On the 25th of February 2022, the NSW AMA held a concerning online webinar with the Commissioner of State Revenue, Revenue NSW, Cullen Smythe. The panellists included a large legal and tax accounting firm. The national AMA President Omar Khorshid bravely facilitated the AMA member-only event to over 700 members.
Payroll tax and new tax laws are the greatest threat to public health.
Amongst medical and healthcare practices, payroll tax audit fear is spreading faster than Omicron. The AMA is to be congratulated on a super spreader event. The AMA seriously did a good job of highlighting the problem.
Ironically, at the event, the Commissioner admitted the only reason why there were not more audits was due to Omicron. If not handled correctly, many practices may be fined themselves literally taxed to death (insolvency). According to the AMA, there is no immediate political appetite to assist at a State or Federal level.
You are on your own.
In my 30th year nationally advising medical and health practices, I have never seen a greater man-made systemic threat to public safety. The last one I witnessed was when Prime Minister, John Howard intervened in the 2002 medical indemnity collapse. Now would be a good time for a similar response or see bulk billing rates plummet overnight!
To make matters worse, there are a few more new Harry Houdini twists not covered at this event that I will touch on.
The bottom line: only a fool would ignore the Commissioner’s payroll tax warning. All practices in Australia are affected.
I expect many practices to be sold or wound up, if nothing else, due to the undue stress and financial uncertainty this will cause. Patients will bear the brunt of it with higher medical bills and reduced access if practices begin to close.
So what are my key takeaways from this event?
- 75% Medical Payroll TaxLiability Strike Rate
Prior to COVID-19, the NSW Payroll Tax office had an impressive table showing they had been doubling the number of medical payroll tax audits. The NSW Payroll Tax Office in 2022 had achieved a whopping 75% medical liability strike rate on all medical related audits conducted in 2022. This includes allied health. Admittedly, only 12 practices due to Omicron were audited. The successful GP payroll tax decision subject to appeal Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue  NSWCATAD 259 (3 September 2021) may encourage practices to prematurely settle. This webinar will certainly add this impressive strike rate. The pre-ccovid19 the strike rate was 49%. Since 2019 this decreased from 41% to 45%.
The cat is certainly out of the bag
To the chagrin of the Commissioner, the panellists had confirmed “most practices” would be affected.
Independent Contractors expect a pay cut or reduce bulk billing now!
Many would have to increase how much they charged independent contractors. Caution was added if this was not done carefully, it would fall foul on the new income splitting ATO rules passed on the 17th December 2021.
The “Devil is in the detail”
The Commissioner stated, “the devil is in the detail”. This is how people are getting caught. Generally, people do not like reading the details. This includes professional legal and accounting advisers. No matter how well-intended they are this is why many are getting caught.
There is no quick fix: No software program or bank can provide immediate 100% protection. It is not that simple and “depends” on the totality of your arrangements.
The Commissioner made it clear it, it was more than a contract or a banking arrangement that would get you off the hook. He even provided an example. The real challenge for practices is to ensure their work/funds flows, business models, signed contracts are up-to ate and consistently operated according to any submissions made to the tax office. Verbal understandings where there are no contracts is admissible evidence. It is not enough to simply change your bank account. Anti-avoidance provisions do apply.
The government has been focussing on team care arrangements between GP’s, specialists and allied health. The practice plays a central coordination role. The panel agreed payroll tax rules are a threat to workflows and work practice. They can be carefully managed.
Similar rules apply across Australia
There maybe be some small differences, however, similar rules apply across all States and Territories. It is irrelevant that Fairwork or the income tax office does not deem your providers as an employee. Payroll tax is far broader. It looks at other “obligations”.
Don’t use mum and dad lawyers and accountants
Interestingly the Commissioner emphasised early in the webinar the use of “qualified” accountants and lawyers who specialised in medical practices. Concern was expressed inexperienced practitioners were creating a problem. He advised not to seek a private ruling and to seek appropriate experienced advice.
Start early: Do not panic
The Commissioner said there are limited exemptions.
The panel concluded doing nothing is not an option unless you can afford to defend an audit and pay up to 5 years’ worth of back taxes. Consider selling or closing the practice.
In 3 weeks, a Commissioner Practice Note (CPN) from the NSW revenue office will be released with regards to payroll tax in general practice clinics.
There is little political or pure appetite or empathy for front liners.
AMA President Omar Khorshid had said he had discussed the matter with Federal Health Minister, Greg Hunt. He said it was a State matter. The States during an election has not shown an appetite to address this issue to date.
A tightrope of tax compliance
What was not discussed in the webinar?
Here are some real sleepers. In the last two weeks, we have seen two major High Court rulings on employee v contractors. Furthermore, there is a new attack on family trusts and income splitting to your children and or “bucket companies”.
This would complete the digital revenue regulation loop in real-time. Do not be surprised to see new Robo tax audit letters.
All of this information needs to be addressed by your advisers.
Two Recent High Court Rulings
Practices need to make sure their contracts correctly set the rights and obligations of an independent contractor. Where there is some dispute then they may look at the totality of the agreement. This checklist will help you determine if you have a “totality problem” problem. The leading cases are CFMMEU v Personnel Contracting and ZG v Jamsek. Three High Court judgments, including Workpac v Rossato, which stated that if comprehensively written, the rights and obligations of the parties under the contract take primacy. While the multifactorial totality approach now has a more limited application in light of these cases, it will still have relevance where there is no comprehensive written agreement, the agreement is partly oral and partly written, or the agreement is found to be invalid.
Payroll tax rules do not naturally follow the High Court rules that deem employees as contractors. Other óbligations can deem a practice liable for payroll tax. The payroll tax rules are broad.
PAYG and Superannuation Guarantee obligations may arise out of any deemed contractor arrangements.
Proda data matching your bank details to the tax office.
They will not target me I am not a big fish. This may provide a false sense of security. What is different it is easier to be dedicated and prosecuted.
The Tax Office due to mandatory e-invoicing commencing with Medicare from 1st July 2022, has the capability to data match all your taxation and payment arrangements in real-time without having to ask your accountant.
What happens when your contractor accountant gets it wrong?
In a nutshell, it explains in a recent out of court payroll tax settlement no matter if your practice gets it right if your independent contractor’s accountant does not complete their own tax return correctly that provider will lose their payroll tax exemption. Practices will have to mandate an oversight on how their providers set up their own arrangements. This will need to be specified in all contracts. New accounting and integration systems will need to be set up to prevent practice fraud where doctors engage in separate banking from the practice.
Where to from here?
Why not simply make everyone an employee?
At first glance, this may sound like a great idea.
This can be problematic. Often owners and practice managers complain you can’t tell a doctor what to do. They do not like somebody looking over their shoulder. If you do you may risk losing them. Once an employee you are obliged to supervise them. The employer is totally on the hook should anything go wrong.
Aside from new Fair Work, Payroll Tax, Super, Workcover obligations, once you make the change do not be surprised if you receive an expensive please explain letter from a number of these regulatory agencies. Set a healthy budget for legal and accounting expenses before and after making the change.
The main reason why practice owners do not like employing doctors is that it is risky employing a doctor you have no control over. It is not to get out of employment-related costs which may be an incidental benefit.
Once an employee the employer relationship exists, instantly the employer becomes responsible (vicariously liable) for any medical or health-related mistakes. The employee’s MDO is funded to sue the employer. You may or may not be able to get employer insurance or it may become too expensive.
Furthermore, this is also bad for succession planning.
People do not like buying practices that may have a cloud of litigation hanging over their heads. A patient can have up to 25 years to litigate a doctor or their employer.
If you do employ your doctors, make sure you have natural asset protection arrangements in place. Have a tenant doctor arrangement. Employer Directors should avoid owning any assets in their name. Think about setting up a family trust.
It is not the end of the world: there is a solution.
It should be a buy once cry once experience.
However, budget for constant compliance changes as the rules keep being modified by regulators and Court decisions. It is the cost of doing business like paying for your car to be serviced regularly.
Understand there is a solution but the devil is in the detail.
Many practice for decades have not addressed the details. Some will have more work to do than others.
Expect more audits if practices do not carefully review their business models, systems, practice agreements and what their staff and websites say. That is where the fun begins. They will look for the slightest of inconsistencies.
In recent months, we have successfully been involved in securing many payroll tax and income exemptions.
Where the regulator believes they do not have a watertight case, they will usually settle. It would be uncomfortable if a new precedent was set. It is understandable why practice owners would accept. It would end the trauma and eye-watering costs of having your doctors and staff investigated. However, the public misses out on seeing what it takes to successfully defend a claim.
They will go after low hanging fruit cases.
Practices usually fail when they do not follow advice to the letter to save on costs. It is not a cheap process, but the benefits do outweigh the costs. Furthermore, avoid piecemeal legal and taxation advice. Be prepared to pay for it. All your advisers need to be on the same page. The defence you did not ask we did not tell you is not very helpful. Do not rely on social media, your well-intended friends or software suppliers (it is not just a software problem). This is a complicated issue.
Seek COMPREHENSIVE (top down and bottom up) medical and health experienced and qualified legal and accounting professional help.
For example, I am a Health and Life Chartered Accountant, Chartered Tax Adviser, Registered tax agent, AGPAL surveyor (for 10 years), former national AAPM Board Director. For over 30 years across Australia, we have specialised in medical and health practices full time.
Since 1997 amongst many other issues in healthcare, I have been publicly writing about the payroll tax problem.
We have worked and trained with lawyers (including barristers and queens counsel who have worked on these major payroll tax cases) on the nuances of these and many other problems practices have. Furthermore, we are experienced in payroll tax, income tax, pathology rent, and Fair Work investigations.
Due to the introduction of the GST in 2000, we had created in 2001 a market and tax audit tested cloud software service fee payment program called the Doctors Pay Calculator. It is a legal, accounting and tax compliance tool. The software pairs client ATO tax compliant codes together with payroll tax tested and legally prepared Tenant DoctorTM agreements.
One final point, many accountants do offer payroll tax insurance. MDOs appear to have pulled out of this cover check your policies now.
This may serve as a useful benchmark.
Self assess now
In the meantime, I strongly recommend you use our confidential self-assessment checklist to work out if you have a problem and what to do next. Do not stick your head in the sand. This may be the last time you will have a chance to do mitigate your risk.
Make a waiting room poster and complain to your local member
Use this article and write to your local State and Federal Member of Parliament. Start a waiting room poster wall campaign.
Vague laws are not in the public interest
Vague payroll tax State laws are not in the public interest. For decades, they have bred too much financial uncertainty. Many practices cannot afford to defend themselves and silently settle without knowing any clear reasoning or rationale for decisions that have been made against them.
Many practices may no longer be viable
It has the potential to systemically destroy General Practice. General practice lives in a fragile and critical social infrastructure all of us and society depends on. Many practices will face serious compliance costs up to $5,000 per doctor, solvency and succession planning problems.
Patients will have to brace themselves for more a sudden 10 to 20% spike in patient gaps. Practice costs are already increasing at 6% per annum.
Less access to expensive care
This may permanently destroy what is left of our overworked and invaluable front line defence to COVID-19. It will do irreparable damage to the communities they humbly serve. Due to COVID-19 anecdotally, there is an emerging and significant contraction of up to 10% in the medical workforce hours. This may push many practices to increase their fees or push them to the brink.
Something like …
Dear Patients, we apologise for reducing or stopping free healthcare due to State and Federal taxes. We have no choice unless you sign our petition.
The letter may read:
Dear Local Member,
RE: It is hard to tax the unwell.
Why are you not supporting my local general practice? They make me feel safe.
The cost of running their practice due to unfair taxes means I or the people I care for have to go without the care they desperately need.
I will have to pay more for it or my practice will. I am concerned that my practice may either reduce high-quality access to services or close if they cannot afford to see me without having to pay.
This is simply not fair. Please provide my practice with a payroll tax exemption. This will allow all of us to get back to work so we can all pay our fair share of taxes that pays you to listen to us.
Practice owners, you are not alone
In the meantime, do not think the bigger practices or corporates have got this under control. I can assure you they have a bigger problem. In fact, the smaller you are, the smaller the problem. Maybe the days of a solo general practice or 2-doctor practices will come back?
You never know. It appears the only way to stop a payroll tax audit is for Omicron to spread. If the next variant B.A.2 hits our shores by July you may get a natural extension. Use your time wisely and make this a priority.
The problem is solvable, but you have to take steps now or face a perilous future that will harm your ability to recruit and retain doctors. Like the introduction of the GST, people hated it but soon embraced it.
Remember, patients will ultimately have to foot the bill or go without timely and less expensive care. It is better to leave a legacy and not a liability.
Chartered Accountant, Chartered Tax Adviser, Registered Tax Agent, Former AGPAL Surveyor 10 years of service
David Dahm is CEO and founder of the national medical and healthcare chartered accounting firm Health and Life and global Founder and CEO of the not for profit project the International Healthcare Standards and Ethics Board (www.ihseb.org)
After a serious work related car accident in 1989, and nine operations later I continue to be a patient and provider advocate. I enter my third decade as a national Chartered Accountant for Medical and Healthcare practices in Australia. I am a former 10-year Australian General Practice Accreditation surveyor. I come from a medico family. I have served on the AAPM national Board and was the inaugural national Chair of the Certified Practice Manager CPM post nominal. I continue to provide accounting tax and practice management advice to many practices all over Australia.
You know who you are and I thank you for this real honour and privilege to serve you and your community through you. Note, I am not a lawyer please seek appropriate legal and accounting advice. This information is for general information and discussion only.