The ATO safe harbour rules for medical and health contractors: what you need to know

GP and healthcare contractors are collateral damage, if they work for non-tax complying medical and healthcare practices. 

Contractors and practices are on notice: your financial well being is at terminal risk.

Especially if practices engage some of their doctors as employees and the remaining as contractors. This will have a direct and indirect impact on you even if you are an employee doctor, if you do nothing.

 

You may feel like you have the support of a lawyer or an accountant in dealing with this complex issue.

The ATO has a useful Employee or contractor “Myth and Facts” sheet that is worth taking a look at HERE

The bottom line, do not assume you or your lawyers and accountants have ticked all the boxes or attempt to do it yourself. We have seen how DIY jobs have triggered a long and expensive audit. However, you need to ensure your expert legal and accounting medical/healthcare sector-specialist advisers are now in the same room with you, so that your arrangements are fit for purpose.

Here is why.

The ATO position

The ATO has a new “who is an employee or contractor” ruling. Not complying with the pending Ruling could leave Medical and Healthcare practices  with up to $7,000 per month compliance bill for every “contractor” they engage.

They are focussing on both the technicality (your contracts) and totality (what happens in reality”) of your arrangements.

Forward-thinking practices by accessing the new “Safe Harbour Contractor Rules” may find this a more affordable and permanent sleep easy “contractor” solution.

This emerging matter arises from the reconfirmation of the High Court position in relation to Employees and Contractors February 2022.

It has set off a wave of regulatory changes, focussed on primary principles rather than just the technical nature of contractual arrangements that do not represent what is actually happening in reality. Any deviation from a lawyer prepared contract may be overridden by a brave brave sounds weird  regulator who seeks the Courts support.

 

 

As of December  2022, the medical and healthcare profession is under a cloud of State Payroll tax audit fears due to the national RACGP/AMA patient State campaign.

For the forward thinking complying healthcare facilities, this will provide an unprecedented marketing recruitment and retention edge for tenant doctors and providers that offer in writing complying contracts and arrangements that are compliant with the “safe harbour” rules.

For years, many practices who have been operating by the book by regularly using experienced lawyers and accountants, have little to be concerned with.

The only exception is they may want to contact their accountant to work with a lawyer who is prepared to provide a “Safe Harbour” letter for legal and tax purposes.

Unknown to many accounting, legal advisers and your professional bodies, this issue does not stop at payroll tax.

 

 

From 15th December 2022 this may also include income tax under the ATO’s new and inevitable Independent Contractor Draft Whos is an Employee Ruling, which does not appear to be on many people’s agenda or in the mainstream medical media.

The new ATO income tax employee ruling has doubled down on the  unprecedented QLD “Medical Centre” Payroll Tax Ruling.

I am happy to be corrected, but sadly I do not think there will ever be a permanent political solution. 

For many, this is the new cost of doing business. Many have wrongly assumed their practice owner, practice manager, accountant or lawyer was on to it. The problem is if it is not in writing it does not exist, plus you need evidence you are living and breathing your contractor or tenant doctor arrangement.

This is the only solution or risk going broke. Nobody wants to buy or pay a premium for a practice with significant and avoidable tax problems. The good news is, do it properly, you could kill many birds off with one stone.

Call your accountant now – you are not fine if they say “everything is fine”

Be wary if your busy accountant says “ëverything is fine”, you need proof they have checked. Assuming everybody has done the right thing is not good enough.

It’s time for forward-thinking health facilities to look into immediately seeking written accounting and legal advice on making sure your medical and or healthcare professional contracts are compliant with the ‘Safe Harbour’ regulations in order that you can offer an extra layer of peace-of-mind protection – not just against audits but towards preserving peaceful sleep every night!

 

In this topic we will cover:

  1. What are the ATO safe harbour rules for medical and health contractors?
 
  1. How do you apply for safe harbour status?
 
  1. What are the benefits of being a safe harbour contractor?
 
  1. How do you maintain your safe harbour status?
 
  1. What are the consequences of not meeting the safe harbour requirements?

As a doctor or healthcare practice, you’re no doubt aware of the complexities surrounding tax and compliance rules for contractors. The Australian Tax Office (ATO) offers relief through a mechanism called Safe Harbour – it’s designed to help medical and health professionals manage their business operations in an efficient and compliant way.

In this blog post we’ll explore everything you need to know about ATO Safe Harbour, from what it covers, who can access it, how to apply for it and most importantly; why doctors and healthcare practices should seek out this invaluable protection. Whether you’re just getting started or well on your way with contractor arrangements – arming yourself with the right information is key!

We’ll also explain why it’s so important that all practitioners understand them, so read on to find out more about this essential workplace tax legislation!

Your accountants are expected to review your employee/contractor arrangements

To start with your accountant is expected to review annually your contractor arrangements to ensure that you do not have workers who should be classified as employees. If you do not ask them or want to ask them then you already have a problem.

So what should you do next before you speak to your accountant? Find out more about the new Ruling. Read on.

  1. What are the ATO safe harbour rules for medical and health contractors?

In Australia, fuelled by the High Court it is clear that there is a consistent convergence of Federal and State employee and contractor laws and regulations.

In the wake of the 2022 High Court Employee v Contractor rulings i.e.
CFMEU V PERSONNEL CONTRACTING 9th February 2022 and
ZG OPERATIONS AUSTRALIA PTY LTD & ANOR APPELLANTS 2022 9TH FEBRUARY 2022, there has been a national and State payroll and income tax regulator rush to publish public Employee v Contractor rulings. 

In the wake of the 2022 High Court Employee v Contractor rulings i.e.
CFMEU V PERSONNEL CONTRACTING 9th February 2022 and
ZG OPERATIONS AUSTRALIA PTY LTD & ANOR APPELLANTS 2022 9TH FEBRUARY 2022, there has been a national and State payroll and income tax regulator rush to publish public Employee v Contractor rulings. 

On the 15th December 2022, the ATO has joined the chorus line with the introduction of

The Tax Institute of Australia recently reported :

“The High Court in CFMEU and Jamsek focuses on the relationship between the parties as indicated in the terms of the contract rather than through their historical conduct, and the ATO has updated its guidance to reflect this.”

The new employee-contractor landscape

Prior to the High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMEU) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek), the courts applied various methods to determine whether an individual was an employee or a contractor. However, since these cases, the contractual terms of a complete and valid written contract have taken a clearly paramount role in making this determination.

Implications of the High Court cases

In CFMEU, the High Court ruled that the particular labour hire agreement for a ‘self-employed contractor’ constituted an employer-employee relationship. This was determined by considering the totality of the relationship arising from the legal rights and responsibilities contained in the contract, rather than following a multifactorial approach. The High Court affirmed this approach in Jamsek, and the approach from both of these cases was applied in JMC Pty Ltd v Commissioner of Taxation [2022] FCA 750 (JMC). The High Court decisions, and that of Federal Court in JMC, emphasise that in the absence of a sham, or some other variation or displacement by conduct, the terms of the contract should be accepted over the traditional multifactorial test.

Extended definition of ‘employee’ for superannuation guarantee

While the High Court in Jamsek declined to rule on the extended definition of employee for the purposes of section 12(3) of the Superannuation Guarantee (Administration) Act 1992, JMC provides some guidance on this issue.

From JMC, the following elements must be satisfied for a person to be characterised as an employee under the extended definition:

  • there must be a contract;
  • the contract must be wholly or principally for the labour of the person; and
  • the person must work under that contract.

The second element is likely the most contentious and is to be approached from the perspective of the putative employer by reference to the terms of the contract. It will not be satisfied if the contract is for the provision of a result and the worker is paid for that result.

This Ruling is consistent with recent landmark GST, Income Tax, Payroll Tax cases and the QLD Payroll Tax ruling with one exception.

To be classified by the ATO as a low risk, a significantly higher but affordable ATO compliance threshold needs to be met if you wish to seek access to their new “Safe Harbour” contractor rules.

Severe penalties apply to both the taxpayer(s) i.e. Practice and Contractors and their respective accountants and legal advisers if there are any breaches.

Specifically “Safe Harbour”  guideline in the Ruling refers to:

“Low-risk arrangements

paragraph 27. An arrangement will fall into the low-risk zone if all of the following are met:

  • there is evidence to show that both parties agreed for the arrangement to have a given worker classification
  • the performance of the arrangement has not deviated significantly from the contractual rights and obligations agreed to by the parties (including the actions outlined in Table 1 of this Guideline)
  • the party relying on this Guideline obtained specific advice confirming that their classification was correct under both the common law definition of employee and the extended definition; the advice must be professional advice from the engaging entity’s in-house counsel or an appropriately qualified third party, such as a solicitor or tax professional, an administrative body or client-specific written advice from the ATO[9], and
  • the party relying on this Guideline is meeting the correct tax, superannuation and reporting obligations that arise for that classification[10], including voluntarily reporting under TPAR where a business satisfies the turnover threshold.”

        

            2. How do you apply for safe harbour status?

If you are a professional in the medical and healthcare fields who isn’t an employee, make sure to get your hands on those “Safe Harbour” taxation letters from your employment lawyer and qualified professional tax adviser! 

Obtain non-employee “Safe Harbour” taxation letters from your advisers 

Medical and healthcare practices and their professionals who are not employees should obtain a “Safe harbour” letter from their lawyer and accountant stating their arrangements do not constitute an employment contract under the new Draft Taxation Ruling 2022/D3 Income tax: pay as you go withholding – who is an employee? (TR 2022/D3) which replaces Taxation Ruling 2005/16: andDraft Practical Compliance Guideline PCG 2022/D5: Classifying workers as employees or independent contractors – ATO compliance approach (PCG 2022/D5).

Your lawyer and qualified accountant who ideally is your externally accountant can provide these correspondences; they will indicate that any arrangement between yourself and another party would not be considered as employment according to ATO Ruling 2022/D3. Don’t wait until later – ensure your independent contractor status now!

Beyond traditional employer and contractor arrangements, consider service agreement arrangements in any written opinion given. This is the safest alternative to contractor arrangement that could be easily deemed an employee for income and payroll tax purposes. 

It may feel like back to the future for many “Medical Centre” owners but this was and has always been the correct way to establish and run a medical and healthcare practice and comply with the law. 

Before wasting any of your money or time, a quick key tip is to test your lawyer and accountant. 

Write to your legal and accounting adviser and ask if they know what they are aware of the issue and the possible solution. Also ask them if they know who “Mr Duff” is in the Healius trademark dispute case. If they do not know, ask them if they would be willing to find out. Make sure they tell you upfront how much this will cost.

To ensure you have a reliable legal and accounting opinion make sure any written advice covers all these laws and regulations see: The regulatory history of independent contractor law affecting medical and healthcare practices. Copy and paste this link and send it to your adviser. If it is not in writing you cannot rely on their verbal advice alone. 

Any advice needs have more substance than just form on a pretty looking letterhead. 

This may be your only defence. 

 

This is a common mistake made when relying on legal and taxation advice which is why we have these new and unprecedented High Court rules. 

 

 

 

Avoid common mistakes made by lawyers and accountants

The High Courts and regulators have made it clear. Solicitors who write contracts without supporting evidence or knowledge of the business model, commercial arrangements, proof of documentation e.g. websites, stationary etc. will find the Court will turn in seconds these well intended contracts or systems into confetti. 

Should you be surprised? Not really this is no different to going to a GP who diagnoses you for cancer without ordering a pathology test. 

 

Make sure your accountant and lawyer understands your business! Never assume they do.

What is clear is the High Court and regulators are demanding more proof beyond a legal agreement. 

Who do you think the Courts are more likely to rely on to provide this proof? Surprisingly you may find it is your humble external accountant. Ideally your externally qualified accountant specialises in medical and healthcare facilities. They are a registered tax agent, who is a member of a professional body e.g. a Chartered Accountant or CPA should have a duty of care to you and act in the public’s interest. 

Historically the Courts due to the nature of their role and qualification, have consistently found accountants to be a most reliable expert witness, over well intended practice owners and staff.   

This has been proven to be the care of the Healius (“Medical Centre”) trademark case and many other earlier cases. 

So treat your accountant like a pathologist if you want to access the “Safe Harbour”rules. Working with your employment lawyer they  can assist in disclaiming your contracts are not employment contracts. But they will need your accountants to explain if they are not contractor contracts than what other alternatives exists i.e. tenant doctor or provider contracts. 

Unless your solicitor is holding out as a tax lawyer and is familiar with your industry and arrangements then you may find it difficult to find a lawyer who will sign off under the “safe harbour”rules. 

This is where your accountant who has specialised in the medical and healthcare industry and knows how practices are set up and run can make a significant difference. 

If you are struggling to find an affordable solution compared to an employment arrangement or tax liability contact us.  

 

 
  1. What are the benefits of being a safe harbour contractor?

A compelling recruitment and retention would be to offer a Safe Harbour compliant medico-legal and taxation arrangement. 

We have found tenant doctors more than happy to assist with and contribute to any new compliance costs (they have little choice). The medium to long term benefits do outweigh the costs.

 

RACGP/AMA patient payroll tax has caused justifiable concern amongst all doctors that they may be operating under tax toxic working conditions. Your own arrangements may trigger an avoidable but significant payroll and now personal income tax audit.

No doctor or healthcare practitioner wants to work in an environment that may trigger an expensive and personal income tax audit.They want their healthcare facility providers to prove they are on to it and doing it correctly using experienced lawyers, accountants, systems and documentation. This includes staff answering the phone correctly.  

A tax auditor can tell by simply reviewing a practice website and signage and by how your staff answer the phone.

 
  1. How do you maintain your safe harbour status?

The answer is simply budget for an ongoing cost for a lawyer and an accountant to annually review your arrangements. This should decrease over time as your systems settle in. 

 
  1. What are the consequences of not meeting the safe harbour requirements?

Failure to comply with correctly classifying your workers i.e. obtaining “Safe Harbour” taxation letters from a lawyer and or a tax professional will automatically place your arrangements at medium to high risk. As a minimum the ATO can retrospectively clawback any tax liability up to 5 years. Arguably they can do this without this Ruling. 

If a practitioner is deemed to be an employee and loses their contractor status,the consequences for both the practice and the contractor are quite severe. See ATO Ruling Table 1 below:

Table 1: Consequences of a worker’s classification

Where the worker is an employee of the engaging entity

Consequences for the engaging entity

(e.g. Medical Centre or Clinic or Practice)

  • Report via Single Touch Payroll
  • Withhold amounts under the pay as you go (PAYG) withholding regime
  • Make superannuation contributions or be liable for the superannuation guarantee charge
  • Meet fringe benefits tax obligations for benefits provided
  • Not entitled to claim input tax credits for wages paid

Consequences for the worker

(e.g. “Medical or Allied Health Contractor”)

  • Not entitled to an ABN in relation to that employment
  • Not entitled to register for goods and services tax (GST) and no GST reporting obligations in relation to that employment

No longer would a contractor be allowed to claim business tax deductions (or they may be limited) subject to PSI rules. Furthermore a  10% GST refund on your business expenses would be disallowed because you are no longer a genuine business). 

Expenses that may be affected include service fee or management fee payments to your landlord or service entity (commonly and incorrectly referred to a “Medical Centre”, family practice or clinic), motor vehicles, medical indemnity, travel and conferences, payments to relatives etc. 

 

The financial impact on say a “Medical Centre” are monthly liabilities over $7,000 

per month per contractor in PAYG, Super, Payroll Tax, and other on-costs

This new  ATO ruling could result in a practice paying over $7,000 per month in PAYG, Super, Payroll Tax, and other on-costs. 

Monthly Deemed Employee Contractor Liability

 Source: Health and Life, Doctors Pay Calculator. Based on a 12 doctor GP practice 

Assuming one doctor  bills $15,000 per month (or $300,000 p.a.) the monthly is estimated financial impact on a practice.

The medium to long term tenant doctor cost of compliance is less than $100 per month.

In light of the recent High Court and ATO Federal Independent Contractors Draft Tax Rulings mentioned above, you should immediately ask an experienced accountant or lawyer to review. 

This matter transcends whatever your position may be on the QLD payroll tax amnesty. To our knowledge there are no proposed ATO amnesty on contractor arrangements.  

Our solution should significantly reduce this concern under the ATO’s new  “Safe Harbour” rules. See below for more information.

By ensuring your service entity is not classified as a “Medical Centre and is Classified as a Service Entity should ensure your compliance with the most recent ATO ruling by ensuring that the service entity can be sold with “safe harbour” legal and accounting arrangements in place. 

This will be a question asked by any potential buyer’s legal advisers or even future Contractors or Tenant Doctors and Providers. 

 


Where to from here?

The bottom line, do not assume you have ticked all the boxes or attempt to do it yourself. We have seen how DIY jobs have triggered a long and expensive audit.  For some useful and practical tips it is worth reading the article Practice Managers you are on notice!: “Medical Centre” Payroll Tax and Federal Court  Ruling targets how you run your practice! Part Three – Before calling a lawyer first work out (or confirm) how to run your practice

Stop procrastinating, things will only get worse, where you could be at a no return tipping point. It will be alright if you start now. Book a no obligation and confidential chat with us if you are still not sure

These are some additional free self-assessment checklist resources that can help you get started:

1. Free Self-Assesements Checklists 

2.Payroll and Income Tax Webinar(s)

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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