Family Trusts Under ATO Attack: Income splitting your kids!

The two main points to come out of ATO’s (Australian Taxation Office) new income splitting ruling on family trusts are, firstly, pay out your adult children’s loan accounts at Uni. Give them an early inheritance.

Secondly, if your registered tax agent/accountant helps you to reduce your tax to a lower rate, they may be in breach of the Tax Practitioners Board (equivalent to AHPRA for doctors and allied health providers) regulations. Your tax agent may risk being severely penalised, sanctioned and possibly de-registered!

This would be like making it illegal for a GP to engage in healthcare prevention.

Quite rightly, you are probably scratching your head and asking why then would you employ an accountant? I can see a lot of my colleagues sweating over this one.

I am sure there will be some interesting and amusing consults with your accountant.

Do not take this personally. It is clear the Government’s coffers are desperate for money and have a plan on how to get it. Taxing the rich is a politically popular idea.

Unfortunately, the ATO tone seems to suggest anyone using a family trust is illegally trying to avoid paying tax. It is an unfortunate stereotype.

Trusts are typically associated with high net worth people, even though it is a common vehicle used by ordinary mums and dads who may have a small business or money they wish to protect. They are not of the same ilk of a Bill Gates or Jeff Bezos. It is primarily used for asset protection and a safe way to create wealth and help family members in need.

The ATO’s new s.100A and Div 7a rules (see detailed references below) after industry consultation are set to come into effect by 1st July 2022. You do not have a lot of time. Clean things up now. 

The main points from the biggest ruling in decades that affects your family trust can best be described here.

Take a typical doctor, Dr Good, with two adult children, a service trust that owns and runs a group practice. They have a family trust that has as beneficiaries Mum and Dad, 2 kids at uni, a “bucket company” corporate beneficiary, “Ben” the family dog, and a self managed super fund.

  1. Remember, from 17th December 2022 to apply the new income splitting service trust or entity rules first, make sure you do not have high service fees. Factor paying an arms-length salary to the practice owner who bills fee for service for managing the practice;

  2. No more allocating $180,000 to adult children at uni but not paying it to them;

  3. No more allocating money to your “bucket company money” or any other entity, including Ben the family dog so you can pay a lower rate of tax.

  4. Service trusts that allocate but do not pay family trust profit distributions may require written Div 7a loan agreements to the bucket company, so expect compliance costs and documentation to increase;

  5. The rules remain murky in some parts. The ATO admits they are not law but guidelines that even the ATO has admitted they are not certain of. Sounds like the payroll tax rules.

Not following the rules may attract the ATO’s attention.

Where to from here?
  1. Document everything: Make sure you have a well-documented defence with your tax lawyer and accountant if you are planning to diverge from a ruling or seek a private ruling (be sure not to trigger a tax audit).

  2. Don’t distribute income to questionable entities that will face scrutiny and likely an audit, for example, to another trust or entity (a superfund, a foreign company, distant relatives or the family dog).

  3. Run joint family bank accounts with your named beneficiaries. This is the only way a trust can distribute to spouses, or dependent adult children, or if a complying Division 7A loan agreement is in place (e.g. with a bucket company).

  4. The flow of payments matter: Just pay out before the end of any financial year any trust distribution with cash and avoid journal entries.

    1. Pay your kids out and give them an early inheritance. Remember, this will be hard to get back.

    2. It is not a good idea to get your kids to pay you back as soon as you have paid them their trust distribution. It may be called a “reimbursement” which they do not like.

    3. Stop taking money out or lending money from one bank account and transferring it to another that is not consistent with your business model, and legal and tax structure. Avoid a “circular flow of funds” (see para 15). 

  5. Large loan repayments: These need to be handled carefully and are likely to cause a compliance problem, and you may not have enough money to pay your trust distributions. Make sure you have some good savings or standby loan facilities available.

  6. Expect your accountant to go into panic mode and your fees are set to increase if they have been entering a lot of journal entries in relation to trust allocations on your books and not doing as set out above. There is retrospective application. The ATO are targeting arrangements usually implemented by using journal entries (which themselves are of no legal effect).

At a minimum, do the following:
  1. Ask your accountant in writing to review distribution patterns and journals in detail for the past two years for all of your entities. This is the first step to determine if any remedial action is required now.

This will be a big task, so expect a healthy bill. The new rules are long and complex.

  1. Revisit tax planning for the future. There maybe systemic issues. Serious sanctions can apply to your tax agent if you do not do the right thing. Do not expect any favours. No client is worth losing their livelihood over. The same principles apply in medicine. 

  2. 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. 

The bottom line, at least pay your kids their $180,000 trust distribution. Make sure it is not a book entry where you have no intention to pay. For example, pay their schools fees from a joint family account. I hope you get the gist, more to come!

At least you will not have to worry about asset protection if the payroll tax commissioner comes knocking on your door.

One major conflict I do appreciate is how a major Federal Court ruling late last year on a number of the issues raised above did not stop the ATO from publishing what appears to be a conflicting guide.

The case confirmed bucket companies are legitimate, and it is not tax avoidance. The main argument could be they are there for wealth creation and asset protection. The ATO seeks to challenge this notion.

For those who like the gory details of the case, I have made a brief reference below.

Justice Logan of the Federal Court handed down his decision on the 21st December 2021 in Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619, in relation to section 100A and the Part IVA anti-avoidance provisions. This case concerned what has come to be described as a typical ‘washing machine’ arrangement: that is, an arrangement where a trust makes a distribution of income to a corporate beneficiary, and the corporate beneficiary in sequence distributes a dividend back to the trust. The ATO is appealing this decision.

I do not blame you if you are confused, so are we.

Normally, Court decisions have precedence over tax rulings. I would not be surprised if some elements of this ruling are watered down. However, key parts will remain, such as proving you are making actual bank payments, with no funny side deals. The burden of proof is on you and you would be a fool to ignore it.

All I understand is that the Tax Office is not the law. It simply administers it. I am happy to stand corrected on anything I have said here. Just be prepared to clearly defend your position. It should prevent an expensive and time-consuming full-scale audit. 

You may feel you are flying off the seat of your pants, but do not panic.

The bottom line: do not change your tax structures or arrangements without consulting your tax advisor first. This is not the end of family trusts, they are important for asset protection. Just administer them properly and do not begrudgingly pay your adviser to do it. It is in your family’s best interests. Triggering and defending an avoidable tax audit can be more expensive and demoralising.

There is no need to get rid of it or Ben, the family dog. Both will keep you happy and safe.

As a footnote: For those of you who like doing your own tax returns or research, here are all the new rules you can read up on with heaps of examples.

For more insights visit our blog.

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

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.

Every cloud has a silver lining: How the 2022 Govt budget may impact your practice

How the 2022 Federal Budget will impact your practice
This year’s Federal Budget is focused on stimulating the economy out of a COVID-19 recession, with measures aimed at reducing the cost of living and supporting small businesses.

To help you understand if the 2022 Federal Budget impacts your healthcare practice, we’ve summarised the relevant announcements below. It’s worth noting that both Houses of Parliament still need to agree to the announcements before they become legislation.

Small business technology boost

Businesses with less than AU$50 million in turnover can deduct an additional 20% of the cost incurred on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cybersecurity systems, or subscriptions to cloud-based services.

For example, for every AU$100 small businesses spend on digital technologies, you’ll receive a AU$120 tax deduction for investments of up to $100,000 per year. The boost will apply to eligible expenditure incurred from 7:30pm AEDT 29 March 2022 (i.e. Budget night) until 30 June 2023, and can only be claimed in the new financial year.

This incentive is aimed at helping you work smarter, not harder, by giving you a tax break for buying software and upskilling your staff. These days, being able to log in and access software from anywhere at any time has become the expectation for staff, providers and patients. Being tech savvy also helps you become an employer of choice, enabling you to improve employee acquisition and retention.

Now would be a good time to start identifying any technology expenditure on your accounting software (e.g. Xero, MYOB or QuickBooks). Keep track of digital cloud software costs, accounting and practice software, communication tools such as Google Chat and cloud-based work productivity tools. Regardless of any tax break, however, remember to base your decision on whether this technology is going to improve your productivity or reduce your risk.

Tax deductions for COVID-19 work-related tests

Commencing 1 July 2022, workers can claim any work-related COVID-19 tests if not paid for by their employer to attend work. The Government will also ensure that fringe benefit tax will not be incurred by employers if they provide COVID‑19 testing to their employees for work‑related purposes.

Regional telecommunications investment

AU$1.3 billion will be allocated over six years to improving regional telecommunications, including greater mobile coverage. AU$480 million has been provided to the company responsible for running the NBN to upgrade its fixed wireless and satellite networks to improve services in regional, remote and peri-urban Australia.

Health system upgrades

AU$96.8 million will be allocated over four years to system upgrades to Australia’s health system to reduce manual processing and improve claim timeframes for patients and medical providers for Medicare services, the Pharmaceutical Benefits Scheme, and other health-related payments. Remember to keep collecting and uploading useful information for Medicare compliance purposes.

Funding for My Health Record and telehealth

AU$23.8 million will be allocated over four years to My Health Record to improve integrations and provide additional funding to accredited practices for their provision of temporary telehealth services during the COVID-19 pandemic. The funding will also enable communities affected by natural disasters to access continued healthcare services via telehealth.

Practice tax compliance

There will be increased scrutiny by the Australian Taxation Office (ATO) on tax returns. Increased vigilance will also be introduced for service agreements, employment structures and contracts for registrars, patient and practitioner invoicing (which will become mandatory in the next five years), and trust structures.

In addition, Provider Digital Access (PRODA) is playing a new role in ensuring appropriate compliance with State and Federal taxes, such as income tax and payroll tax.

Mandatory Medicare eInvoicing

Practice management billing systems will need to be electronic invoicing (eInvoicing) compliant by 1 July 2022 to avoid triggering a tax audit. Check with your software provider if you’re unsure.

If you’d like more information on how these announcements impact your practice, speak to your accountant, or chat to our team.

Every cloud has a sliver lining: How the 2022 Govt budget that may impact your practice

We’ve made a note of the advice offered to practices, and the elements of the new budget that may impact practices, as follows. Until it is passed by Parliament it is worth keeping an eye out on some key incentives.

Practice Opportunities

Federal government has introduced an incentive for business with less than AU$50 million in turnover, allowing them to deduct an additional 20% of the cost incurred on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cybersecurity systems, or subscriptions to cloud-based services. For example, for every AU$100 small businesses spend on digital technologies will see them get a AU$120 tax deduction, for investments of up to $100,000 per year.

The finer details are yet to be confirmed. You cannot claim a tax deduction in this financial year, only in the new financial year until the Budget is passed by Parliament. The bottom line is the Government wants you to work smarter and not harder. So anything that can help you do more with less they are keen not only to give a tax break for the software but also for upskilling your staff. This is critical for recruitment and retention, especially when great staff are attracted to tech savvy practices. These days people expect to login from anytime from anywhere. It is becoming a new quality benchmark patients, providers and patients look for. Now would be a good time to start identifying any expenditure on your Xero,MYOB,Quickbooks or any accounting software you use.

Keep track of digital cloud software costs from websites, to new accounting or practice software, communication tools such as Google Chat and cloud based work productivity tools.Regardless of any tax break, always remember to make your decision on whether this technology is going to improve your productivity and or reduce risk and your sustainability.

Many useful software and outsourcing solutions are a great way to replace those difficult to find and or replace roles in your practice.

  • Tax deductions for COVID-19 work related tests and in particular, the PCR and rapid antigen test. Commencing 1st July 2022 workers can claim any work-related tests if not paid by their employer to attend work. It is interesting to note whether PCR tests will no longer be bulk billed. There may be opportunities for practices to offer non-bulkbilled services to corporates for their employees.
  • AU$1.3 billion, to be allocated over six years, for improving regional telecommunications, including greater mobile coverage. AU$480 million has been provided to the company responsible for running the NBN to upgrade its fixed wireless and satellite networks to improve services in regional, remote, and peri-urban Australia.
  • AU$96.8 million over four years for system upgrades to Australia’s health system, to reduce manual processing and improve claim timeframes for patients and medical providers for Medicare services, the Pharmaceuticals Benefits Scheme, and other health-related payments. Practices should remain mindful of collecting and the timely uploading of useful and meaningful information for Medicare compliance purposes.
  • AU$23.8 over four years to My Health Record to improve integrations and provide additional funding to accredited practices for their provision of temporary telehealth services during the COVID-19 pandemic, and enable communities affected by natural disasters to access continued healthcare services via telehealth.
Practice Tax Compliance
  • Increased ATO scrutinization on tax returns. Introduction of Increased vigilance encouraged for service agreements, employment structures, contracts, including for registrars, patient and practitioner invoicing which will become mandatory in the next 5 years, and trust structures
  • PRODA is playing a new role in ensuring appropriate compliance with State and Federal taxes such as income tax and payroll tax. For more information watch our video on Income Tax, Payroll Tax, Proda compliance – A Deep Dive Access the recording on demand here.Read the Q&A here and a follow up story and access the slide deck here.
  • 1st July 2022 Mandatory Medicare e-invoicing technology consideration. A key area of concern are Practice Management billing systems and ensuring they are e-invoicing compliant by 1st July 2022. Check with your PMS vendor. This will have a systemic impact on your digital and paper workflows if you want to avoid triggering an expensive and avoidable tax audit. For more information watch our video on Income Tax, Payroll Tax, Proda compliance – A Deep Dive Access the recording on demand here.Read the Q&A here and a follow up story and access the slide deck here.
  • Federal government is set to digitalise trust and beneficiary income reporting and processing as of mid-2024, which it said would give all trust tax return filers the option to lodge income tax returns electronically, increasing pre-filling and automating ATO assurance processes.

For more insights visit our blog.

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

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.

Payroll Tax Duck Hunting Season warns AMA

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!

Many of you have read my views on this matter. So I do not seek to rehash the past, except to say this is worse than I thought. I wish I was proven wrong.

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?

  1. 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 [2021] 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%. 

  1. The cat is certainly out of the bag

To the chagrin of the Commissioner, the panellists had confirmed “most practices” would be affected.

  1. 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. 

 

  1. 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.

 

  1. Fragmented care

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. 

 

  1. 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”. 

 

  1. 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.

 

  1. 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. 

 

  1. Commissioner NSW
    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.

 

  1. 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”.

Finally, Services Australia (formerly Medicare) has forced all practices by end of the financial year to move to their new PRODA web services online. 

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.  

The Medical Republic article called Proda 2 The Great Big Practice Reset covers this new problem.

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.

Seek comprehensive professional advice. Do it properly and watch out if you have the spouse’s name on the family home. 

It is not the end of the world: there is a solution.
  1. 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. 

  1. 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.

Signatures:…………………………………………….

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.

For more insights visit our blog.

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

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.

Banking on a practice tax time bomb?

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

This Employee v Contractors checklist and Medical and Health Contractors checklist may be a useful starting point in mitigating a potential blame game.

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?

However, and to be clear…

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.

“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.

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.

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..”

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. 

  1. 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.

This Employee v Contractors checklist and Medical and Health Contractors checklist may be a useful starting point in mitigating a potential blame game.

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.

  1. 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.

  1. 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.

For more insights visit our blog.

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

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.

Federal Court Tax Ruling Shock: Your spouse may no longer be able to protect your family home

Federal Court Tax Ruling Shock: Your spouse may no longer be able to protect your family home

This article was first published by the Medical Republic on 16th November 2021.

The latest Federal Tax Court case is a sobering reminder you and your spouse cannot take asset protection for granted. You are not entitled to financial security. you have to work to protect it.

Protecting the family home should always be at the forefront of one’s mind. This ruling may have serious implications for doctors or healthcare professionals and practice owners.

It is very common for people to transfer assets to a spouse (or family trust) before embarking on a “risky” activity. For example, before going into practice, becoming a partner in a medical or healthcare practice or undertaking a “risky” development.

Back in the 1990’s pharma companies would have me present nationally to packed out audiences. Often the local venue organisers would ask me why I was so popular.

I would joke that: “I teach people how to Make it, Keep it and Hide it!”

How to Make Money in healthcare, Keep it from the tax office and Hide your money from people who wanted to sue you.

The basic principles remain the same, however, there are some recent big BUT’s!

In these COVID times, healthcare professionals and their owners have been forced to undertake higher than usual risks. These include and are not limited to:

A COVID19 practice outbreak causing the practice to shut down and quarantine all staff for 14 days for a costly deep clean; and or

State or Federal government multi-million dollar plus contractor payroll or income tax audits due to recent case decisions found not in favour or practices or a sharp increase in interest rates.

A single significant adverse event could potentially destroy the livelihoods and life savings of frontline workers and their owners. Unfortunately, these new threats are real especially if you carry a lot of personal or business debt.

The family home exposed and more? 

Unwittingly, you may have placed your family home at risk when your accountant said to put the house in the spouse’s name. This latest court case sheds new light on how something that appears so simple can go so horribly wrong.

In the Commissioner of Taxation v Bosanac [2021] FCAFC 158 tax case, the court made a judgment against the taxpayer for unpaid taxes. It established holding a $4.5 million property acquired in the name of one spouse (despite being divorced) was jointly owned 50/50. The tax office could recover the debt by attacking the family home that was not in the taxpayer’s name.

Mr and Ms Bosanac had initially jointly purchased a home in 2006. They paid a $250,000 deposit with funds from a pre-existing joint loan account in their joint names and borrowed the remainder to acquire the property in Dalkeith, Australia. The property was then used as collateral to acquire other investment assets like shares.

The Full Federal Court said, “on the objective facts… the spouse Ms Bosanac held 50 per cent of the property on trust for Mr Bosanac.”

The Full Court of the Federal Court judge held that the property was jointly owned thereby “enabling the Commissioner of Taxation to make a claim on the property for unpaid taxes” incurred by Mr Bosanac.

Trying to avoid paying your debts is not a recommended strategy, however…

At one extreme, you have people who go into business, rack up large loans, then dump their businesses with little exposure to their ‘personal’ finances. They use ‘legal structures’ and ‘property transfers’ to avoid taking responsibility for their actions: leaving the small creditors and the tax office to foot the bill.

On the other end, you have people who have transferred the property to a spouse or trust well before going into business or incurring any liabilities.

They have correctly structured and financed their business, and have just been down on their luck.

You should be able to choose how much risk when you go into business or undertake a speculative investment. Appropriate risk for reward is the basis of our financial system. It promotes innovation and progress. Supporting beneficial risk-taking that is not reckless should be admired and not shunned.

On the contrary, unlimited liability could be seen to do more harm. Creditors do need to take some responsibility when offering credit.

Deliberately incurring debt without any intention of paying it, should not be condoned. Nor should you have to lose your house if you have taken the right steps due to an unforeseeable event.

The law supports this view to a scary point…

Sackville J in Prentice v Cummins (2002) 124 FCR 67 states at :

“I am prepared to assume for the purposes of this case, without deciding, that if all that is known is that a professional person:

  • transfers the bulk of his or her assets to a family member for no consideration;
  • has no creditors at the time of the transfer (or retains assets sufficient to meet all liabilities known at that time);

  • is not engaged and does not propose to engage in any hazardous financial ventures; and

  • intends to protect the transferred assets from any action brought by a client who might in the future sue for professional negligence (there being no such suit in the offing at the time of the transfer),

then s121(1) of the Bankruptcy Act does not render the transfer void against the person’s trustee in bankruptcy.”

The accountant who lost his family home

Despite Sackville’s view, in recent times this no longer appears to as clear cut.

The Federal Court decision of Turner (As Trustee of Bankrupt Estate of Wallace) v Wallace [2016] FCCA 963 (Wallace Case) suggests that transferring an asset to a spouse may not be an effective strategy in some circumstances.

Mr Wallace was an accountant, when he transferred the family home, just before he invested in a failed car detailing business, it was held he had intended to defeat creditors. Accordingly, 10 years later when the business failed his interest in the family home was deemed to be available to pay unsecured creditors.

Protecting the family home and your wealth

The recent decision may come as a surprise to many lawyers and accountants. How can you protect your home (or other assets)?

We have 14 tips that may help you that you should raise with your legal and accounting adviser.

New Mandatory Director Identification Laws

As a side note, there are new ASIC Director identification number laws. Big brother is with us. This will help data match with government agencies any entities you are a director of. Company directors can now apply for their new Director identification numbers (director ID).

Key dates are:

  • individuals who became a director on or before 31 October 2021 – must apply by 30 November 2022

  • individuals who become a director between 1 November 2021 and 4 April 2022 – must apply within 28 days of appointment, and

  • individuals who become a director from 5 April 2022 onwards – must apply before the appointment.

To apply, directors can log into ABRS online using the myGovID app and the online application is likely to be the fastest channel, with director IDs issued instantly. It is free to apply and available to directors within Australia and overseas. Applications are available by phone and by paper, for those who need them.

 

Further information about the MBR program and director IDs can be found at the Australian Business Registry Services (ABRS) website.

To obtain a better understanding click here for your Protecting the family home and your wealth checklist to find out what steps you need to take. Consult your accounting and legal advisers first. It is advisable to do this before you comply with the new Mandatory Director Identification Laws. 

For more insights visit our blog.

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

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.

New Medical Practice Payroll Tax Ruling: How you pay your contractor doctors may affect your bottom line

New Medical Practice Payroll Tax Ruling: How you pay your contractor doctors may affect your bottom line
Did you know that payroll tax applies to your medical or healthcare practice?

This article was first published by the Medical Republic on 24th of September 2021.

The latest $795,292.95 payroll tax decision is Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (3 September 2021) reveals a clearer way in which State Revenue offices makes sure to collect revenue from sources other than income taxes. If you are not aware, or if you haven’t been paying attention, continue reading to learn how this affects you.

The latest medical practice payroll tax case is the Thomas decision. It is about a general practice with three locations that has engaged contractor GP doctors who were paid 30% of the patient fees they had generated.

Dr Thomas was billing, on behalf of his doctors, patient fees and charging a flat 30% service fee on everything the doctors had billed.

Despite the contractors holding themselves out as individual sole traders, co-located on the same premise, their income was deemed to be a relevant contract and subject to payroll tax.

Sadly, Dr Thomas had lost his case. He was hit with an eye-watering payroll tax bill.

For over three decades across Australia, I have seen this common type of arrangement. Many unknowingly share similar errors. Engaging lawyers and accountants can be a grudge purchase. Alternatively, something to put into the ‘I am too busy’ or ‘it’s too hard’ basket. With the benefit of hindsight, it may be a cheaper alternative to do something now while you can.

The case is a timely warning to reexamine your agreement and practice arrangements today.

This alarming decision sets a new NSW Tribunal precedent that many other hungry State Revenue Offices will be watching with interest.

It is clear it is next to impossible for an experienced well-trained barrister to help practices comply. The rules are opaque. They seem to have more mutated interpretations than the coronavirus and we might have stumbled on a Delta variant.

This is my optimistic assessment. Being subject to an audit can be a financially debilitating and demoralising experience. They can be never-ending. Some practices I know have been waiting for up to 8 years for a multi-million decision. In one case, a practice website triggered a full-scale investigation because it said “Our Doctors” and “Our AGPAL accredited general practice”.

Your next level option is going to Court. This is rare. It takes a special kind of person(s) who is prepared to put everything on the line. You need to be pretty sure of yourself. We thank those who are for their courage. We can learn from you. We all should do our utmost to help them.

In the end, we need everyone’s help to lobby for change.

  1. I did not know payroll tax applied to my practice?

Having written extensively about medical practices and complying with payroll tax before, this decision may come as a shock to you as it has to me. 

It’s important for those who practice as an independent medical or allied health contractor to know what type of practice they work with and what that means for them and their practice.

For my regular followers, you know I do not like the ”C”contractor word. When it comes to statutory authorities, this can be like holding out a red rag to a bull. We prefer the name Tenant DoctorTM  as a more appropriate description. 

Primarily because the practice should act as the landlord providing support services and the practitioner is the tenant who purchases these services based on a percentage of the individual practitioner’s gross billing.

If you happen to work at a large group practice (circa greater than 4 to 5 full-time equivalents, it is time to take careful notice.

One day, do not be surprised if your practice charges you a higher service fee to cover any payroll tax owed. For contractors, depending on your practice size and location, this can be up to 4.95% of what you are getting paid each month.

It is time to reexamine your agreement and practice arrangements now.

  1. The new payroll tax case that will affect many practices

One day, do not be surprised if your practice charges you a higher service fee to cover any payroll tax owed. For contractors, depending on your practice size and location, this can be up to 4.95% of what you are getting paid each month.

After working with many solicitors and barristers who have front row tickets to this and other similar payroll tax matters, it seems in this decision how you pay your doctors may irrevocably get you caught up in an audit and there is no clear solution.

If upheld, this decision could mean Uber, Deliveroo, building contractors and many other industries could easily be caught. This decision appears overwhelmingly too broad, unworkable and therefore appealable in a Court if you have the deep pockets to go with it.

The various State payroll tax laws are no different to the MBS interpretation rules. Currently, there are no clear Court precedents for general or medical practices, other than possibly confusing State Tribunal decisions. In 2016, the closest more authoritative Court case appeared in allied health called the Super Optical Court case. This had begun to reveal some key practical issues for practices to review.

The latest decision leaves open a new world of avoidable uncertainty. It can only fuel a hungry State Revenue Office to go after low-hanging fruit practices that have paid little attention to the ever changing interpretation of rules. You would be naive to think a well-written contract was a silver bullet solution. In this decision, the opposite may be true.

Unchallenged, it will have a significant systemic impact on general practice compliance costs and practice morale, valuations and succession planning. In these COVID times, our community’s front line GP defence teams are once again being hit with a greater threat, but this time it is from within.

Ultimately, practices will be forced to pass these costs to patients. Those on razor thin profit margins will be forced to significantly cut costs, merge or close. It is a problem that does not appear to be going away anytime soon.

Interestingly, smaller practices may stand to benefit over large practices. I would not be surprised to see GP contractors moving to smaller practices, if larger practices do not proactively address these concerns today.

Nobody is really immune, you still have to properly protect yourself and ensure you do not unintentionally self-incriminate. It is not easy and you are not alone.

Your accountants and legal advisers are also struggling to get a grasp of this problem.

  1. How the new ruling could affect your medical or healthcare practice

The recent Thomas decision is a less authoritative Tribunal decision. It has not dissimilar arrangements, from a favourable general practice decision called Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue, from the 25th of July 2019. 

A key takeaway from those involved in this case was their failed defence in arguing the effect of bulk billing and Medicare assignment of income.

As established in the Homefront Nursing home case, when GPs bulk billed Medicare and assigned the patient responsibility to the Government and not the practice, it appears to have been a key argument demonstrating the doctors individual clinical practice was separate from the practice who was in the business of providing practice management support services for a percentage of the doctors gross fees.

Unfortunately, in the Thomas case, this argument appears to have fallen on deaf ears.

Curiously, the judge spent little time explaining his reasons for knocking back the Homefront Nursing defence.

He simply relied on the Super Optical case. He relied on the “flow of funds/payment” argument.

This established, that if there is any flow of funds between the practice and the provider or anyone associated, this will be deemed a relevant contract where obligations are imposed, such as restraints of trade. The High Court had refused to hear the matter. In other words, only local State politicians can change this ridiculous outcome.

This has caused much confusion and angst amongst professional legal and accounting circles. Many feel the jury is still out on this one. I am less inclined to think so. The possible solution remains in your practice agreements and systems.

Deemed “relevant contract”