What does running a medical practice with independent contractors akin to a brothel and the Australian Tax Office have in common?

Each of them engages independent contractors. This should be a humorous article, especially the part about the squeamish accountant who refused to check the website of his client, a brothel, to make sure it complied with tax laws.

I want to express my gratitude to the Australian Tax Office (ATO) for their most recent draft judgments on independent contractors, which are also retrospective. You may cry as a result.

Edit: 11.01.2023 The recent Queensland State Revenue Office (SRO)  Medical and Healthcare Payroll Tax Ruling has vindicated our position and softened the skeptics. It is very descriptive and far reaching. We expect other states to follow. 

A key take away is your legal agreement may not be good enough and will be ignored by the SRO. The overall “character” of your arrangements are more important than your legal contract. Most importantly I expect many practices will need to undergo a name change to avoid any further misunderstandings. 

Subscribe with us to register for our latest webinar on what you have to do next. 

End edit 

There is no need to worry because you will see we have a workable solution, per the below.

We knew this day was coming and have been reporting on it for over three decades.

We can help you at the bottom of this article with 5 simple steps to get you started if you take the correct actions today.

You may save time and money by attending our most recent free webinar below. Your team will keep one step ahead of the taxman with the aid of this shareable webinar.

It is important to note, to make  sure you ask the correct questions of seasoned experts who can demonstrate a track record with contracts and systems that have successfully withstood marketplace and the tax office.

Ask your current advisors whether they advise on payroll and/or PSI issues on a regular basis, and not just occasionally: when they get that odd call from a former client asking them about a potential accounting/tax concept that they read about in an article over the weekend that they believe may affect their business.  For the record, we have been providing this type of advice to our exclusive medical-sector clients Australia-wide for over 30 years.

We have successfully secured tax exemptions for our clients through the use of our documents and systems.

We acknowledge and respect the ATO’s urgent budgetary  needs, particularly given the weakening global economy and cost of living pressures for the every-day Australians.

There is a lot of information in this new ATO Independent Contractors ruling below.

In summary, these were my initial takeaways. The ATO will not accept signed contracts if they do not walk the talk. They can be struck down as a sham. We call them “confetti contracts”.  There needs to be substance and not just form. Our links in this update will provide more tips and examples of what they are looking for e.g. contracts, documentation, systems, conduct, websites etc. 

You have to prove it to your accountant. Your accountant will need to annually risk rate you. If you are a high risk they will need to advise you to fix it or seek advice from the ATO.

This could start to get a little tricky. If you do not your accountant risks losing their own tax agent’s licence.  There is a $30m crackdown on high risk accountants.

They may be seen to be negligent. Expect your accounting and legal fees to go up. Budget for it. 

INDEPENDENT CONTRACTOR RULING

INCOME TAX: PAY AS YOU GO WITHHOLDING – WHO IS AN EMPLOYEE?

Published:      14 Dec 2022.

and

CLASSIFYING WORKERS AS EMPLOYEES OR INDEPENDENT CONTRACTORS – ATO COMPLIANCE APPROACH

Published:      14 Dec 2022

CONTRACTS

Documentation of relationship i.e. signed contracts with your providers.
There must be an absence of coercion.

SUBSTANCE Proof

Prove contracts are being implemented in practice. Do books and records and
staff confirm arrangements? This is not an exhaustive list from case law.

Fees and Income

Service fee rates and calculations are correct? Can you explain your
service fee calculations? Does your bank reconcile? How is Income and GST recorded and reported to
ensure there is information symmetry? Do you keep separate ledgers? Can you prove and reconcile
payments? Was your accountant and lawyer involved? Did your accountant check it? Provide any written
advice. 

Rosters

How are ”roster” and/or leave requests documented? What are your banking
arrangements? 

Advertising

How are you advertising on your website? What do your letterheads and
brochure say including any advertising? How do walk-ins make appointments? 

RISK

Are significant risks being undertaken?Do they use their own tools of trade
and delegate work? Does the risk commensurate with the return?

GOODWILL

Does a saleable asset exist? Does the contractor separately advertise their
services on an ongoing basis? Can they generate their own goodwill?

INTERPOSED ENTITIES

Operating through a company or trust does not provide any additional
protection. Contract wording is critical.

NEITHER EMPLOYEE OR INDEPENDENT CONTRACTOR – LEASE OR
BAILMENT

Well-meaning service facility agreements may have not been recently
updated/caught up. In summary, be careful of agreements referring to  the word “license”. 

ACCOUNTANTS RISK RATING 

Accountants will in future have to risk-rate your contractor arrangements
using traffic light reporting e.g. Red being High Risk; and the client should seek advice from the
ATO?! 

The timing, right before everyone’s break, could not be better! This is similar to when the ATO implemented the updated income splitting guidelines last year just prior to the Christmas break .

To be really honest, if you are reading this and still have faith that your political officials will change the onerous income-tax or payroll-tax regulations, I hope this reality check will convince you to quit waiting on lobbying efforts undertaken by Members of Parliament on behalf of their constituents, medical-sector associations, or the odd mid-tier accounting firm(s).

The time for inaction has now unfortunately passed. Your prior issues won’t go away if you sell your business or retire early.

A prospective buyer will offer you less money for your practice if you don’t address the problems. They know about the problem(s) that affect medical practices across Australia, or at least their advisers definitely should.

What is obvious is that many practices may have underinvested significantly in their legal, accounting, business processes, and documentation over the years. How much did the practice spend on annual legal and accounting expenses; and whether or not their advisers have provided proactive (and preferably competent) guidance, are two simple methods to determine this.

Although you might have made significant short-term financial savings in minimising expenses on advisors, you may lose your entire practice in the long run. We have come across practices in this exact situation and have worked with them to resolve the problems that they were experiencing.

“You will no longer benefit from even the glossiest, lipstick-on-a-pig independent contractor agreement”

Recent rulings from the ATO and the High Court, both of which were released just prior to the current Christmas break, have confirmed everything we have been publishing  for quite some time. Simply said, your contracts cannot be upheld if they don’t walk the walk.

If you don’t have a current and well-written (and ideally signed contract by both parties), you put yourself at risk of an expensive audit.

The ATO’s guiding principle is: if it smells like a pig and looks like a pig, it’s probably a pig!

(I apologise in advance. I adore pigs and do not want to harm their reputation).

Perhaps signing a contract should be your last action?

The first thing that comes to mind after reading the Court judgements referring to the ATO rulings is to first perform some housekeeping before starting a lengthy, laborious and expensive process of preparing agreements with lawyers and accountants and obtaining doctors signatures.

This entire procedure may now be automated and streamlined thanks to cloud-based technologies.


Unfortunately, many people have largely neglected or were simply uninformed of what should be the standard ‘cost of doing business’. Sadly, there is far too much dependence on the accountant or lawyer to point out any problems.

If you only communicate with your advisers on a yearly or as-needed basis, you are probably in danger if you have not heard from them by now.

GP Professor Max Kamien in his article “Why payroll tax is an idiot’s attack on general practice  empathises saying you are a doctor looking after poor or vulnerable patients, or being an honest fool ignorant of the law is not defence according to his patient, a Supreme Court judge.

Surprisingly, you’ll discover that formulating your service contracts should be the last thing you do, rather than the first. What we frequently observe is that many contracts could unintentionally implicate you due to a misunderstanding.

You need top-notch documentation, contractors who are eager to carry out their contractual obligations; and check whether the said independent contractors offer their services to the public by way of website and similar advertising methods, claims the tax office.

(Source:Photo: Gerry Goodstein/(c)2021 Gerry Goodstein)

The agreements must be more ‘readable’ than Shylock’s contract from Shakespeare’s Merchant of Venice.

Slick, expertly drafted legal documents from reputable law firms won’t help you until the first step has been completed first.

Be specific and lucid. The agreement does not automatically become an independent contractor service agreement merely by labelling the individual party to the contract as an independent contractor.

When should one call a hamburger, a pizza? The key is to  be exact. Even while they may share the similar elements, they are not necessarily the same thing when you look under the hood.

The ATO has made it clear that before they accept your interpretation of the provided independent service agreement , they will now examine how you put your respective business models together!

This is supported by the most recent draft judgment and case law from the Australian Tax Office (“ATO”). The ruling is retroactive.

It is not a good idea to turn contractors into employees

Making everyone an employee is an easy fix if you can convince your providers to accept a financial hit (relating to lower remuneration) and as an employer, you’re willing to be held liable for any negligence claims attributable to yoru medical clinic, due to your employees potential negligence in treating patients, per the Australian vicarious liability laws.

I’m not sure how affordable or simple insurance will be to obtain in the future; as was similarly experienced by homeowners suffering from recent  flood and bushfire disasters. We have written about why you should, per the article below.

Source: “Make Doctors a Smaller Target for Lawsuits .” Make Doctors a Smaller Target for Lawsuits, Medical Observer 5 Oct. 2007.

Furthermore, the regulators can enquire as to why you hadn’t previously declared your contractors as employees and failed to record their compensation on your books if you abruptly changed your arrangements.

This alone might defeat any strong defence.

Now for the Dirty Details

Some of you may wish to skip this section and start improving your practice because you are already persuaded. If this describes you, a helpful webinar, examples, and a checklist are provided in the post HERE.

Why would you compare a medical or healthcare facility to a brothel?

The answer is simple: it is the best legal example I could find of two organisations that run remarkably similar from a business perspective that have been subject to public Court proceedings.

In 2018, I had first reported on this brothel case HKYB AND COMMISSIONER OF TAXATION (TAXATION) [2018] AATA 4770 (31 OCTOBER 2018).

The title of the article was New Tax sting: Is your practice running like a brothel?

Please do not be offended by the comparison; as this subject-matter is  serious and should be treated as such.

The traditional business model of a brothel, bases its management fees on the percentage paid by the client. A number of Australian cases and tribunal examples relating to brothels were the closest I could find to mainstream medical and health care practices.

The particular case referred to marketing the sale of condoms, which bears an uncanny resemblance to how a medical clinic may market vaccines or cosmetics. All the sex workers in this case were paid a percentage of fees generated. The fees included labour and accommodation which is a key point in contention for both sex workers, and the medical/ healthcare  industry.

Using common law, our deep dive court provides insightful examples of what the courts can do (and therefore the ATO will look for).

How easily these truths could be applied to a medical or healthcare practice is frighteningly revealed by the above example.

In 2020, a second brothel case confirmed what was largely predicted.

The ZHANG AND COMMISSIONER OF TAXATION (TAXATION) [2020] AATA 3008 (10 JULY 2020) (Banksia case) provides further excellent examples of what not to do.

The independent contractors (sex workers) were paid a percentage of the billings; however, they were ultimately deemed employees and the business was liable for Income tax, PAYG and GST plus penalties and back taxes.

Poor bookkeeping, the owner’s and accountant’s inability to explain their spreadsheets, and the failure to account for income and GST in a bank account separate from that of their sex workers were all issues. The accountant made a bad witness.

Additionally, the sex workers had no separate advertising to draw customers to the location, and their website exclusively promoted the business, and not them individually  away from the location or the business main website.

The judgement stated:

“But the applicants failed to explain the elephant in the room, being the website. The website tells a quite different story about the business”

In the end their accountant and madam were thrown under the ‘tax bus’.

Has my lawyer or accountant made a mistake?

You might think these are brand-new ‘pig’ laws. Not at all.

As a solicitor from Hamilton Bailey regularly reminds his clients, unfortunately the ATO and SRO are merely enforcing existing laws and regulations relating to Payroll and similar taxes.

It must be noted that these are not new laws, so don’t accept that particular justification from the accountant and/or lawyer that have been advising you and your business over the previous decade or two. The rules have been tried and tested at common law for quite some time, dating back to approximately 1978.

The fundamental precepts remain the same, and for this predominate reason I do respect the ATO and SRO’s prerogative to commence enforcing long-established tax rules to a previously largely untouched industry.

The laws need not expressly mention a medical practice in order for the said law to be applicable. Every taxpayer must follow them. At a later date, I aim to write more about this.

Robotic audits do exist

We anticipate an increase in audits over the next 18 months due to the authorities’ new data matching and sharing systems and Services Australia’s required e-invoicing legislation, which went into effect on July 1, 2022.

Things could start getting a little ugly.

For the adamant sceptics, we have listed HERE a summary of all the significant cases that, specifically, have an impact on your medical or healthcare profession since 1978.

Why is it difficult for people to comply?

There are many important laws that you should have been advised upon by your current accounting and/or legal counsel. We have not provided an exhaustive list in this article in the interest of brevity.

The actual problem in practice is that everyone assumes that the other party is aware of it, and on to it.

Furthermore, it is not a good idea for many people to rely on their friends, family, and social media in relation to seeking legal and accounting advice.

Until you feel you are about to lose your family home (like was the case in Victoria recently), paying for advisers “just to talk” is an invisible/low value transaction many people resent.

The adage ‘she’ll be right, mate’ is afterall, human nature. Only when an individual observes a colleague getting audited does anybody do anything.

The best strategies are to set aside a realistic budget, time and engage expert counsel.

Successful businesses do not base their choices on who offers the cheapest deal.

This is not like buying a banana, your practice is like your second child or family home. It may be in danger and potentially in need of a lot of help to get it back to the standard expected of it by the ATO and SROs.

Successful owners just want to eat well and sleep well. It is not about greed; it is about maintaining  financial security and being fair to everyone.

How come legal and accounting advisers have not kept me up to date?

Unfortunately, more needs to be done even by the biggest and brightest well-intentioned advisers. They must show they have a thorough awareness of your affairs and the capacity to apply them in the context of the legal and accounting systems. Communication should be timely.

It is required of advisors to probe. Despite there being a big problem, some advisers are worried about losing a client or having to invoice a client for further fees which may be disputed by the client; or even being sued for previous negligence if the problem is brought to the client’s attention – at the present.

This may be considered negligence in the eyes of the law and is incredibly unacceptable, regardless which law society and/or accounting standards body the advisor is a member of.

So this is why you may be  left wondering why my accountant or lawyer has not told me any of this?

It was interesting to note what the judgement said of the accountants role in the brothel case HKYB AND COMMISSIONER OF TAXATION (TAXATION) [2018] AATA 4770 (31 OCTOBER 2018).

The judge expected the accountant Mr Derrick to review the website! (Hint: potentially plan for a severe increase in your annual accounting fees!)

“…he (the accountant) had not studied the “House Rules” in the Ladies Area but rather proceeded to the manager’s office.” para 121

Funny enough, the court made a remark when the accountant was asked why he did not visit the brothel’s website.

“Mr Derrick’s answer that he did not look at the applicant’s website because that would not have been approved of by the firm was not, with respect, credible at all, much less persuasive.

We were left to wonder whether this answer had recently been invented.

Be that as it may, viewing the applicant’s website could hardly have been regarded as gratuitous, much less prurient, given the professional service he was rendering to the applicant.” para 125

Poor advice, what can you do about it?

There are typically four explanations for why an adviser may have missed an opportunity to give you advice.

These are all poor justifications;

  1. either you didn’t ask and they didn’t tell, or 
  2. they either didn’t know or didn’t care; or 
  3. they believed that the lawyer, or the accountant, or the book-keeper, or the practice manager, or the owner would be on top of it.

Assuming anything is a dangerous thing. You should trust, but verifying is essential.

It is advisable to have your lawyer and accountant in the same room together, in order to advise you and your business competently . Check to see if your lawyer and accountant are in agreement. Any of their advice to you should be in writing.

When creating service agreements, contract lawyers frequently make the mistake of neglecting to review  your financial records, or enquire about your business model and operations. This can be as a result of your financial constraints or because they failed to take this into account.

They should at the very least inform you in writing of the limitations of their expertise particularly when it comes to tax-related issues. A good commercial and tax lawyer is difficult to find, and they are not inexpensive.

Due to this, many agreements fall through. We frequently confer with  tax lawyers for this reason.

A duty of care

The final point is particularly intriguing because all lawyers and accountants have a duty of care to let you know if they have the expertise and experience necessary to complete the work in accordance with their scope and relevant laws, or decline the engagemen

They should at the very least be aware of all these regulations, if not they should refer or guide you to a more appropriate adviser.

Ask them if they are qualified to offer guidance after displaying this article to them.

Unfortunately, we have a number of new clients who paid excellent money but received little more than basic accounting and legal guidance, which is giving the Federal and State tax offices a pay-day.

“Stop using justifications, these are new laws and do not affect me”.

Do not buy into the excuse that these are new laws. The principles of the laws and regulations have not changed since the year 2000. They affect all tax payers.

It is naive to think that medical or healthcare professions will enjoy any special exemptions due to their important work throughout COVID19 period.

The public’s impression that you are more intelligent and considerably more wealthy than the average person on the street, would be negative for your individual reputation and profession if the medical sector attempted to seek any special favours.

For the record, the  common and statutory laws relating to independent contractors go as far back as 1978.

Specific to medical practices, the HEALTH SERVICES FOR MEN PTY LTD & ORS  v D’SOUZA & ORS [2000]  NSWCA 56 started the ball rolling by defining when a doctor was an employee or independent contractor. The case was in relation to which party owned the medical records. The practice won the case against the doctor.

This was a non-tax Supreme Court case. It therefore did not receive a lot of attention from the masses.

The  Hollis v Vabu independent contractor judgement from the High Court in 2001, which involved a courier, changed the way employment law was interpreted.

Over time, these principles were subsequently ratified and refined.

We have compiled at the bottom of this article, to the best of our ability, under the title The regulatory history of independent contractor law affecting medical and healthcare practices. 

Finally! The buck stops with you the business owner/taxpayer

Whether you are a practice owner or independent contractor, you are responsible for meeting your taxation obligations.

As the court cases we have cited, dobbing in each other is an exercise in mutually assured destruction, due to the principles applying in a similar fashion within the Federal and State context.

It is up to you to invest the time and resources in dealing with the appropriate issue.

If you continue to ignore the warning signs, do not be surprised if a judge will not be sympathetic to your plight.

In the meantime, get on with it and consider purchasing tax audit insurance.

If need be, do not hesitate to contact our office to discuss whether your current accounting and/or legal advisor’s insurance policies may cover any work-deficiencies that would lead to the ATO and/or SRO ultimately finding you to be responsible for (on behalf of your accounting and/or legal advisors).

Where to from here?

It is time to do something in 5 easy steps or just go to step 5. There are no shortcuts.

Start with these free, no obligation and confidential steps:

Step 1

Read our article Payroll tax is harming your patients, and the future value of your
medical and healthcare practice. But it can be fixed.

Step 2 Watch our free webinar:
Succession Planning:
Payroll and Income Tax Traps and Pitfalls for Medical and Healthcare Practices: A Practical Deep
Dive
Step 3

Take this self-assessment
test.

For Practices:

Employee/Contractor v Tenant Provider Self-Assessment
Checklist.

For Individual Providers: 

Contractor Self-Assessment Checklist tool


Medical and Healthcare Employment Compliance Self Assessment Checklist

Step 4

Contact your accountant and lawyer. Make
sure their advice is in writing in relation to your particular practice/business.

Step 5 If you are still struggling,
give us a call and we can give a free succession planning and compliance check for no
obligation.

You can organise a quick free, confidential
30 minute chat here by clicking HERE!

Who can you trust?

Health and Life in the Media

It’s time to collaborate with knowledgeable experts you can rely on.

We avoid having any conflicts of interest. When possible, we devote all of our resources to provide you with useful advice and original, authentic content as a pro gratis service; we do not sponsor organisations, accept commissions from financial planning, or suggest goods that are not our own.

How can we guarantee the quality of our advice?

Conflict of interest free

We support the right to free expression. We can speak freely about the most challenging situations you may be dealing with because we have no sponsorship agreements, commissions, or income from our recommendations. We are conflict interest free.

Evidenced Based

Everything we do and say, including what we communicate to regulators, is open and transparent in the national press and in writing. Before we roll out any ideas we run them through the national media. We usually receive great feedback straight from the source – it is evidence based and not just based on our opinions. This is how we assist you to remain ahead of the game.

In 30 years and over 1,200 medical and healthcare clients we have had no problems with the regulators.

Why? Because we take special care to complete things correctly the first time. We are aware that your community depends on you.

We are here to support you in maintaining your attention on your patients, providers, and the community you serve.

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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