practice is doing will not save you from the awkward questions.

 

About me: David Dahm BA (Acc.), CA., FCPA, CTA, FFin, CPM, FAAPM, FAIM, FGLF.

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.