Last of the payroll tax columns: maths and gambles

12 minute read

Fixing your entity structure may cost as much as one year’s payroll tax bill, or a lot less. So why will no one talk about it?

Welcome to my last payroll tax column (I hope), which I’m sure will come as some relief to a selection of doctor social media group detractors and a lot more relief to our editor, who has to sub these columns every few weeks. [I’ll hold him to this. – Ed.]

Why stop?

Let me start to answer that by putting to you a few questions I put to some senior people at some leading medical advisory firms and peak medical organisations recently (slightly edited to protect the innocent):

  1. Do you believe that an administrative services model, if structured correctly, would survive a payroll tax audit by most state SROs?
  2. Are you aware of any groups running an administrative services model and either
    1. Surviving an audit based on their current structure
    2. Being confident that their structure is well enough developed for them to survive one if they got one?
  3. Do you have any sense of how many practices (and through this roughly how many GPs) are not going to have to worry about a payroll tax audit based on having well set up structures already?
  4. Why do you think there is no public narrative about the option that members might have to build their existing administrative entity structures to be compliant, at least to the Queensland SRO ruling, which is thorough and largely based on case law?
  5. Given that there are numerous practices that run as administrative entities out there that have either survived audits or are now confident of doing so, should the alternative of remediation at least be discussed and debated along with the currently debated options, which mainly concentrate on getting state governments to abandon payroll tax for GPs, or moving to pay payroll tax and recouping the burden through increased fees to patients? 

Guess who answered these questions for me?

No one. One person – from an advisory group – at least got back to me to say that they would discuss them with me at some point, but off the record.

Why are these questions so difficult to answer?

They are pretty straightforward.

Do the maths

A few weeks back in South Australia, where the hammer is close to coming down on 285 practices who have all been assessed by that state’s SRO as needing to pay payroll tax as of 1 July, one practice, with 20-25 doctors, came out publicly and said that moving to payroll tax was going to cost them $140,000 per annum.

I checked this with someone who should know and it seems to check out. So in the next decade of the practice’s life this turns out to be about $1.6 million with inflation.

According to current campaigns and narratives being run out there, in particular at the moment in SA, this cost will need to be picked up by patients … and isn’t that a terrible thing state governments are making GPs all do to their poor patients?

That’s certainly one way you could look at it.

Another is that a service entity that willingly moves to payroll tax, without checking properly first what the cost of remediation might be, is being derelict in their duty of care to their patients.

That’s because remediation might fix the problem for significantly less than $1.6m, avoiding significant ongoing cost to the service entity owner, but more importantly avoiding the idea altogether of an ongoing patient tax and less bulk billing.

You probably have no clue what remediation might cost you, especially at this point of time. The cost is going to be on some spectrum depending on a myriad of factors.

I’m no accountant, but I’ve asked a few and heard estimates that the structural fix could cost in the range of $30,000 for under a dozen doctors to $110,000 for a larger entity with 20+ doctors.

Even in the worst-case scenarios, remediation for that size a practice is not going to come within cooee of $1.6m. In fact it would pay for itself in one year.

Remediated or not, you still might have to defend your structure as it existed in the past.

But with a good advisor, that cost can now be calculated with reasonable accuracy too.

And that would give you a lot more valuable information to make an informed and responsible decision.

One option some groups have gone with is to entirely blow up their old businesses and restart them with the right structure – not a cheap option but still significantly under that $1.6m figure in relative terms.

This option apparently provides a decent layer of protection from an SRO to go backwards on an audit and chase money. It makes the money from the past very hard to get at. And given how many juicy live non-restructured entities SROs have to prey on, the low-hanging fruit principle is almost certainly going to dictate activity for a long time yet. It’s never a guarantee, but it’s certainly an alternative to the $1.6m roll-over option.

If you don’t know, a lot of practices have survived rigorous audits from SROs already. Some of those practices have been following the case law from before Thomas and Naaz and remediating as they go. Others have remediated more recently.

Virtually none have put themselves in for an amnesty, interestingly.

But even a backwards five-year audit on a 20-doctor practice is likely not to cost an owner $1.6m.

How do I know that? I don’t really, I’m no accountant. I just ask around and do the maths. But at least I’m doing that. It probably wouldn’t hurt some groups to give it a whirl.

The maths versus the gamble

What’s at stake here is the credibility of a practice that doesn’t even bother to check their options here. If they simply follow the current all-encompassing publicly aired narrative and give in, it’s the patients that are going to hurt the most, not the service entities or the doctors working with them. They are just going to put the price up.

Stepping back and reading a lot of the socials on the issue you’d be forgiven for thinking that a lot of entity owners are making a bet that the dominant narrative from the peak medical membership groups – that payroll tax is an unfair tax that will threaten GP livelihoods and create an unfair impost on patients – still has a great chance of succeeding.

In other words, some entity owners out there are gambling their futures on the idea that state governments will eventually give in and remove the tax burden from GP service entities, thus eliminating all that possible future cost for nothing. So they’re going to wait?

Is that really a good bet now?

It’s a big bet, that is for sure. Gambling on the future of the doctors who work in a centre and all their patients.

If Sportsbet were running the odds they’d be very long now given no SRO has actually given an inch on the idea of dropping the tax.

Does anyone think that SA Revenue is going to cave into the narrative that the college is trying to run through the national and local press on it being a patient tax, before 1 July?

Why is no one talking publicly about the idea of just checking the maths of remediating versus paying a great big bill every year?

Why is there no narrative on the available alternatives for service entities?

A few weeks back the college managed to get the ABC on board to run some national press on the SA situation and the bigger story about the problem in every state.

In all those stories there was no mention from anyone that there was another way entities could approach the problem: that entities could, if they wanted, seek advice and do what quite a few practices have already done, and fix up their structures so they are compliant moving forward.

You could say it’s not great journalism by the ABC to miss that this alternative option exists. But these journos are on a daily news cycle moving fast. If someone doesn’t tell them there’s another way that might work for some practices, they’re very unlikely to pick it up themselves.

And so what we ended up with is a national narrative that indicated that GPs and GP practice entity owners were entirely trapped by a group of evil SROs who had “reinterpreted” the law and were running rampant across the land, laying waste to the sector and to the hip pockets of unsuspecting patients who are all struggling with cost of living pressures.

That is not the only narrative, but it’s the only one being aired.

One reason why the college and other interested parties are not making any effort to air the alternative could be that they want to keep putting maximum pressure on all governments to simply change the law.

In other words, the college and other interested parties are gambling it all on that single narrative, possibly calculating that any airing of an alternative would give SROs too much leverage.

But that narrative on its own is fake news.

Why don’t we see professional advisors more active in promoting alternatives?

This is going to sound a little blunt, but for the most part accountants and lawyers have let their GP entity owner clients down significantly on payroll tax.

How else could so many entities have the wrong structures from a payroll tax perspective if their advisors had been on their game for the last 10 years?

The excuse that state SROs have changed their interpretation of the tax is lame and not accurate. It’s misdirection.

The law has been the same on payroll tax for the best part of a decade in most states.

Yes, some case law gave SROs ammunition to go after entities, but the reality is, SROs mostly just weren’t aware that so many practices were non-compliant.

As this process has unfolded the strategy of peak organisations like the AMA and the RACGP has been to declare that nearly everyone is non-compliant (not true) in the hope that SROs and state governments would feel that the problem is so big they would need to change the law.

That strategy backfired big time. All it did was alert SROs all over the country to potential revenue they had no idea existed.

So far the strategy of a lot of advisors has been to keep their heads down and not say anything. What can they say? Sorry, we stuffed up?

That would show some leadership, but their lawyers are probably telling them not to that for obvious reasons.

How can ForHealth sell for $1 billion if there is no alternative?

Remediation is probably not available to certain groups, but it’s certainly an option for a lot of entities.

We know this because entities that have remediated are surviving audits.

If the corporates were faced with the single option of giving in, then a large proportion of them would almost certainly be worthless based on their contingent liability of back audits, and the cost of converting to pay payroll tax moving forward.

But what we see in the press this week is an advisor of one of our largest corporates leaking to the financial press that they think they can sell it for double what they bought for just under five years ago.

If you don’t believe there are quite a few remediated practices surviving SRO audits then ask yourself, how could one of our two largest corporate GP entities – and the one with the worst legal track record for developing tax-avoiding structures, as announced by a judge in one famous Federal Court case – put itself up for sale at $1 billion, double what it was acquire for in 2020?

Either the people at BGH are stupid (nope) or they know something about ForHealth’s structural setup that makes them supremely confident that they aren’t going to have a big payroll tax problem when they get to do due diligence on a proposed sale.

If ForHealth, once Primary Healthcare and Healius Medical Centres, has not remediated in some major way, then it’s back payroll tax liability for the last decade would be astronomical and a sale price of $1 billion would be a fantasy.

Private equity does miss the point from time to time. But only when there’s something very subtle in a market in play that is difficult to forecast.

The payroll tax problem is not something subtle. It’s probably the first item on a due diligence agenda on the sale.

One billion dollars and the BGH folks haven’t got something convincing to tell their buyers about what is going to happen with payroll tax and the group?

Surely not.

Note: Re the “Last of the payroll tax columns” idea. I really hope so. There will still be lots of news on payroll tax we will cover I’m sure, but I can’t see that there is much more for people to work out now regarding the payroll tax situation and their options, notwithstanding the failure by peak organisations to air those options properly.

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