This article was first published by the Medical Republic on the 6th of April 2021.
When a practice manager, doctor, or doctor owner says “our doctors are contractors” without realising it you may be opening a whole can of worms for your practice. Even your website that states “Our Doctors” could trigger an audit!
In this article, we cover the top 5 common errors and why it is more likely than not you will get caught. How you respond is the key. This is Part One of a two-part series. Part Two of this topic covers practical court case examples of what I commonly see practice get wrong.
With this in mind, if you are not interested in reading the devil in the detail try my latest free, national 15 to 20 minute practice self-audit Employee v Contractor v Tenant Provider tool. This is here to help you score yourself on how safe you are and what to do next.
Employee and Contractor arrangements are a highly contested area of law and tax in Australia. Both have serious legal and tax consequences. Many practices prefer non-employee arrangements due to medico-legal, Fair Work and employee on cost and recruitment and retention. I like to use a more apt description called Tenant Doctor ™ or Tenant Provider ™ arrangements.
All levels of Government are becoming desperate for money to pay for the pandemic.
Setting up and running a practice is expensive. The devil is in the detail. Understandably, some tasks may have taken a lower priority. Unfortunately, compliance is not a choice, it is a necessity. The practices that do it well reduce uncertainty and are up to 200% more profitable than the average practice.
For medical and healthcare practices, there are two main reasons why you may get caught up in a stressful and expensive Employee v Contractor, Medicare, Fair Work, Payroll Tax, ATO or Superannuation audit.
It may be due to a practice dispute over pay or when you are buying or selling your practice. Alternatively, your arrangement may be picked up by an ATO or statutory systemic digital audit possibly from different angles.
Every day we read more stories about practices where doctors or healthcare contractors are being unexpectedly investigated and/or deemed as employees with employee entitlements with PAYG, Super, payroll tax or GST obligations. We have seen contractor arrangements subject to the recent Department of Health’s pathology excessive rent investigations and Medicare Shared Debt rules.
A “gentleman’s handshake” is no longer good enough when it comes to avoiding disputes and meeting your compliance requirements. It is not a choice.
No matter how big the company or clever your lawyers and accountants are, the tax and Fair Work authorities have been aggressively pursuing small and large businesses. Fancy letterhead and titles will not save you.
Underpayment of Wages cases since 2019
1. Top-tier law firm clocks up $290k underpayments bill – Australian Financial Review (17th July 2020)
Sleep better…you can do something about it.
If you cannot explain your structures and your numbers without your accountant and lawyer in the room, you may have a problem. The role of your adviser is to help you to simply and holistically understand and explain your arrangements. Initially, you should not need them in the room to answer a simple question. This one tip can significantly help avoid drawing more attention to yourself.
The bigger problem is when your adviser cannot simply and holistically explain your arrangements to you, or you do not ask. This is not uncommon. Very rarely when I talk to practice owners can they or their advisers properly explain why they have their arrangements beyond a tax reason. This is a big warning sign.
It is understandable (and it may not be fair) that both State and Federal government agencies are going after the easy targets. Medical practices make for a good public hanging of our most morally abiding and trusted citizens.
It can send a gut-wrenching fear that you could be next! If you feel this is you, if you feel nervous every time you get your own mail, understand this is a choice. You can do something about it.
Feeling entrapped by authorities and pressured to answer the phone or email quickly is not a good idea. The opposite is true if you do not know how to respond correctly, this can only encourage more questions.
It is hard to unsay things, once you have let the cat out of the bag.
Investigators will talk to everyone from your doctors, staff, your accountant and ask to see your contracts and website. They want to see if everybody’s understanding is on the same page. It is not a happy time for anyone. It is worse than accreditation because you get to foot the entire bill.
Start now (trust me, it is never a good time) and be clear on your own arrangements. Do not wait for an audit.
What are regulators really looking for?!
Today, the ATO and their friends are looking at the overall “character” of your practice arrangements. To many advisers’ surprise, they take a holistic view. No single contract, system or well-intended advice in isolation is a panacea to your concerns.
The missing pieces of the jigsaw puzzle must be complete. A simple example is a practice being investigated due to a contract dispute. They are facing a million-dollar payroll tax bill. The official reason given is their website said “Our Doctors” and they are an “AGPAL accredited general practice”. This means nearly every practice in Australia may have the same problem!
In Australia, I have reviewed over 1,200 practices over three decades. I am yet to see a practice get it right. I am yet to give $500 for my have you got your practice arrangements right.
With this in mind, our latest free, national 15 to 20 minute practice self-audit Employee v Contractor v Tenant Provider tool is here to help you score yourself on how safe you are and what to do next.
We hope you will find this as a useful way of protecting your practice.
This comprehensive checklist is based on many decades of experience in disputes, working with lawyers, the ATO on court cases and new laws.
It will walk you through the key areas of your practice that you may need to tidy up. They range from your website, accounting and administrative records, software systems, through to your legal agreements.
It will provide an automated rating and summary of key issues to help you start the conversation with your team and your advisers.
Do not be afraid, you may find all you have to do is make a few small cost-effective tweaks such as fix your website and stationery.
In the end, it is cheaper than an expensive government audit or an embarrassing dispute with a disgruntled provider. Providers can also use and share this tool to help the practice location they work at.
The five biggest common practice errors!
The five biggest errors we see practices make are:
1. Not having an up-to-date signed agreement you may be accused of fraud. Lawyers have advised me that without a signed agreement such as a tenant doctor arrangement where you are collecting money on their behalf it may be a criminal offence to deduct money from a doctor’s billings without consent. Due to COVID-19, if you are thinking about increasing the practice percentage for a jab, make sure you have this in writing!
2. Employee-like contract terms. Off-the-shelf templates are only a good idea if your lawyer and accountant is fully aware of your structure and arrangements. Often we see self incriminating contractor agreement terms that state:
- Restraint of trade clauses
- Restrictions to delegate work
- Money not held in trust
- Practices insisting that complaints are handled by the practice
- Guaranteed minimum hourly (top-up) rate e.g. $50 per hour or 50% of gross billings whichever is higher.
These types of terms or language may deem your contractor as an employee.
3. Website referring to “Our doctors” or “Our Team” and/or “our accredited general practice” listing providers who are not employees or subcontractors. If they are tenant doctors/providers they should be listed and treated like tenants in a Westfield shopping centre.
4. Using the same single Xero, MYOB or accounting ledger and bank account to record medical fees and paying administrative staff. Not using systems like the Doctors Pay Calculator to clearly separate (practice service entity) landlord and (doctor/provider) tenant activities.
5. Piecemeal professional advice. Advisers only give advice in their area of expertise. Sometimes they fail to advise or be aware of the shortcomings of their advice. A big mistake is not having their advice in writing. Start with a holistic approach that covers all areas such as your business structure, income tax, payroll tax, Fair Work, commercial or medico-legal issues. It is not uncommon to find your local or specialist medical accountant is not aware of many of these areas and are simply outside their depth.
Do nothing is not an option – start asking the right questions
To maintain the status quo is no longer an option. For real progress, you must seek it out. Start asking for a helicopter view. When you do not ask, the ‘we did not tell you defence’ is common. It puts you in a difficult position. The checklist helps you start asking the right questions which are more important than the right answer.
Finding the right adviser
Relying on well-intended free advice is a suboptimal solution
Nobody likes paying for legal or accounting advice. Let’s face it, paying for advice is a grudge purchase is like going to the dentist.
What makes this worse is it is intangible; you cannot see the immediate benefit. This makes it harder (next to impossible) to justify.
People are happier to pay for a cure than to prevent a problem. Sounds familiar? Even if it is free, is a 20-minute chat that can save your livelihood worth anything to you? For many, it is simply not a priority when every day you are saving a person’s life. It never seems to be a good time. For others, it is in the ‘too hard’ basket.
For the more profitable high performing practices we see, they make it an annual strategic objective to review. It is affordable and doable. It increases practice certainty for them. Many fail to realise this.
Needless to say, being an honest and ethical fool is not a defence.
Like vaccine hesitancy, you need to get over it. Ultimately, it is your responsibility and not your accountant or lawyer. Advisers do have a role and have bills to pay. Unfortunately, there is no Medicare equivalent for advisers. The good news is that good quality advice does exist and it is affordable.
Facebook network groups are a popular way to get free advice. But in the long run, they may do more harm than good. They lack context unless you like pouring all your confidential information and secrets on the net. You cannot rely on the advice you have received if it is not professionally experienced or qualified. Like BBQ advice, you may end up getting burned.
Off-the-shelf legally prepared agreements are a better start. However, they may suffer a similar fate. Many are implemented on a piecemeal basis. I have seen with a recent client it can make your situation systematically worse especially if everyone has signed off on a dodgy agreement.
Does my accountant and lawyer have the right experience?
Any accounting and law firm can simply state they “specialise” in medical practices.
In the end, all care but no responsibility disclaimers do not cut it. You really should test out their gloss credentials. There is a simple way. They should demonstrate they do more than a lot of doctor tax returns and not just sell you insurance and loan products that you may not need.
An experienced qualified registered accountant and legal adviser should be at least 10 years full time in your area of work. The fact the local accountant does the tax work for Elon Musk is a warning sign not a pitch.
We only specialise in medical and healthcare for a reason. Healthcare has become too complex. Being a jack of trades and a master of none is not a healthy approach. Advisers should be able to quickly identify and solve your problem.
To find out how medically specialised they are, find out if they are in the medical or health media and for how long? Ask them do they know what a SIP or a PIP, SWPE or outpatient clinic is? If they can’t answer this, then seek a second opinion with someone who can. Some of us have been AGPAL accreditation surveyors for many years. We even know what a bowie dick test is. They do exist if you look.
Verbal professional advice
Receiving professional verbal advice is only as good as the paper it is written on so think again about how you engage on this issue. Like the courts, start with a holistic approach. Most importantly make sure you receive and act on up to date advice at least every two years. The newspapers of business medical journals like The Medical Republic and Australian Doctor are a useful starting point.
Procrastination and denial
Setting a time and a budget aside to seek appropriate and timely advice now will make your accountants and legal advisers’ invoice look cheap, should you get hit with an expensive dispute. As a minimum, contact them by email for some advice.
No, you do not need a Rolls Royce to deliver pizza’s but it really depends on how much you value your practice. It is important to eat well and sleep well. Play the long game. Most practices find the certainty will provide a silver lining. You will become more profitable and sustainable by doing the right thing the right way.
Will I get caught?!
If you get caught is a choice. Rightfully, some senior doctors would say to me “David, we have never had a problem in 30 years so I am not too concerned”. Historically the chances of getting caught have been low.
However, the new digital data matching and sharing era across government departments is a new game-changer. For the Government, it is now cheaper and easier.
We are too ethical to be doing the wrong thing!
Often ego and ignorance can be the real enemy.
It would be most unwise to rely on being a medical practice because you save lives at the front line. Rightly or wrongly, it may give you very little if any special immunity from prosecution. Playing the devil’s advocate (and I come from a medical family) I can only imagine what someone in the Government may be thinking.
The average punter may think, doctors are highly intelligent, resourceful and ethical people. They already get enough special treatment. They must be making a mint on the vaccine rollout and hiding it with their clever accountant! They should know better. Right?! This will be a vote winner!
I know this may be hard to swallow. For some, despite the COVID vaccine rollout, you may have to walk and chew gum on this issue.
If you are at this point you may be thinking it is a good time to sell out or sell down your practice while you are ahead. If so, read my article How much is my practice worth?
Tax agent profiling
Another new trend from the Tax Office is profiling tax agents and their clients. If your low priced malleable tax agent has been accused of systematically not doing a client’s books correctly by giving you deductions that the competition will not, this may potentially expose you if you fit that profile.
Robo audits are real!
Together with new tax rules, the ATO can paint a picture of your affairs from many different data sources.
Plan for a please-explain, especially when your tax return income does not match up to your lifestyle expenses. These may include your house (they know how to use Google Maps and realestate.com) or your when you go to buy a luxury car or when your Maserati appears on Facebook.
Data sharing across State and Federal agencies has now arrived. Examples include the new global and local Government Digital Business Plan. The new and controversial mandatory E-invoicing laws will affect how you issue tax invoices to your providers and patients. The ATO data sharing (using the myGovID and RAM relationship authority), Single Touch Payroll and Company Director Identification – Director Identification Number (DIN) requirements are linking up all your related entities together. This will help identify excessive remuneration or profit-sharing to lower tax-paying family members or entities such as “bucket companies”.
With a potentially debilitating domino effect, it will not take much to trigger an investigation.
We all live in an unprecedented permanent digital audit trail. No longer can you afford to re-invent the past. It is time to tighten the screws on any loose arrangements.
Are you likely to face a practice dispute?
Unhappy people may dob you in!
I recommend monitoring your staff morale every day. We use an inexpensive tool called Officevibe. It only takes one disgruntled doctor to trigger a bigger problem. We have seen a provider get investigated. Their accountant had triggered an expensive million dollar payroll tax investigation with the practice going back 5 years.
Practice disputes could trigger a cascade of problems. This can be over fair pay or buying or selling a practice.
Gaslighting: Charging providers a higher service or management fee due to COVID-19
In general practice, the low balling of the General Practice Medicare COVID-19 Immunisation Rebate has thrown the cat amongst the pigeons for owners, providers and their staff. Based on the current COVID19 Medicare rebate it will be difficult for a doctor to get full informed consent. The only way for the Government to get this up is to exploit the goodwill of doctors and practice owners.
Practices need to combat the medico-legal risk of cutting corners, burning out staff or going broke.
The money may become a virulent breeding ground to trigger a major contractual dispute within the practice and amongst providers.
To remain viable, practices are being forced to charge higher service fees up to 50% of gross billings to their GP providers. The Federal Health Minister’s threats not to charge vaccinated related fees for the vaccine are concerning.
Many practices who are billing on behalf of their providers may not be aware, to lawfully deduct this or any amount they will need an agreement in writing or run the risk of being criminally accused of systemic theft.
This will add more pressure on practices to do things properly.
How can you immunise your practice from further investigations?
Firstly do not use the “Contractor” word when trying to describe how you engage your doctors and providers. Most practices have what can be described as a Landlord and Tenant relationship. They and sometimes their advisers unwittingly do not realise it. The characterisation of your relationship is critical in dodging an unnecessary audit.
Like a red rag to a bull, the Contractor word only raises more questions than it answers. We prefer our clients to use the word Tenant Doctor ™ or Tenant Provider ™ and not even the words Independent Contractor.
Language is important. Using commonly used words in front of an investigator or staff tends to imply something else that you may not have intended. This could have serious unintended consequences. This is especially true from a legal and taxation point of view.
Try and conduct your affairs as if you will get audited. It may be due to a contractor pay dispute they or their accountant may report you or when you are trying to sell part or all of your practice.
Alternatively, there are the new mandatory tax or fair work rules that are automating audits at an unprecedented rate, that may flag an instant and expensive multi-agency robo debt like desk audit(s).
From a legal and tax compliance perspective…
For those who may feel I may be scaremongering, the following cases and tax initiatives go further to explain what the Government law enforcers are looking for. You decide for yourself.
There is a clear convergence and harmonisation of employment, contractors laws and investigations. Our biggest and most powerful law firms in the country, even they are getting it surprisingly wrong. Here is proof the devil is in the detail.
1. Make sure you have the correct structures and systems that back up your contracts the correct business model
Medical and allied health industry businesses often fall within one of two types of business models:
a. An employee or contractor model. In this structure, a practice entity carries on the medical services business and contracts with its patients. The practice entity then separately engages either employees or contractors (or both) to provide the services the practice entity needs to serve its patients.
b. A service entity model. In this structure, practitioners carry on their own business and contract with patients directly. The practitioners pay a fee to a services entity for the provision of administration and other support services, and often the right to occupy the premises to carry on their business.
The two models have very different PAYG withholding, superannuation and payroll tax consequences.
I have been working with the barristers and QC’s on a number of recently high profiled cases that affect medical and healthcare practices. The legal opinion is clear. Your entire practice ecosystem needs to be compliant. As the Super Optical payroll tax case has shown, charging consumables and guaranteed minimums with rosters from the wrong entity can attract attention.
Substance over form matters. A holistic top down approach and not a just a bottom up piecemeal approach makes a difference. A well written service agreement is not good enough. You have to prove you are doing what your service agreement says is what you are doing. Avoid taking short cuts.
It is a delicate ecosystem of legal, tax and commercial your practice needs to navigate through. No problem exists mutually exclusive of another. These issues are subtle and more complex than they first appear.
When you cannot explain your arrangements without your accountant or lawyer in the room, you instantly make yourself an easy target.
Healthcare practices with fragmented structures, systems and poor documentation are easier to prosecute.
Practices need to make sure of four things:
1. Clear business model (is it a true service trust arrangement).
2. Legal documentation and compliance
3. Financial accounting and administrative systems
4. What do your staff and doctors understand their arrangements to be.
It is common to see practice invoicing does not match banking, accounting and legal documentation. This immediately increases any income tax, GST, superannuation and payroll tax risk.
The auditors look for substance over form. To the contrary they may unnecessarily compromise a practice in an audit.
In these examples since the early 1990’s, used by small to large corporate practices, the most popular arrangement is more appropriately described as a tenant doctor ™ arrangement .
The practice acts as a landlord and the doctor a tenant. They have a service agreement akin to a rental contract for support services e.g. premises, nurse, rent and practice systems.
The practice agrees to charge a doctor GST based on a percentage of the doctors gross billings for the week or month.
For tenant doctors, many practice accountants are not aware of the need to set up a seperate billing trust or medical fee clearing account arrangements. The main reason this is not usually part of processing your practice’s annual financial statements and tax returns. Furthermore if you do not ask, they will not tell. Then again you may reasonably ask how are you supposed to know if they do not.
Too many unnecessarily complicated and time consuming daily journal entries and reconciliations.
A common example is when complicated monthly or journal entries to remove tenant doctor income or payments from the practice ledger.
My key concern is why does a practice have so many complicated monthly journal entries in the practice entity to do the weekly or monthly pay?!
Many practices unwittingly often do these journal entries to reverse out these transactions each month or year to make them look like tenant doctors. This is certainly not a good look.
This would be analogous to Westfield collecting and banking Woolworths money on their own books or ledger?
I used to audit shopping centres and trust accounts like real estate, solicitors and accountants use. This is certainly not how it works in the real world.
To be commercial, there needs to be a clear separation between provider and practice income activities including a separate trust bank account. Recognising it is the practitioners money and not the practices is a good starting point.
Be wary of new service fee calculation software that automatically compounds your problems
Before implementing a new automate spreadsheet in the cloud make sure your accountant approves in writing. No matter how attractive automation may look the old adage rubbish in and rubbish out holds true.
Finding a more efficient way to process your doctors pays is a good idea. However you need to be careful. Remember Software companies are not your accountants. They do not sign off on your tax returns. Many accountants are not aware of this area. Worse if you are fee sensitive it is overlooked because it is not part of your routine tax return compliance.
For a new client, I recently reviewed a new automated practice service fee calculating software program. It systemically and erroneously recorded all doctor income and payments into one chart of accounts. To compound the problem their new fully integrated software automated journal entries had made it very complicated. It was next to impossible to reconcile for the time poor practice manager.
Implementing a doctors pay solution requires a little more careful professional legal and accounting thought than a piece of software. If you want to avoid an end of year bill shock ask your accountant first.
Using one bank account and ledger to track and pay a doctor
This is another common example. Despite a radiology practice arguing they had a tenant doctor arrangement in the Winday payroll tax case they were found to be liable for payroll tax.
This happens when a service entity incorrectly reports on their financial statements and tax returns how they record doctors medical fees.
Mistakenly they record all of the fees they collect on behalf of their medical practitioners in the service entity’s profit and loss statement under the heading “Medical Fee or Patient Fees”. Furthermore they continue to report all of the payments remitted to the medical practitioners as a “Contractor” expense in the same entity ledger and bank account.
Recent legal cases including the Uraidla Physio contractor case have clearly established it is not enough to have a well-written contract. It is important to show your practice can walk the talk and not be taken out of context. A good example is the use and implementation of the Doctors Pay Calculator to overcome the above systemic problems. Now is a good time to review your agreements, policies, procedures and systems.
2. High Profiled Fair Work Under Payment of Wages Investigations
Unprecedented high profiled under-payment of wages and admissions by Australia’s top law firms and their clients such as the ABC, Woolworths and Bunnings is proving even the big guys and their clients are finding it difficult to get it right. Since 1st July we have seen unprecedented data sharing technology and coincidentally we have seen successful systemic successful lawsuits by the State and Federal Government for the underpayment of wages.
Even the lawyers who are advising them are getting it wrong. They include some of Australia’s biggest medical, law and accounting firms.
Underpayment of Wages cases since 2019
7. Top-tier law firm clocks up $290k underpayments bill – Australian Financial Review (17th July 2020)
3. The Australian Taxation Office (ATO)
Commencing 1st July 2021 I have written extensively on the new ATO profit allocation rules that affect doctors and healthcare practices with a personal services business or who have a service trust or entity that income split to family members or entities that pay a lower marginal rate of tax.
Recent successful employee v contractor court cases and investigations reveal the devil is in the detail. It takes more than just a well written legal agreement. You need to be across all of it and not just parts of your practice arrangements.
It would be naive to assume that a single well written and expensive practice legal agreement from a reputable law firm will be the silver bullet that saves you. Recent Australian court cases reveal the contrary is true.
For Part Two of this article practical examples and case law of common mistakes practices make click here.
About me: David Dahm BA (Acc.), CA., FCPA, CTA, FFin, CPM, FAAPM, FAIM, FGLF.
Registered Tax Agent, Former AGPAL Surveyor 10 years of service
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 use and discussion only.
If you subscribe to our newsalert, you should receive automatic notification of any material updates we become aware of.