Beyond payroll, fear the all-seeing eye of the ATO

14 minute read

The latest political flare-up on payroll tax is largely a festival of fear and ignorance that doesn’t help owners or GPs.

Last week a major booking engine company released results of a survey about payroll tax that set off a chain of network TV stories, even getting a few politicians out of bed to respond to some of the survey stats that didn’t make for good press.

The survey may have been well intended, but it was conducted by a group with no expertise in a very complex legal and accounting issue. It has so far not released the methodology, the actual questions or even all the results.

Asking GPs and practice owners questions about payroll tax, if you do not understand the history and what is going on in a lot of expert detail, is a very dangerous game.

Payroll tax is an extraordinarily complex issue requiring not just an understanding of several key state cases (not just Thomas and Naaz) but also every key ruling so far by each state SRO and the history of those rulings, several federal tax cases, new ATO rulings around “deemed employees” vs “contractors”, new Fair Work regulations, and a fair bit of standard but complex accounting and law.

The booking engine company in question probably had every intention of supporting and helping its client base (as well as getting itself quite a bit of free PR).

But through not understanding the complexity and nuances of the payroll tax issue, it probably did the opposite.

One highly publicised result was that of the 300 practices they asked, up to 95% felt that they would need to put their prices up by at least $12 per consult as a result of the stance of SROs.

That translated would mean 95% of practices intended to convert their structures and start paying payroll tax.

It was a badly designed survey question that created a sensational but stupid result.

It must have been music to the ears of the SROs in Victoria and NSW. The AMA made a very similar error two years ago in a webinar when a senior representative told the NSW revenue commissioner that he thought most of his AMA members would be liable for payroll tax under the old but newly clarified law.

It’s very lucky that this booking engine has thousands of clients so those 300 could not be identified, because if they could be, they’d be in quite a bit of trouble on a few fronts.

If you come out and say you are going to put your prices up by $12 to cover payroll tax and you run a very typical trustee structure where you have regarded your GPs as tenants not employees until now, you are admitting to your local SRO that you have been conducting business fraudulently for many years. That your so-called tenants are actually employees.

In Victoria and NSW there is no amnesty so admitting this would be putting a giant target on your back for an audit.

Worse, you would also be saying to your local SRO: “We surrender, we are going to treat our GPs as employees from now on and pay you payroll tax.”

And that SRO would rightly expect you to do that … and probably be annoyed if you didn’t in the end.

Any practice that has been under tenant/landlord trustee structure would be completely nuts to put their hand up and give in without first getting proper professional advice on their situation and their options given their particular setup.

A lot of practices are compliant for payroll tax already and a lot more are now examining their options and restructuring to make sure they are moving forward. Which, by the way makes the 95% figure almost certainly spurious.

This survey, well meaning or not, set in train a whole new set of political manoeuvring in NSW and Victoria. Another largely ignorant group, politicians, did not want to be publicly shamed for being seen to send any GPs out of business – something which would obviously clog up their hospitals in an even more horrific manner, if that is possible – so some responded erratically with fluffy statements of intent.

If you ask GPs to answer a question they think might get politicians scared enough to try to change tax law, none have a downside by saying, yes, I’m putting up my fees to meet payroll tax costs.

It’s equivalent to asking turkeys if they want to come to Christmas dinner and getting a 95% “no thanks” response.

The survey is flawed and the fuss created by the flawed result is not helping anyone.

Most tenant/landlord trustee setups have not opted to go over to paying payroll tax yet, and those that get decent advice probably won’t do it because even if they did convert to paying payroll tax (which will also cost them restructuring money) then they would be exposing their practice to the more significant risk of the ATO assessing their contractors as employees under new deeming rules.

Not only would the practice be in major trouble for all the years they operated with doctors effectively as employees but claimed as contractors – they might be up for superannuation, annual and long service leave and other costs over many years, plus penalties – but all their doctors would be exposed to potentially having false income tax returns for the many years they’ve represented themselves as sole traders, not employees.

Payroll tax is not just payroll tax. The law on employees versus contractors is also changing and important to understand at the federal level. An owner and a tenant GP have a lot of homework to do and it’s unfortunately complex, messy and expensive.

The booking engine company survey illustrates a lot that is wrong about where we are on the payroll tax situation – way too many cooks who never so much as took one cooking class but want to cook up a storm.

For years accountants and lawyers let the structure of medical practices drift into dangerous territory because no one was arcing up over where things were heading.

The accountants and lawyers were not doing their jobs.

The booking engine company survey hit national TV networks and of course politicians had to respond with fighting words about saving general practice and the like.

Then they followed it up with a survey of members of the public who – surprise – said they’d go to EDs rather than their GPs if GP costs went up.

The problem with this sort of side show is that it creates what is almost certainly false hope and causes some GP owners to hold out longer on making tough decisions.

Option 1: pray that every state government will change tax law just for GPs

Let’s examine the option of holding out for lobby groups to convince the right politicians in every state to change fundamental tax law for one profession only.

To get rid of payroll tax via the political path every state will separately have to cave in to the same pressure in the same way and go to parliament to create legislation that will change tax law and defy common law legal precedent, walk all over existing SRO rulings just for general practitioners (though yes, technically the actual taxpayers would be their ahem, employers, practice owners).

It sounds like a great idea when you first think about because general practice is so fundamental to a working healthcare system.

GPs are at the beating heart of our health system sustainability and the major strategy for preventing a complete breakdown of our hospital system.

We need to help them here.

But politically would anyone even go close to trying to do this and even if one crazy state managed it, would they all be able to do it?

No, because apart from it being entirely impractical it would be political suicide for any politician to try it on. The electorate and the business lobby would crucify any government that singled out GPs for special treatment in this manner.

And GPs would likely be crucified in public as a greedy group of doctors in the process, a narrative we’ve already seen from some in governments over the past 10 years.

They need to figure things out much better for GPs, but they simply can’t (and won’t) do it this way.

In in the early days of the payroll tax issue asking state governments to exempt GPs from payroll tax was the RACGP’s strategy.

It was pretty naïve and has caused confusion and delay in GPs and owners understanding and taking the right action.

The RACGP is not going to tell you this out loud, but if you read their position now, it’s all about getting SRO rulings in each state that mimic the comprehensive ruling that we now have in Queensland.

The reason the RACGP wants this is because the Queensland ruling is a detailed “how to” of making your practice function in such a manner that you won’t have to pay payroll tax, or at least, not for every tenant doctor you have on your site.

The RACGP went through a lot of negotiation and pain in Queensland to get to the realisation that no state government is going to change the law just for GPs and then to get Queensland to at least provide a good set of ground rules so GPs knew what they were dealing with.

Queensland SRO ruling is a comprehensive and good rule book to work from.

In last week’s PR circus the RACGP notably did not come out and say the states had to drop payroll tax; it said the other states had to do what Queensland did and make the ground rules clear.

Option 2: restructure so you meet the requirements of the Queensland ruling, even if you’re not in Queensland

The only big remaining issue the RACGP has to overcome is a belief that the Queensland SRO ruling is simple and comes down to only one thing: if you change your payment flows to the money going from the patient to the tenant doctor first and you can trace that, then the Queensland ruling says that money is not taxable.

The RACGP has been putting out that this is the solution to being payroll tax-exempt.

It isn’t at all.

The Queensland ruling is comprehensive for a reason. There are about 40 other items of significance a practice needs to look at.

The Queensland ruling is here. You should have a go at reading it or you can check out this webinar we did based on it last year and see whether you think that just fixing payment flows is the whole answer. If you do, maybe then ring a good lawyer and accountant and get them to sign off that it’s OK as well. Then you might be sweet.

Somewhere between 12% and 20% of practices who are running a tenant/landlord model are probably already, or nearly exempt (it might be more, no one knows for sure but it is not 5%), so they would have no need to put their billings up, unless they were deciding to act like Coles and Woolworths and take advantage of the situation. Most wouldn’t do this, but if they did and got caught doing it, they’d be in a world of hurt. Any practice can put any price they like on their fee in a mixed billing situation. It would be stupid to say to anyone it was to meet payroll tax. In nearly all cases as things stand today, it just wouldn’t be.

Option 3: sign up for amnesty and convert your model to pay the payroll tax

This might be a crazier option than option 1 (remember that option involves praying politicians will help you in five different states) depending on your circumstances.

One of the big other problems in the payroll tax debate that emerged midway through was the idea that if you get an amnesty from a state on “no backward audits” and then opt to convert to paying payroll tax then you as an owner or your tenants as GPs would have no issues as a result with the ATO.

Some high-level people in the RACGP have told me they have legal advice that the ATO would continue to treat your tenant doctors as contractors even if you have restructured and start paying your local SRO payroll tax.

But think carefully about what can happen here.

In the last few years there have been several significant federal cases involving the ATO and at least two new rulings from the ATO (a good summary of recent changes is here) which suggest that depending on how you structure and treat your tenants, who you now acknowledge for SRO purposes are employees, the ATO could very easily “deem” your tenants as employees.

If it does that, the pain will make the payroll tax issue look like a grazed elbow.

The good news is that what you’d do to protect yourself from such an ATO assessment is the same as what you’d do to escape payroll tax obligations in Queensland.

The law at the federal level is yet to be tested. So if anyone says “that won’t happen, it’s never happened”, you should ask: “hang on, wasn’t that what we all thought about state payroll tax rulings and law six years or so ago?”

Option 3 is pretty high risk and still expensive in restructuring terms – apart from anything else, you’re now paying payroll tax for all your tenant doctors, but there are other costs to restructuring as well, before you get to that massive ATO risk.

If you opt for it you’ll need to then sit back and hope the ATO doesn’t start turning its eye on medical practices, Sauron-like, just as the SROs started doing about seven years ago.

The trend in tax collection is not with you (or anyone else in business).

The tax system both state and federal is in trouble. There simply is not enough of it.

All governments need much more tax and they don’t know how to get it because they are all afraid to impose new taxes or do tax reform. Subtly reassessing existing rules and recent cases has a lot of upside for tax authorities seeking more revenue.

Don’t blame them, it’s what they do.

Most practices won’t go broke but the system is in a lot of trouble

Another dubious and telling stat to come out of the booking engine company survey last week was that 16% of practices said “they might” end up going out of business.

They might? How do we put a figure on how many actually would?

About 8% go out of business annually in the normal course of business for all sorts of reasons anyway.

And that 8%? All practices have the option of mixed billing when they need to. This doesn’t mean they need to add a fee to those patients they know can’t afford it. It just means add one to those you are pretty sure can.

Unless you are in the country where the triple bulk billing incentive has actually given you an option to fully bulk bill those under 16 or holding concession cards with an increase that is getting close to what you might add as a mixed billing fee, you may simply not have the luxury of full bulk billing any more.

That of course is a pretty big disaster in the long run for the hospital system because there will be confusion and patients will be missed, and their only option will be to go without care or go to an ED.

This is causing a lot of stress for GPs who mostly love their patients.

But GPs can’t afford the luxury of guilt too much longer and they certainly should not be taking the blame for this situation. General practice is largely small business and it’s fighting not just against increased compliance activity around things like payroll tax but also against competition from private telehealth platforms, pharmacists and even private health insurers.

And the reality is that for the last 15 years the government has dragged down their income to the point where without new revenue options, they can go broke.

The system is changing and the reality is that the government is still not doing enough to help GPs survive in that system, as much as they desperately want and need them to, so GPs have to do what they have to do.

Amid all this, try to avoid further confusion about your options on payroll tax.

The options outlined above are not likely to change in the next few years if you consider all the dynamics in play.

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