A new tax threat looms for practices

5 minute read

This time it’s the Australian Taxation Office, not the states, looking into whether workers are true independent contractors.

Good news: this story is not about payroll tax. Bad news: it is somehow worse.

Earlier this week the Australian Tax Office released a new ruling, Practical Compliance Guideline (PCG) 2023/2, outlining its compliance approach to classifying workers as employees or independent contractors.

In a nutshell, medical centres could find themselves owing superannuation to their tenant doctors – 11% of earnings rising to 12% in 2025 – as well as being required to withhold their income tax.

There are some similarities to payroll tax, in that it is (a) to do with tax and (b) affects practices whose independent contractors are employees in all but name – but the consequences are far larger.

The ATO guidance says it will look at the totality of a contract – which includes any verbal agreements – and see whether it matches reality when deciding whether a business should be paying superannuation on a worker.

It will also look at the substance of a contract, and won’t be fooled by a contract that calls a doctor a contractor but also specifies working hours, billing patterns, non-compete clauses or any other feature that makes the doctor effectively an employee.

“Sometimes an entity that is carrying on a business will engage a worker with a written contract that describes the worker as an independent contractor, but when all rights and obligations in the totality of the contractual arrangement are considered, the arrangement is actually one of employment, or vice versa,” the ruling says. “A label in a contract, written or otherwise, cannot deem the relationship to be something it is not.”

It sets out four “risk zones” that it will use when assessing whether certain workers satisfy the extended definition of employee for superannuation purposes.

Some businesses will be low or very low risk, provided they meet certain criteria.

These include, but are not limited to:

  • a comprehensive written agreement that governs the entire relationship between the parties;
  • One party being able to show it obtained specific advice confirming the classification as independent contractor; and
  • The business obtaining specific advice confirming the application of the extended meaning of employee under the Superannuation Guarantee (Administration) Act was correct.

Without these pieces of evidence, it becomes very hard to argue that a worker is not an employee.

The businesses that do not meet these criteria and end up in the medium- or high-risk categories can also expect to have more compliance resources devoted their way if the ATO comes a-knocking.

Applying the ruling to general practice, healthcare accountant David Dahm told The Medical Republic that if the contract between a medical centre and a tenant doctor is written in such a way that the tenant doctor is being treated as an employee – non-compete clauses etc. – the ATO may decide that doctor is as an employee.

“The benchmark standard should be that you have a written contract, and what have you written in that contract walks the talk,” Mr Dahm said.

“It needs to be detailed enough that it’s not left up to implied or verbal arrangements that might contradict the intentions that both parties had when they entered into the contract.”

The sting in the tail is that businesses found to be employing doctors rather than providing them services must withhold tax from and pay superannuation on them.

“This is the big one,” Mr Dahm said.

“If you’ve got a full-time-equivalent GP and suddenly all your contractor doctors get pinged and … now they’re employees, then you suddenly have to pay super and annual leave and take out their PAYG.

“That’s another $7000 a month, we’ve estimated, for a doctor who bills typically $300,000 to $400,000 a year.”

In other words, it makes the 5% taken by payroll tax look like a picnic.

The other thing that makes it markedly scarier than payroll tax is that there are no thresholds, meaning it affects a small, one-doctor practice just as much as a 50-practice corporate.

Another key difference is that where each state or territory revenue office oversees how payroll tax is applied in its own jurisdiction, the ATO guidance is national.

Medical practices that have nominated for a payroll tax amnesty or that may have decided to just pay payroll tax on employees could find themselves in a world of pain thanks to the ATO ruling, Mr Dahm said.

“By nominating for an amnesty, [and therefore] a payroll tax audit, you’re also potentially making yourself exposed to this particular ruling moving forward,” he said.

“Because if you’re suddenly paying payroll tax, then the next question that arises is ‘surely they must be employees?’”

Doctors who are found to be employees will also face consequences – they won’t be entitled to their own ABN in relation to that employment, nor will they be able to register for GST in relation to that employment, nor will they be entitled to claim the deductions they might as a small business.

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