Australian Tax Office Risk: Contractor doctors or healthcare providers who allow their patient fees to be banked in their practices ABN linked bank account may trigger an expensive tax audit in the new financial year.
For decades, we believe, many thousands of practices/doctors have unknowingly submitted the wrong bank account information to Medicare.
Many unknowingly may have committed a “serious offence” under the Health Insurance Act and/or Income Tax Act and Payroll Tax rules
Due to the Australian Tax Office’s new mandatory e-invoicing laws, it will be simpler for the tax office to automatically raise a red flag. Failing to promptly answer their questions could turn this into a super spreader event and affect the entire practice. We have seen this with the recent NSW GP payroll tax decision. This has set the nation-wide series of payroll tax audits on medical and health practices in NSW, Victoria, QLD and WA.
Contractors who wish to protect themselves click this confidential and free self-assessment test called the Medical and Health Contractors checklist. Find out if you are at risk and what you can do about it.
For decades, many thousands of practices/doctors may have unknowingly submitted the wrong bank account information to Medicare.
If you engage independent contractors and you have submitted a HW 052 Online Medicare claiming form practice bank account bank account ABN linked details, then technically this may constitute a “serious offence” committed by the practice or organisation, as referred to in the HW052 form, if they are independent contractors.
If this is the case then according to the Government a Provider registration for Electronic Funds Transfer payments form (HW029) form should be completed and submitted.
Notwithstanding, you may not have committed an offence under the Health Insurance Act, however commencing from 1st July 2022, do not surprised if the Tax Office comes knocking on your door with a please explain letter.
Practices and providers should check their HW 052 Online Medicare claiming form that has been submitted to Medicare. Did you give the practices ABN bank linked details or the contractors.
For unprepared practices, our earlier article Do not Use the “C” Contractor Word! explains this may not be cheap or easy to defend. While time is no your side, now is a good time to get started.
Practices and hospitals need to ensure they have been set up correctly when the Australian Tax Office’s new mandatory e-invoicing for Commonwealth agencies begins on 1st July 2022. The inflection point is when the private sector for example private medical and health practices will be forced to join. Check your PRODA account now has a e-invoicing option.
As happened when the GST was introduced, this may expose and highlight any poor tax compliance issues.
E-invoicing is akin to real-time microchipping every transaction you make. When fully operational, e-invoicing should work like plugging in a missing bulb in a Xmas tree. It can instantly expose non-compliance and lead to a robo-audit of your tax affairs.
An example is what may happen with a patient’s computer-generated tax invoice and related provider stationary.
Tenant doctor’s (contractor) service fee arrangements are common in a medical and allied health practice and in public hospitals. Often the practice’s ABN, rather than the tenant doctor’s ABN, appears on a patient tax invoice, stationary and website/digital payment systems without an appropriate disclaimer. This automatically flows downstream into the organisation’s accounting system. In front of a judge, this may unintentionally mischaracterise your arrangements.
Take action! Share this article with your practice manager to see if YOU have a serious problem.
The good news is that there may be a practical and cost-effective solution.
The bad news is, some practices will have to take a number of not-so-cheap steps to clean up their books and processes.
What should I do next?
Do not remain naive. It is a complex problem that needs a complex solution. Just because you are healthcare worker or practice there are no special exemptions when it comes to paying taxes. There is a simpler way to work it all out.
Step 1 – Find out if you really have a problem
We stumbled over this issue when a GP practice client asked us to sign off on their new Medicare Bank account details for Online Claiming (HW052) application. When I read the form, alarm bells started to ring, given the new mandatory ATO tax office e-invoicing rules commencing on 1st July 2022.
This affects all Medicare billing doctors and providers in private practices with contractor, employee and tenant doctors arrangements. This includes public hospitals with provider private practice arrangements that bill Medicare. All providers and practices should immediately check whose ABN linked bank account name appears on their banking online claiming arrangements.
If you are a non-employee provider, an business an Australian Business Number (ABN) is mandatory. You or your entity should have a bank account linked to this number. The ATO’s new e-invoicing rules are part of a global digitally-encrypted invoicing integrity program designed to stamp out fraud. However, it appears to have greater application beyond merely fraud.
Every tax invoice you issue to a patient legally must have a registered ABN printed on it. Your registered Australian business (e.g. a provider) will leave a permanent digital audit trail. If the ABN is incorrect, it will not be easy to go back and fix your books or transactions later.
In future years, it may trigger a series of “please explain” statutory audits, which may prove costly, especially if the practice ABN is used as the ABN that banks and or bills the provider and/or patients. By data matching your humble bank account, this may trigger a domino effect of audits income tax, payroll tax, superannuation guarantee, to Fair Work and WorkCover audits may arise.
Without remedial action, this may lead to commercial disputes. This may harm staff morale and potentially lead to expensive arguments with a provider’s external legal and accounting advisers.
Step 2 Confirm which bank account should you nominate on which form: the practice or the contractor?
The simple answer is: put the provider’s name and not the practice on the form. This simple measure will have significant implications on your business, legal and tax structure. This will affect the practice’s or provider’s accounting, bookkeeping, banking reconciliations, BAS and annual tax returns! Seek professional advice before making this change.
However, and to be clear…
“If they are a contractor or tenant doctor, only put a provider’s name that has a valid Australian Business Number (ABN). Avoid putting it in a contractors personal non business bank account details.
How should a contractor/tenant doctor’sTM bank account be set up?
All provider bank accounts must be linked to a separate, individually-named commercial bank account. They cannot be linked a personal bank account that has no ABN. The owner of the bank account must have an ABN registered with the Tax Office.
You can check if you have one here. Ideally the ABN should be GST-registered. GST registration is mandatory if your practice billings exceed $75,000 p.a.
Banks will not allow multiple ABN’s to be attached to one bank account. Many practices have clearing or billings in which all contractors deposit their money into the one bank account.
To get around these rules, often the practice offers doctors its own practice ABN for the purposes of billing, so that all doctors billings can be centrally paid into the one account. They currently do not check whether you have this authority, other than what the practice advises.
As a former bank and trust account auditor, take it from me, this is a no no! Or so my friends high up in banking have advised me.
You can be forgiven for being confused.
Yes, indeed, it is confusing.
Filling out the forms
There are three essential and somewhat mandatory forms providers and practices commonly complete when signing up a new doctor/provider. They are confusing and misleading documents. They may automatically imply an ëmployment arrangement pre-exists even though none were intended. The following application for a new provider/prescriber number contains steps that lead to this conclusion.
The first form a HW019, requires the provider only to sign and individual and not a practice or organisation declaration. It is a serious Federal offence if it is incorrect or misleading.
Specifically, question 23 provides is pre-emptively suggestive. It may unintentionally self-incriminate the individual provider. The form should state their engagement status and not state “employment status”.
A self-employed independent contractor could accidentally tick the incorrect box i.e. an “employee – contractor” as shown below. If so this may the beginning of many problems to come. Many providers make this mistake as they do not seek professional accounting or legal advice. They usually leave it up to the practice manager to sort out. This is not recommended.
Adding to this concern is the use of the words ëmployment status and question 24 “employment at this location”.
This may legally imply that an employee or employer relationship exists. This type of evidence would raise the eye of the tax office, Payroll Tax and Fairwork in a heartbeat. It is clear the various State and Federal Department agencies have not been talking to each other.
Question 29 of the form asks: “Provide the bank account details for the recipient of the Medicare benefit for the location(s) named at question 21”…
BUT it is not clear whether the recipient means the provider or the practice, since Q.21 simply refers to the location of the practice.
Now, in order for a provider to claim online for a practice or organisation, completion of form HW052. By completing these forms according to a recent media statement on 10th December 2021 by Services Australia:
“This form (HW052) is intended for payee providers for one or more servicing providers. For example, a medical practice that employs multiple doctors where claims are paid into a business bank account.
To give us those bank account details, the ‘financial institution details’ section of the form needs to include the name of the nominated provider linked to that organisation’s bank account (known as the payee provider).
We have an additional form (HW029) for individual contractors who may work for multiple practices with different payment arrangements.The payment arrangement between a servicing provider and their employer is solely a matter between them.”
Specifically, the form HW027 must be signed by the individual provider to allow the practice or organisation to bill on the provider’s behalf. It clearly states that this form is for providers and organisations whose primary role is the provision of healthcare services. Clearly if multiple providers are linked to the same practice ABN account, it becomes more difficult to defend a payroll or income tax audit. It does start to throw into the question of whether the provider is an independent contractor.
Alarmingly, as stated earlier, for many practices signing this form, Services Australia has assumed you are either employing or subcontracting independent contractors. This evidence may significant medico-legal, payroll tax, income tax, superannuation guarantee and Fair Work Act implications if you never intended these independent contract providers to be caught under these laws.
The definition of “payee provider” is interesting to note. It implies if the money is not being paid into the independent providers bank account, then it is implied the practice or organisation is the healthcare service provider due to the completion of a HW027 form and therefor the primary healthcare provider/employer.
Question13 clearly states “The bank, building society or credit union account must be in your name. A joint account is acceptable. Payments cannot be made to credit card, loan or mortgage accounts.”
A joint bank account cannot be in the name of the practice bank account with multiple provider names or monies added. A commercial (practice) bank account is not permitted to hold or link multiple (independent contractor) ABN bank accounts.
There can only be one ABN linked to the practice bank account. Many practices have inadvertently been using their practice ABN bank linked account to receive all independent contractor fees. This is a bad idea.
This can only be achieved with a regulated solicitors or accountants independent trust account. Fancy software solutions or promises made by a bank will not save you, other than a rare Act of Parliament and a good defence. This is acheivable.
The form also states you may be liable for breaches; since on each of the above forms, it clearly states if you are the applicant you are committing a “serious offence” for false or misleading statements! i.e implying there may be a Health Insurance Act breach. A greater concern, in the absence of a good defence, this information could be used against a practice or organisation or provider for breaches in the Income and Payroll Tax Acts and Fair Work.
Common practice arrangements – clearing and billing trust accounts
Practice Managers should not be completing a providers form for them.
It is not unusual to see practices prepare this information, rather than the doctor, who is in a rush, and simply trusts the paperwork has been completed correctly by the practice manager or the organisation. Providers, not wanting to be perceived as ‘difficult’, they unwittingly sign and submit an incorrect form without question. After, all every other doctor and practice has been doing it this way for a long time, and there appear to have been no problems.
To centralise banking and bookkeeping, it is common to see the practice’s bank account linked to the practice’s ABN. Rarely is the commercial independent contactor’s bank account linked to their individual ABN or submitted in a HW052 Online Claiming Form.
A practice usually directly deducts, from a provider’s bank accounts, any service fees and charges, from a separate account set up by the practice. This is normally linked to the practices ABN. This account is commonly referred to as a clearing or billings trust account.
This also helps complete accurate bank reconciliations for any fees collected on behalf of the provider. This is critical in ensuring there are no errors, and that fraud controls are in place. Usually, it is set out as a key provision in the service or practice agreement with the provider.
These arrangements have now become more popular, due to a recent GP payroll tax case. Unfortunately this practice maintained only one bank account to pay all their doctors and administration staff and overheads. This triggered a successful payroll tax prosecution.
With the above arrangements it could be argued has the independent contractor money legally assigned to the practice their income. If not the practice would have no written authority to deduct service or any other money from the independent providers bank account. Without an up to date signed service agreement or contract, the practice runs the risk of being accused of theft plus many other statutory offences.
Indeed, the above arrangements would technically constitute a “serious offence” committed by the provider and or practice,if the practice engages independent contractors.
Ideally independent contractors should complete a Provider registration for Electronic Funds Transfer payments form (HW029) form and a valid service agreement should be in place. It is important to seek appropriate legal and accounting advice before considering this option.
When each independent provider banks into their own bank account this can create a banking, cashflow, book keeping and accounting nightmare.
Am I a potentially high tax audit target?
If you are a tenant doctor/ independent contractor the simple answer is YES if you have completed a HW052 online claiming form with the practice account and not your own personal ABN-connected commercial bank account.
Consider submitting a Provider registration for Electronic Funds Transfer payments form (HW029) form .
But do not be alarmed, remain calm. You may find you are not alone. So seek independent medically experienced legal and accounting advice. If not professionally handled, the situation can rapidly escalate. This can be avoided.
For a clearer view, if you are a contractor, click here for our free Medical and Health Contractors checklist to find out what questions you need to ask your accountant and lawyer.
Am I, David Dahm, scaremongering??
Knowing the COVID19 pressures that practices are already facing, I faced writing this piece with considerable trepidation – feeling like the sailor Frederick Fleet in the Titanic’s crow nest yelling “Iceberg ahead!”. It is something nobody really wants to face.
Understandably, some may feel I am scaremongering. Judge for yourself – here are the facts. Here is the ATO’s current position on their nationwide data matching activities.
The Tax Office is ready to data match
The introduction of the new e-invoicing laws heralds a new era for the Australian Tax Office.
“The Prime Minister and Treasurer have announced a $A3.6 million push to make electronic invoicing mandatory for all Australia’s Commonwealth agencies by July 1, 2022. They also plan to consult on options for mandatory adoption of e-invoicing by businesses.”
Hence the old excuse, “nothing has happened before so why should I care” is no longer sufficient.
All Australian Federal Government departments, including Medicare, from 1st July 2022 must issue e-invoices. In exchange, providers/suppliers will receive a fast payment if they voluntarily register. It will be mandatory for the private sector (however the accounting profession successfully lobbied for a delayed start due to COVID19).
However, clients using our cloud based Doctors (e-Service Fee) Pay Calculator will be ready for the new tax office rules.
Source: information and data manager
The Federal Commissioner of Taxation Chris Jordan recently announced;
“We receive, match and pre-fill increasingly large volumes of data from a variety of third-party providers. In 2021, we pre-filled over 89.5 million pieces of data and we’ve expanded our data matching protocols to get more data from third parties..”
Source:‘A new decade in tax administration’: ATO Tax Commissioner Chris Jordan speaks to challenges ahead 25th November, 2021
When it comes to successfully prosecuting tax fraud or non-compliance, two things are required; firstly a minimum of two willing parties (with identifiable banked linked ABN’s) and secondly a transaction (e-invoicing), to instantly prove an offence may have been committed beyond a reasonable doubt.
It is logical that. if the ABN that is receiving the doctor’s money is not the same as the doctor’s ABN, then this may trigger a robo-audit.
Who should I blame!
When I spoke with a doctor last week, and raised the issue with him, he was alarmed, appreciating that a payment error originating from head office, might trigger a significant systemic tax audit against all located in the practice. His reaction? “Who can I sue?!”
Unfortunately blaming others will not save you. It is not enough to assume that because your practice manager, bank, accountant, lawyer, the Tax Office etc., said nothing, you are in the clear. Or that common sense is necessarily on your side. Common sense does not always prevail.
Step 3 Move quickly to address the problem
The reality is that you need to move quickly to address the issue before 1st July 2021 – if not earlier.
The last thing you need is an angry call from a doctor or their lawyer. The natural defence will be if you did not ask then we could not tell you what to do.
Do nothing and you maybe be found guilty of being complicit
I fear that most doctors, an overwhelming majority, will play the “wait and see” game. The feeling may be that there are just too many people affected, so the government will simply act and fix the form. After all, how could they ground the system to a halt?
This may be true, but it may turn out to be a systemic tax problem, not just a simple form problem. One that may take some time to fix.
Unfortunately, either hubris, undisciplined growth, or being in denial, may result in you or your practice putting yourself at risk and attracting an audit.
Do not believe for a second that any big corporate or small practice has got this right or there is a special loophole or privilege they enjoy. That is a myth.
Just as with medical and allied health payroll tax audits, if there are many breaches identified, systemic bank account integrity tax audits are likely to follow. It could get ugly. You have at least 1st July 2022, if not earlier, to get your affairs in order.
Start now, by understanding you and your practice may be implicated in a group practice audit. We have seen this happen in a number of recent payroll tax cases. Contractor doctors were forced to sign affidavits in relation to their arrangements. To protect yourself, arrange to discuss this with your providers.
On a positive note, due to unforeseen compliance debts, more doctors might become available to meet a doctor shortage. Who knows… there may be a silver lining!
Yes this is going to hurt a tad!
Any fix will not be cheap. The first step will depend on how well your business model and legal structure and practice agreements have been set up.
The next step is for you to finely calibrate your accounting and bookkeeping systems to address any concerns. Either way you will need to seek professional advice… now!
Alternatively you may pay a higher price later should you get audited or receive a complaint from an angry provider. It is better to be on the front foot and act now.
Consider this.. the last thing anyone needs is for medical and healthcare practices to end up on the ATO’s top 100 list of targets. Do not expect the public to be too sympathetic.
Three things you should do right now
The issue is not worth losing your family home over. It is avoidable with careful planning.
Complete a self audit and update your systems
Put everything in writing and assume nothing is correct unless you see it for yourself. To get started, complete our self audit questionnaires to pinpoint any problems.
First up, fix the low hanging fruit – such as each contractor getting their own website, and removing the word “Our Doctors” from your website if you have contractor doctors. Or it will make it harder in an investigation to assert that the doctors are contractors.
Carefully review your banking arrangements. Set a legal and tax compliance budget… it may cost up to $1000 per full time GP or more depending on how well you are set up.
This is the cost of doing business, just like the introduction of the GST in 2000 incurred costs. I think you will find it in the end.
Update your contracts and systems – and be aware there is a problem with individual provider bank accounts.
If each provider banks in their own name, the practice staff would require access to multiple provider bank accounts to perform multiple reconciliations.
It would be next to impossible and/or uneconomical to do a bank reconciliation where you have multiple providers. You would need many, well-trained staff to keep on top of it.
Many practices came to this realisation of the need to keep a separate doctors bank account after the GP medical practice Thomas payroll tax case made a key point about this issue.
Quick solutions offered by advisers included setting up a seperate billings trust or clearing account.
However if this arrangement is not permitted by Medicare, this remains a problem. The threat of having committed a serious offence via your Proda account (which allows for e-invoicing) will not go away.
Carefully familiarise yourself with the new forms. Do not tick any boxes you do not understand.
Source: Proda online
Bank reconciliations prevent fraud and error – a practice must not relinquish this role
Normally, practice staff perform daily patient fee bank reconciliations on behalf of providers who also bill their patients and clients.
This is a critical service – if they were to cease this role, it would open the contractor and the practice to cashflow problems, false reporting of income and BAS information, fraud and inappropriate billing allegations. This may trigger a breach of contract with your providers.
Furthermore, the practice might not charge, on a timely basis, the correct service fee percentage against their gross billings received. This may be a significant revenue risk to the contractor and the practice.
Normally a patient billing system (such as Pracsoft, Best Practice, Zed Med, Genie etc) are operated by the practice.
Practices use this information to complete a provider’s bank reconciliation using the practices Xero, MYOB or Quick Books accounting software programs.
It takes significant time to daily and accurately reconcile hundreds of transactions to a bank statement and patient fee debtor reports.
This is why the majority of providers outsource this critical function to the practice.
What is bank reconciliation?
Regular bank reconciliations are a way to double-check your bookkeeping. In recent times I have found a number of practices have started to by pass this critical function as it has got all too hard. It is not a choice it must be done if you do not want to stand accused of not having adequate fraud and accounting controls in place.
You do it by comparing your business accounts against your bank statements. Both sets of records should agree with each other. If not, you need to figure out why.
Why are bank reconciliations important?
An alternative practice outsourcing solution:
Set up an accountant’s independent trust bank account compliant with APES 310.
Only an experienced public practice accountant who is a member of one of the recognised professional bodies such as a Chartered Accountant (CAANZ), CPA or IP member, can do this. Legal and audit oversight is needed, and this is a specialist area, beyond the scope of most traditional accounting firms, regardless of their size.
Ideally, they will have worked closely with medical practices for over 10 years, have worked with lawyers in drafting practice tax compliant agreements, have been involved in tax investigations, prepared doctors’ pays and have access to accredited tax agent registered endorsed service fee compliant software.
We are about to release a solution that should tick all of the above boxes. Contact us for more information.
Get reliable advice now
Make sure you have an accountant and legal adviser who has a deep understanding of how practices are set up, beyond simply a tax return and financial planning. The devil is in the details e.g. how to correctly complete a HW052 form.
We have been operating as a chartered accounting firm in public practice now for over 30 years. Since 2001, clients have used our unique national cloud based Doctors (e-Service Fee) Pay Calculator program for medical and allied health practices. It is designed to meet your medical and health practice accounting, legal and tax compliance needs.
Our recommended agreements and systems have successfully defended clients facing income tax, payroll tax and pathology kickback investigations. It is important to ask yourself if your adviser has the same experience and capability.
Obtain tax audit insurance – remember this is not a solution
It used to be a much more expensive and difficult exercise for the tax office to audit you. Not any more. Tax audit insurance is now a must.
BUT make sure to read all your tax audit insurance policies. In recent years Medical Defence organisations have either amended or removed cover. Speak to your accountant.
Policies usually cover expensive legal and accounting fees, for statutory compliance and for income tax, payroll tax, superannuation guarantee, and Fair Work. If these associated Federal and State agencies are not listed, you are not covered. Many are not.
To comply or not to comply?
For many of you, this will fall into the “too hard” and “see what happens” baskets. An expensive audit or complaint is a matter of choice. It becomes harder when there is so much industry information out there to argue and plead ignorance.
We have all hit the same fork in the road. The good news is, this will give you a competitive advantage when it comes to recruiting and retaining doctors. In the end, like the GST, it should leave practices in a stronger position.
How it will end is up to you.
Click here for the original version of this article.
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, so please seek appropriate legal and accounting advice. This information is for general information and discussion only