Path labs are demanding 50% rent cuts

Major pathology companies are attempting to halve their rental payments to GP practices across the country, a move that threatens to financially cripple already struggling clinics at a time of critical need.

Many Australian GP clinics depend on rental payments from co-located pathology centres to remain viable, and the revenue source has become increasingly important during the COVID-19 crisis, which has cut their patient numbers and left many on the brink of collapse.

David Dahm was interviewed by the Guardian for this story Pathology giants seek 50% rent reduction from hard-pressed Australian GPs amid coronavirus crisis reported in April 2020

At Health and Life, our recommendation is not to automatically agree to a rent reduction as the current pathology downturn of income is temporary. 

This is a template response you may consider when responding to a request. So far none of our clients have reported that they have had to reduce their rent.

After September 2020 practice will be able to renegotiate leases now is a good time to assess what the practice requirements are. Seek appropriate accounting and legal advice now. 

They had reported that some of Australia’s biggest pathology companies began writing to GP clinics in the past week requesting they accept a 50% reduction in rent.

GPs say they feel pressured to accept or face an early termination of their leases, a problem compounded by the federal government’s decision to block new pathology services from replacing any that close down in the next six months of the COVID-19 crisis.

The situation has left GPs facing an invidious choice: accept the 50% rent reduction or risk losing their tenant and the entirety of their rent for the next six months.

The Australian General Practitioners Alliance, the peak body for GP-owned clinics, says GPs depend on pathology rents to survive, particularly at a time when COVID-19 has caused significant losses in revenue.

“In some cases, this may make the difference between general practices remaining open or closing,” AGPA executive officer Richard Hart said.

Pathology companies have suffered their own downturn due to COVID-19, as GP visits drop and demand for testing falls in parallel.

Both GP clinics and pathology services – which provide COVID-19 testing – form a crucial part of the response to the pandemic.

Letters from Laverty Pathology and Western Diagnostics Pathology, owned by pathology giant Healius, have been sent to clinics across the country.

“It is our strong preference to keep as many Approved Collection Centres open and trading as possible,” one letter said.

“To facilitate this, we are requesting that you agree to an arrangement that provides us temporary rent relief.

“Accordingly, we are requesting a reduction of 50% of the current monthly rent under our sublease.

“This proposed rent relief would be for an initial three-month period from 1 April 2020 to 30 June 2020, which will continue on an ongoing monthly basis until the parties further review the arrangement at the end of the period.”

Healius confirmed that its pathology providers had been reaching out to landlords, requesting their assistance with rental costs during a period when they are seeing a significant decrease in pathology testing volumes.

“Most of these requests have been met with a willingness to assist and discussions have been, and are continuing to, take place to agree a mutually acceptable outcome,” a spokesperson said.

David Dahm, an accounting and taxation adviser to GPs based in Adelaide, estimates that pathology labs bring in around $15,000 to $25,000 per annum per full-time GP.

With psychologists and other allied health now working from home due to COVID-19, GPs have already lost substantial rental payments.

At the same time, GPs are dealing with dwindling numbers of face-to-face patients, and technical problems with the rapid transition to telehealth.

GP clinics were gazing into a “funding black hole”, he said.

“GPs live off [the government’s Practice Incentives Program] and pathology rent,” he said.

Dahm said pathology labs closing or cutting rent would rob GPs of “what fundamentally keeps the doors open – that safety net”.

“What I’m saying to people is, firstly, you don’t have to accept what the pathology labs say to you. Get some professional advice. There are other ways around this particular problem and don’t just knee-jerk and react.”

This threat of breaking the lease was fully articulated in one letter to a GP, which said the proposed rent relief “is the most viable way for us to keep our Approved Collection Centres operating effectively without having to potentially close them pursuant to early termination rights in our sublease”.

A federal Department of Health spokesperson confirmed it was pausing new pathology leases – effectively stopping GPs from finding new tenants – as “part of Australia’s response to COVID-19”.

The department said it was “important that pathology providers remain viable and continue to prioritise and increase their capacity to test for COVID-19”.

Prime Minister Scott Morrison provided further support for this action on Wednesday when he announced that landlords would have to reduce rent for commercial businesses proportional to their loss in revenue.

Should you have any concerns contact us here to oragnise a time to for a confidential chat.

The Medical Republic has released a survey to its GP readership to find out more about rent reductions (take the survey here). So far, 81 GPs have responded. Here are the results:

The Economic Stimulus Package: Instant asset write-off threshold increase explained

A key part of the government’s economic response to the coronavirus is to support business investment and cashflow by increasing the instant asset write off threshold and eligibility rules.

So what is the instant asset write-off (IAW) and how can it help your business?

Claiming an immediate deduction

Put simply, the IAW provisions allow your business to claim an immediate tax deduction for the full cost of a business asset you buy. Normal depreciation requires you to deduct the cost against your business profits over several tax years.

Under the new rules, you can claim a tax deduction in the same financial year you purchase new or second-hand plant and equipment costing under $150,000.

The IAW is not a cash refund. You don’t get the amount you spend back from the ATO, but instead get the advantage of bringing forward a tax deduction you would normally receive over several tax years.

A simple example is a plumber who buys a new $16,000 trailer for his company. Using the IAW he can claim an immediate tax deduction of $16,000, which in turn reduces his business profit so he pays less tax.

Rules for the IAW

To claim the IAW, the total cost of the asset must be under the relevant threshold. This includes the cost of having the asset installed and ready for use.

Each asset must be under the threshold, but there’s no limit to the total amount your business can claim.

If your business is registered for GST, the IAW threshold excludes GST. Otherwise, the threshold includes GST.

From 12 March 2020, businesses with an aggregate turnover of up to $500 million are eligible for the IAW, up from $50 million previously.

Eligible assets for the IAW

What you can purchase ranges from furniture through to computers and IT equipment, that may be required to enable staff to work remotely.

Industry specific kit such as new tools for tradies, or POS devices and security systems for a retail store also meet the rules.

Although the IAW is generous, assets such as horticultural plants and in house software are ineligible.

Watch out for the traps

To claim the deduction, your new asset must be fully installed and ready for use before the end of the financial year in which you lodge your claim.

If you are a sole trader, you also need to apportion any private use. For example, if you purchase a new car and use it for business purposes 70 per cent of the time, you can only claim 70 per cent of the cost.

You are not permitted to reduce the asset’s price with a trade-in or personal use apportionment to get under the current $150,000 threshold. For example, if your new equipment costs $210,000 and business use is 70 per cent (leaving a claimable amount of $147,000), you can’t claim the IAW as the original cost is still over the threshold.

If your business is structured as a partnership, it’s important to remember the partnership owns the asset – not the individual partners – so there’s no double-dipping. If a partner buys the asset in their own name and doesn’t qualify as a small business taxpayer personally, they can’t claim the write-off.

Using simple depreciation

If your business buys an asset valued over the IAW threshold, you can’t claim the immediate deduction. You can, however, allocate it to your general small business pool and use the simplified depreciation rules.

The general depreciation rules apply if you are ineligible or choose not to use the simplified rules, or if the ATO classes your business as medium-sized.

Using a general small business pool allows you to combine the business portion of higher cost assets and claim a 15 per cent deduction in the financial year you start using them, then 30 per cent each year after that.

Accelerated depreciation initiative

As part of the government’s coronavirus response, medium businesses with a turnover of less than $500 million can use accelerated depreciation rules to deduct 50 per cent of the cost of an eligible asset on installation. Normal depreciation rules apply to the balance of the asset’s cost.

In these unprecedented times, we are to assist you. Please don’t hesitate to give us a call if you have any questions about the instant asset write off or any aspect of the broader stimulus package.

Six vital steps to take if your practice is in COVID-19 distress

Practice management expert and accountant David Dahm has released a comprehensive and practical 101 survival guide for practice owners HERE

Since the start of the COVID-19 crisis, many practices have been buried in a rolling series of problems which are starting to culminate in a fight for financial survival.

Dahm says the most important starting point for any practice in distress and running from crisis to crisis, is to step back, take a deep breath and realise they are going to need a well-thought-out plan. “The bottom line do not make any big decisions without getting specific and written advice”, he told The Medical Republic.

“Now is the time to seek professional advice from your accountant. Remember you cannot unsay things to your staff e.g. we have to let go of our nurses or staff. There are many things you can do before this is a real or necessary option”.

Getting your initial messaging to staff right right is critical says Dahm. To do that managers and owners are going to need to ask the right questions and not just get the right answers, he said.

Dahm told The Medical Republic many doctors and practice owners have been not able to step back, given the speed and the nature of the crisis. But if a practice is going to survive, then formulating a plan is what needs to happen.

“Some may feel that their only option is to exit altogether. This is a last resort option. The first thing you must do is speak to your accountant and healthcare practice adviser who has experience with these matters”, he said.

“We do not recommend this as an initial response, no matter how you feel. Your practice is viable if you have the right attitude and approach.”

To help practices understand their context, Dahm has put together a 170-page survival 101 guide, which is available HERE. Due to the challenging environment, Dahm is updating the guide daily, and he expects some updates to be directed by feedback he gets on the guide.

The guide, called Kicking COVID-19: General Practice Continuity Checklist Guide, breaks down the key things a practice will need to do to assess its situation and plan for survival, or in some cases, exit. The guide is mostly in an infographic format for ease of communication.

The guide outlines the following six steps in detail and provides pointers to important resources so practices can either start implementing a plan themselves, or with professional help:

  1. Early leadership and team communication – get in control
  2. Establish a practice crisis plan – among other things, this will give your team reference points and purpose to keep them calm and thinking through the process in a better way
  3. Finance – don’t go broke! Call your accountant first and understand properly the financial settings you will be working within
  4. Process – automate and outsource
  5. Customer focus – what you should be telling your doctors and your patients
  6. Learning and growth – get daily feedback and use it

Dahm is also planning a free webinar focusing on the guide when he will discuss feedback on the guide, which he is encouraging all practice owners and managers who read it to provide.

A link to register for the guide is HERE.