Colourful practice advisory principal David Dahm has written a 262-page application to the ATO on the status of tenant doctor structures which in essence asks nearly everyone to put up or shut up.
Accountant and medical practice advisory principal David Dahm seems to have arrived at his “damn the torpedoes” moment (any and all puns intended) in his long and ongoing series of encounters with the various state tax offices, peak GP organisations and, at times, even his own accounting profession, on GP practice tax structures.
In what would become one of the most decisive sea battles of the US civil war at Mobile Bay in 1864 Vice Admiral David G Farragut faced with no option left to save the day, and to avoid the possible decimation of his entire fleet, instructed the captain of the steel battleship USS Hartford to pull away from a traffic jam of ships occupying the channel in the bay and charge his ship at full speed through a field of sea mines.
Just prior to entering the field of mines and having been warned by several spotters on other ships of the imminent danger ahead he apparently turned his men and shouted, “damn the torpedoes”. (Torpedoes was a term used back then for sea mines.)
The scene is replete with possible metaphors for where Mr Dahm finds himself and who he has been battling over the past few years in what he sees as a vitally important issue for the survival of the GP sector and for their patients.
Just prior to Christmas, after quite a bit of thinking, collating of lot of research gathered over the years, writing and rewriting, and finally, checking and then double-checking with two legal firms, Mr Dahm, who isn’t the most eloquent or succinct communicator (yes, big pot calling a kettle black, I know), sent a 262-page application to the ATO which was essentially seeking a ruling on the status of “tenant doctor” structures in medical practices.
Mr Dahm has a very simple premise in his submission (albeit a long-winded one): if structured as true “service entities” which treat doctors onsite as if they were tenants in a shopping centre receiving landlord-type services for their tenancy and not as medical practice businesses directing or managing doctors onsite as if they might be “employees” in any way, every medical centre in the country has a watertight case not to be paying payroll tax and, more importantly now, will not be captured by the ATO’s fast-evolving “deemed employee” framework.
The last bit about not getting captured by the ATO’s “deemed employee” framework is what everyone should be paying the most attention too now, because by late 2024 a lot of groups lobbying against payroll tax on behalf of GPs – the AMA, the RACGP, GP corporates and more – were patting themselves on the back for doing a substantive amount to de-risk an issue which had developed into one of the biggest existential challenges to the viability of the GP sector in generations.
Last year these groups managed to get Victoria, NSW, Queensland and SA to completely warp their tax rulings, and even law (not yet but it’s coming), to exempt GPs in various twisted ways from some or, in the case of Queensland, all of their potential payroll tax liabilities and commitments.
Now, if you want to understand how much or if you pay any payroll tax as a medical practice you first need to start with your postcode. It’s very different – weirdly different – in each state. Why would it be? GPs aren’t doing anything differently between the states.
In Queensland, apparently you won’t be paying anything – although that’s not quite settled in law yet, so let’s wait and see.
In the other states there are mostly ratios applying on how much you pay depending on how much bulk billing you do.
Tying payroll tax to bulk billing was essentially blackmailing GPs to pare their businesses back for a political win on bulk-billing rates.
In NSW, just as one example, a rule that says you have to be doing 80% bulk billing, and you are exempt, had immediate perverse consequences: a lot of big corporates were already running at or near 80%, so they were all automatically exempted from paying the tax, while a lot of mid-level practices were stuck in No Man’s Land where upping to 80% was going to put them under significant financial stress.
One of the big corporates that benefited was owned by one of our biggest local private equity firms, so the effect of the change was to increase the value of that group immediately and significantly. So, a big win for big business and PEs there but not really a win for individual GPs per se and quite a hit for certain types of GP practices.
Across the country, depending on the state, most practices made a conscious choice to go with signing up for payroll tax on the logic that although they’d likely be paying something, they now had some path through what at first seemed a catastrophic new financial impost.
In SA, 60% of the practices signed up for an amnesty to the local state revenue office and soon after that SRO came out and said that based on the information they had received from applicants it didn’t think any of them could avoid paying the tax.
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The Victorian SRO made a similar statement about practices in that state to the Australian General Practice Alliance.
Mr Dahm was particularly annoyed by statements like this because he says they were demonstrably misleading and possibly designed to herd practices into accepting the payroll tax frameworks, when there is a very clear alternative – tenant doctor models which set themselves up as true service entities.
A large proportion of practices appear to have accepted the politically driven payroll tax concessions and signed themselves up to pay.
In SA the threshold to start paying is much higher than most other states now (one concession) so after doing the sums and taking a concession on top most practices decided to give in.
While most people were finally seeing some light at the end of the tunnel on a dastardly problem – a way through based on the concessions that lobby groups had forced on naïve state politicians, many of whom were facing an impending election – Mr Dahm was seeing the whole thing going from very bad to potentially apocalyptic.
For some time he had been looking at the upstream tax implications of what was going on, most notably, how the federal government would end up looking at practices and doctors that, seeing a way to navigate payroll tax now that they could survive without addressing their basic practice structure and management protocols, decided to sign themselves up and openly admit they had the wrong structure.
One extreme and obscene outcome of this trend, according to Mr Dahm, is that some practices whose structures were largely defendable in a payroll tax audit – they just needed to tweak their management protocols and do some house cleaning like asking their tenant doctors to set up their own websites – have signed themselves up. They are just going with the zeitgeist of the thing.
Mr Dahm believes that the AMA and the RACGP are in large part to blame for outcomes like this because at no point during the payroll tax wars did they ever really push the alternative narrative that properly structured service entities offered a practice and its GPs safe harbour.
Mr Dahm has concluded that if the ATO follows the logical process of key law and rulings, some of which were only clarified properly last year, they would have no alternative eventually but to come after a lot of the practices that have opened themselves up by freely signing up to the payroll tax regimes of the states.
If the ATO acts like it always has, there won’t be any getting on page between federal and state tax regimes to make sure that, having created concessions for the GP sector at the state level, federal regulations and laws wouldn’t mess all that up.
The problem, according to Mr Dahm, is that once a practice alerts the ATO in one way or another that they are cool paying payroll tax, whether their state levies the tax on them or not, the ATO is going to have a big red flag on that practice in potentially having what is termed “deemed employees”.
If the ATO does that then the payroll tax problem will seem like a pleasant walk in the park for any practice that gets an audit. Worse, this time every doctor working in that practice would also be in trouble with the tax office.
If the ATO deems doctors to be working at a practice as effectively as being like employees, then PAYG, GST and superannuation are all in play for sorting out backwards and forwards.
Imagine if a practice has to pay GST to their GPs on their commission going backwards for five years. Or pay them superannuation. Or, those GPs have to redo their tax returns for at least five years because the ATO doesn’t recognise them as sole traders or as businesses anymore?
This apocalyptic vision is so awful that a very natural thing is already starting to happen. Various people and groups are arguing on social media and among themselves about why this will all never happen.
There are a lot of arguments out there from a lot of doctors and even from doctor business groups decrying the possibility. A lot of these groups or individuals are doctors doing their own thing interpreting what, in some cases, looks like they have Googled. A lot are saying, if it’s that bad why hasn’t it happened.
None so far have produced a comprehensive set of arguments based on all the current tax and accounting law, accounting practice and even regulation around software, which could suggest they’ve got a good point. Mr Dahm now claims he’s done that in his 262-page thesis.
So, a lot of people and groups are lining up to say Mr Dahm is scaremongering.
The problem might be that there’s a lot of deju vu in all this.
Mr Dahm is most famous for being one of the very first people to out payroll tax as a problem after the major precedent state-based legal cases came out more than five years ago. At the time he was labelled Chicken Little. But he was largely right from the outset.
Prior to Christmas Mr Dahm was already getting quite a lot of flak for the position he was taking publicly on this new potential issue of tax at the federal level.
One of his clients asked their lawyer for a second opinion and the lawyer came back saying that Mr Dahm’s ideas were patently false and that he was flagrantly doing tax promotion for commercial purposes by trying to scare people.
The lawyer, however, provided nothing at all to the client in the way of federal or state tax regulations and tax law that might prove his point, for what ostensibly may be a highly damaging and defamatory opinion to his client. The client ended up sticking with Mr Dahm, who did send all the research and background on what he was arguing to his client.
It might have been this incident that caused Mr Dahm to decide to charge his ship through the field of sea mines.
He was over all the confusion and misinformation he was seeing and decided to lay every card he had on the table and let the tax authorities either make a call, or, if they didn’t, acknowledge in some way that there was an alternative they were prepared to consider.
So he sat down, put all this thoughts, research and work together, checked it with lawyers who he understood knew this area of tax law pretty well, and sent the 262-page application to the ATO just before Christmas.
Dahm being Dahm of course he decided to send the document to a few other people that he thought should be interested: every SRO in the country, the Prime Minister’s office, the Minister for Health, the Department of Health and Aged Care, Services Australia, to name a few.
Apparently, the Prime Minister’s office has already gotten back and they are confused but worried, so he has someone’s attention already.
It wasn’t long before the RACGP got wind of the document and wrote to Mr Dahm requesting that he send them a copy, which he did, despite the fact that he took a largely dim view of how the RACGP had handled the whole payroll tax problem in the past few years.
What Mr Dahm felt about the RACGP and payroll tax was that the organisation chose to largely ignore the idea that practices needed to consider returning to the basics of why “service entities” were originally developed as a structure for their business, which was to protect them from medical liability.
He says that the college decided to take a stance that GP practices were special and should simply be exempted from the tax because of their status and importance to the health of the community.
Mr Dahm is a big supporter of GP practices (they are his clients after all) and their status in the healthcare system and maybe an even bigger patient advocate. But he thought the college and the AMA were not doing anyone favours by not airing the service entity and tenant doctor narrative properly.
“It all might have been okay except they always ignored the original premise for setting up service entities to protect them from potentially huge medical legal liability costs and all the obvious emerging tax law at the federal law that was going to come into play if practices didn’t change anything,” he told TMR.
“They just wanted politicians to exempt them from a tax every other business is paying and move on and have no considerations for the broader implications of not actually revisiting structure and spending some time and money fixing it all properly.
“Then they wanted everyone to clap when they got a few concessions from some of the SROs. It was never that simple.
“They see Queensland as their greatest win because there they are saying there is going to be no payroll tax for GPs.
“Ironically Queensland did the most work and had come up with a very comprehensive set of rulings which followed both state and federal law accurately.
“If practices had chosen to go down the path of following the initial Queensland SRO rulings they’d all largely be okay. Now they are saying, hey we don’t have to do anything. But they do if they don’t want to get caught in all the serious problems that are apparent if you admit you owe payroll tax and the ATO thinks your contractors might be like employees.”
Mr Dahm wrote directly to the Queensland commissioner for revenue expressing his disappointment at what the politicians had done to what he saw as excellent guidance on payroll tax law from a local SRO.
He said the new exemption ruling was problematic on multiple fronts, citing the ATO framework for “deemed employees” and suggesting that exempting one profession only was inviting all professions to create legal challenges for the state.
“It’s crucial to emphasise that legal and ethical pathways exist for GPs to establish their practices,” he wrote.
“When considering the rules in their entirety, the inconsistency is striking enough to make people at COAG blush.”
A big and obvious issue with what Mr Damn is pointing out to everyone in his submission is that no one wants to know.
If what is in the document is correct in logic and law, it’s going to cause problems for everyone at the state and federal level.
Last year federal Health Minister Mark Butler castigated the states for their aggressive payroll tax positions and encouraged them to do something about it to help GPs.
What’s he going to do if the ATO, as Mr Dahm predicts, starts doing something similar or worse to all those GPs he is spending so much more money on? In one end from the federal government (good on them for doing something at least) but then out the other because the ATO is applying tax law correctly.
That isn’t going to be a good look. Luckily for Labor, unluckily for the AMA and the RACGP, it’s unlikely to be an election issue, because it’s a slow-burn problem – like payroll tax originally was.
But it looks entirely like it could be a problem for a very simple reason. It’s the law (at least Mr Dahm’s submission is saying it is).
No wonder Mr Dahm is hated so much. No one wants someone to be pointing out that actually, as mad as this all seems, the law is the law and the law says you are all paying your tax wrong, so start stumping up.
Or, change the law.
That’s started happening at the state level and already the outcomes are looking perverse, which is probably what you get when you get a bunch of politicians making policy on the run in order to win an election. See Queensland writ large.
How long before the Pharmacy Guild wakes up and demands their members don’t pay tax either as frontline healthcare professionals, and so on?
Hopefully Mr Dahm has a dog, because although he may end up being right, he’s not going to have any friends if he keeps prosecuting this debate in his “damn the torpedoes” style.
The AMA, ACRRM, and the RACGP are all going to hate him for the same reason they did in the state-based payroll tax debate: they don’t want their practice owners to have to spend a dime on restructuring. They want to do business the way they always have, in which case we will be back to pressuring politicians to change the law.
As a quick by the way here, there are quite a few practices conducting business as well-structured service entities. Some have survived state and federal audits and they’ve all found a way to get around the very real challenges that such structures create for medical centres that want to optimise patient care by having doctors work in a synergistic and team-like manner.
“It’s harder yes, and some of the ways you get it done causes extra cost, but it’s being done,” says Mr Dahm.
He points out in defence of practices considering the path of tenant doctor structure that those who do go to the trouble of getting their tenant doctor structure right significantly increase the value of their businesses for sale one day because they are waterproofing them from the sort of back liability tax problems that the law says exist and could at any time rear up.
Also, doctor recruitment and retention are far easier for these groups because these practices offer the promise of a safe harbour from tax problems for their tenant doctors as well.
Also hating on Mr Dahm are the SROs, although for a while there you suspect the Queensland SRO and he got on quite well.
Of course, soon it might be the whole federal government health juggernaut, ministers, departments, policy makers and so on, who, having worked very hard in the last few years to right a very wobbly GP sector ship may suddenly find themselves giving with one hand and taking a whole lot more with the other.
Some of the other doctor-specialising accountants aren’t happy with Mr Dahm either because he’s been pretty blunt in saying the accounting and legal sector has let down GPs big time in the past two decades by allowing the situation to develop and doing nothing about it.
When we point all this hate out to Mr Dahm he sighs and says, “what do you do?”
“I’m not just trying to be a smartass here. There are very real and complex problems that a lot of people are just ignoring that I’m trying to bring to light.
“In the end, patients are being charged out-of-pocket fees because of poor or incomplete implementation of tax advice.
“The notion of a simple solution to intricate challenges surrounding contractor taxes and Fair Work regulations is misguided.
“There has been a defeatist attitude that the complexity is insurmountable, leading to inaction. Our submission aims to eliminate incomplete advice and misinformation in the marketplace, addressing systemic gaps in knowledge and resources.”
Which all feels like it confirms that Mr Dahm has crossed a line in his mind on the matter. He’s considered the imminent danger of a battery of torpedoes to port and decided to proceed regardless. He wants someone to rule on his submission so there is universal clarity for everyone on all these complex tax issues.
And if they don’t, which is feasible – the ATO might just not rule, which they’ve done in the past on messy matters like this – at least he’s outlined in intimate detail to the authorities that matter how he is doing stuff.
I guess the question for everyone should be, what if Mr Dahm isn’t wrong?
So far, mostly, his clients have substantively survived various types of rigorous tax audit, both federal and state based, which might be a hint that he could be onto something.
What then?
Oh, and what happened to Commander Farragut in the end?
His do or die move paid off. His ship showed his fleet the way through the minefield and they engaged and defeated the Confederate navy inside the bay. The victory closed the bay as a vital port for the Confederacy and likely helped change the course of the Civil war.
If you want to read Mr Dahm’s 262-page submission you can ask him if he’ll send you a copy at www.healthandlife.com.au.