Edit: Breaking news: Tenant Doctors/Contractors, set up your own website now. New ATO tax and High Court ruling confirmed on 24th November 2022 read on and watch the video below for more information.

 

I recently received a call from a tired senior GP. He asked,

“Surely, David, if I sell my practice, this will solve all my payroll tax problems? I no longer have the money, time, or energy to fix it.”

The simple answer is probably not, and here’s why.

For those of you who are not familiar, if you are contracting doctors through your practice but treating them with similar expectations to an employee, your practice may be subject to payroll tax rulings. Please see our earlier blogs for further details.

The AMA has recently put a national spotlight on the extensive payroll tax costs to your medical practice. This article is amongst the widespread publicity surrounding payroll tax, which then begs the question: why would anyone want to buy a medical or healthcare practice? 

People are becoming more aware of the problem. This is in part thanks to medical professionals doing their “due diligence” through social media. So, do not be surprised if your doctors are not aware. Specialist and mainstream media will only compound these concerns and further pique the tax office’s interest.

It was recently reported in the national media by another national accounting firm that the majority of GP practices with more than 3 Full Time Equivalents (FTE’s) may have a problem. We have gone to some lengths to avoid such inflammatory comments. Although it may have been well-intended, their thoughts on the matter are not assisting in providing GP practices the reassurances that are sought .

This instantly creates a buyers’ and tax auditors’ market.

Perception is reality. 

If you do not protect yourself from a significant contingency risk, such as payroll tax or a major lawsuit, all bets are off. No matter how attractive you may look, one cannot sell tickets to the seats on the Titanic if they perceive it as a significant risk.

Show you are bomb proof! 

Many practice owners are clinging to an avoidable ticking time bomb.

Owners have to prove they are taking the right steps in the right direction. In a heartbeat you may risk losing a doctor, or a buyer, or trigger a tax audit. You need more lifeboats and more attention to detail. 

By simply not answering their questions, it is easy to put somebody off or trigger an uncomfortable enquiry. Grimacing in saying, “My accountant and lawyer are on it,” provides little comfort. Buyers, tax auditors and potential doctors will want to see proof, not just promises. 

In recent years, we have seen many practices with fewer than 8 FTE’s faced with retrospective payroll tax liabilities ranging from $2 to $20 million. In addition, their locations have triggered multiple distressing individual ‘contractor’ income tax audits. 

This means the practice entity may become difficult to sell as a going concern. The buyer’s advisers would tell the buyer to walk away – or else they may risk being sued for providing the buyer with negligent advice.

According to the evidence even the Big Four accounting and legal firms appear to be getting it wrong.  Payroll tax and income tax compliance would not be an issue if they got it right in the first place. So the next question is: where do you start? Is there a better way?

Looking for your payroll and income tax gaps can be like searching for a blot clot

Becoming payroll and income tax compliant isn’t a simple problem to solve – you have to know exactly where to look. For example, simple mistakes such as  if you don’t have the right ABN on your bank account, could trigger an audit or dispute.  

The big corporations are also struggling with this issue. Otherwise we would not feel the need to write this article if off-the-shelf advice was yet available. It does not seem to matter how big or specialised the corporate  medical and healthcare practices are, or who their advisers are. So do not feel bad if you have not gotten it right yet. 

The following are examples of common mistakes made by practices and their legal and accounting advisors. 

The following are examples of common mistakes made by practices and their legal and accounting advisors. Clicking on this free two-page cheat sheet, self-assessment practice checklist, and provider checklist should give you a quick leg up (pardon the pun) on a complex issue.

The “Payroll and Income Tax Tips and Tricks video” provides a deeper context and real-life examples. 

The video explainer uses live medical practice investigation examples. There are evidence-based examples of what not to do and what to do. 

Amongst a sea of possibly conflicting advice, we want you to feel confident in addressing any concerns you may have. There are four popular myths we hear.  For this reason, if you watch the video above, you will notice we have dispelled many of the following urban myths. 

Myth #1: Independent contractors are not at risk!

Independent contractors poor bookkeeping and DIY tax returns have been known to trigger a practice payroll tax audit. It is a two-way street. GP’s from the same practice have secured a payroll tax exemption while others have not.

Social media tax commentators have suggested  contractors may be denied a management fee tax deduction simply because you did not have an independent website away from the practice? In fact, under the latest the Personal Service Income rules (para 106 and example 22), a recent High Court ruling deemed a contractor as not a “genuine business” because it could not prove they provide their services to the public. A LinkedIn profile was not enough.

Again, please see our video for more information. We have raised this issue on many times. Failure to do so may end your contractor arrangements all for the wrong reason. 

Your service agreements, service fee calculations, accounting and reporting systems for both the practice and the provider must walk the talk. Cost-effective technology and services does exist that can make this happen. 

Successful prosecutions are on the rise because laws are getting clearer and regulators are sharing new technology that makes it easier to match and share data.  

 

“The ATO’s new data sharing laws and tools will instantly pick up any reporting difference e.g. income banked using the incorrect ABN via your provider PRODA accounts” 

 

Note from the 1st July 2022 Services Australia (formerly Medicare) and Xero are e-invoicing compliant according to the ATO’s website

This means they can monitor all earnings in real time. They promise that if you e-invoice register, the government agency will pay you faster. Whether you register or not, the ATO has access to enough information to calculate your earnings. We anticipate that it will function similarly to how bank interest and dividends are automatically reported to the ATO on pre-fill tax returns. 

You can no longer run or hide. Only successfully audit tested legal agreements and accounting systems will work.

Our primary concern is that failure to comply with the personal services income rules may result in additional costly audit activity. Check with your accountant to see if they can provide you with tax audit insurance.

 

Myth #2: Doctors will leave practices if we talk about their contracts

The reality is, doctors are actually fearful that their practices have not set up their contracts properly.  This is a compounding issue for recruitment, retention and succession planning for both doctors and practices. 

Potential owners and contract doctors do not want to work at practices where they might attract avoidable and expensive payroll, income tax, and Medicare audits. 

Practice owners have to show that they are on top of the problem to doctors, buyers, Medicare, and the tax office in ways that go beyond a well-written service agreement from a reputable law firm.

They need, and should demand, to see more evidence of accounting and bookkeeping systems, including the use of correct websites and stationery, with staff on the same page.

It is not a choice; it is the law if you are a practice owner or contractor. Ignorance of the law is not an excuse, any more than being an honest fool who blissfully ignores the media and AMA warnings until there is a problem, which can be too little too late.

Doing nothing potentially sets everyone up for a mutually assured destruction of their finances.

Myth #3: All I need is a well-written agreement. 

Another common myth is that a well-written legal service agreement will save you. As raised above, you cannot simply draw a smile on the Mona Lisa’s face and then call it the Mona Lisa! You have to walk the talk; this cannot be solely achieved by your advisers.

Incidentally, proactive practices have a competitive edge. This issue is set to cause a flood of disputes between practices and their “contractors” in the next 18 months. I object to the word contractor and prefer the term Tenant-DoctorTM, as “contractor” mischaracterises) the fundamental relationship.

It is the primary reason why many practices are in trouble. Many commercial and employment lawyers are not tax lawyers and unfortunately, may have not taken tax and other statutory obligations into account when drafting their agreements.

Tax lawyers are like great physicians – hard and expensive to find, but they are the ones you should consult for this type of task.

It is about the big picture. In order to meet your payroll and tax obligations, you need to look at all of your arrangements with both a top-down and a bottom-up view. Only medically experienced expert lawyers and accountants will be able to guide you through this. 

There are many moving parts that must line up. To be valid, your agreements have to reflect in precise terms: your business model, current laws, practice structure, financial statements, accounting, bookkeeping, and BAS tax reporting, as well as what your website, stationery, staff manuals, office staff, and public think.

To consider: Are your legal and tax advisers aware of significant changes to tax and contract law in the last 2 years?

Seven significant legal and taxation regulations affecting medical and health care practices have  been issued in the last two years. Have your agreements taken these and the other 16 laws in the payroll and income tax video into account? 

You have to review the entire ecosystem. The smile (aka. service agreement) is only one small part of Mona Lisa’s painting if you are seeking the full value of your practice. 

Myth #4: It can’t be fixed without changing the laws

The good news is that your payroll and income tax issues can be fixed if you stick to the existing rules like those who are already compliant. There are many practices that have achieved a legally approved payroll tax exemption. There is nothing to fear if you educate yourself and ask the right questions. The video demonstrates what to do and what not to do. 

Poor political optics: Doctors expecting a *special* payroll tax law simply due to poor advice is wishful thinking…

It is a little naive to delay any further action in the hope the politicians will give doctors a special exemption. If you look above, it is clear there is a significant budget deficit. It appears the governments are no more prepared to pay higher medicare fees, than they are to give doctors a tax break. 

No matter how unfair you think something is, it is bad politics to ask for a special exemption on something so complicated that even your lawyer and accountant are still having trouble with it. If they did not, we would not be writing about it.

In this current economic environment,  it would take a very brave politician to publicly argue with struggling voters that well-heeled, intelligent doctors who have access to smart advisors should get a special tax break.

Like COVID-19, tax audits can be infectious

By law, payroll tax audits are instantly extended to independent contractors. The opposite also applies, where independent contractors can trigger payroll tax audits.  We have seen independent contractors fail a personal tax audit because of an audit of their practice location’s payroll tax obligations. 

Finally, doing nothing will do more harm than good

It is time to trust, but to verify. 

Apathy, ignorance (wrong advice), or trying to do it yourself are your real enemies. You could end up leaving a liability and not a legacy.

We have seen very successful practices nearly go bust. It only takes a letter or complaint.

Watch out for mandatory single-touch payroll in February 2023.

If you fix it up, you have a better chance of selling your practice for something, rather than for nothing, and avoiding unnecessary audits in the meantime. 

Where do we go from here?

As aforementioned, this highly recommended video demonstrates what is possible. There are more opportunities than problems.

Contrary to popular belief, when doctors understand the problem and how to solve it, they are more than willing to pay and collaborate with the practice.

This video has been used as a useful independent discussion tool to get things started when trying to confirm each other’s arrangements.

It should help you guide your lawyers and accountants on how to best meet your compliance requirements.

Eat well and sleep well

Many practices have gotten away with this until now, but with the transition from paper to digital audits, it is a lot easier to be a target. The costs of setting up and running your undercapitalised financial and tax-compliant systems should be regularly budgeted for. They are the invisible cost of doing business. For many practices, this is not even an issue. 

Time is running out to secure good advice. Be prepared. It looks simple, but it is not. DIY will not work, no matter how clever your bookkeeper or practice manager is. Do not kid yourself.

In a cloud of uncertainty, only you can clear it up and create some certainty. In the meantime, it is difficult to put a value on your practice. This will only make it difficult to recruit and retain doctors and staff.

It is time to set aside some time for a budget and provide financial security to everyone. Ultimately, there is no point if the patient survives, but your practice ultimately dies of a disease that could have been prevented.

The payroll tax mess is making it hard to run your practice and lowering its value in the long run.

The good news is that it can be fixed properly with the help of experienced legal and tax advisers who have been successful in defending these audits. 

For succession planning purposes, it is time to stop looking for excuses, get on with it, and fix your practice forever.

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.

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