The RACGP/AMA Mexican tax standoff won’t work

14 minute read

The claim that you either grant a payroll tax exemption for GPs or they will all go broke is flawed and may stop them getting on with a real solution.

Our erstwhile and sometimes maligned honorary finance editor David Dahm rang me this week and asked me a question that nearly triggered an anxiety attack.

“Jeremy, if I rang you as your accountant [he’s not, thank heavens] and said, I’m pretty sure that unless you change the name of your business you’re likely to get a tax audit, either from the ATO or the NSW SRO or both, what would you do … ?”

The anxiety reaction was solely associated with the words “tax audit”. I got audited once and although I came out the other side relatively unscathed, the experience all the way was scary and anxiety-ridden.

You don’t know what you don’t know as a small business punter, and you don’t know if your accountant doesn’t know either really (do you really believe what your mechanic tells you is wrong with your car?), so when you get asked lots of more and more targeted and detailed questions you start getting very worried and paranoid.

It’s very hard to get everything right and you generally need to. “Ducks in a row” takes on a whole new meaning.

It’s an awful and time-consuming experience whether you make it through in one piece or not.

Of course, anyone can get audited at any time.

But for doctors, and particularly GPs, the chances of an audit are now higher than usual.

It’s a very real possibility that hangs over the head of so many GP practice owners now that it has become a very serious problem for the whole healthcare system in this country.

Why is government sticking more pins into the beating heart of our healthcare system when general practice is already struggling?

The first thing everyone should understand is that all this tax stuff is not targeted at doctors. It’s an across-the-board realignment affecting lots of professions and business owners.

And it’s happening now simply because tax authorities have more data to make more meaningful judgements of what really has always been the law.

My answer to David’s business name question, once I’d shaken myself out of my audit panic, was “Hell yes I would, in a heartbeat … I’d do anything to make sure I’m on the right side of a tax authority.” (I say this touching wood, eyes squeezed shut and with all fingers crossed just because I’m even thinking about the topic, it’s that awful an experience).

So here’s a question for every practice owner GP and tenanted (contractor) GP out there in a week when a supposed landmark GP practice payroll tax case was lost by Thomas and Naaz, and both the AMA and the RACGP came out guns blazing saying this case damned nearly all GP practices to going broke and there was nothing the government could do now but give in to their demands and make GPs exempt from payroll tax.

What happens if not one state government or the federal government (which has made important changes to contractor vs employee regulations recently) gives into these threats from your member organisations?

I ask this because our reporter Holly Payne has rung around every state and territory and guess what? No state or territory is going to change their mind and carve out GPs as a special case for payroll tax exemption.

In fact, none are even going to bend just a little like Queensland did, and create a payroll tax holiday for GP practices to get their act together.

That Queensland only created a 2.5-year holiday, and then said everyone sign up if you want the holiday (so we know who to check on when the holiday is over), should have made it abundantly clear that GP practices, which are small businesses, are not getting carved out for special treatment.

I still hear a lot of GPs willing and hoping here.

Maybe, just maybe, it will happen.

It won’t, but let’s just say it did.

If every state government suddenly universally decided to exempt from payroll tax GP practices that have a service-entity structure and run tenanted doctors, then every one of those doctors would still likely have a huge problem with the ATO. The ATO doesn’t follow state revenue office rulings and would continue looking at those structures in a similar way to determine if the tenant doctors were not in fact contractors but employees.

And if they found the latter, then all those tenanted doctors would have their personal tax returns wrong for the past seven years.

What can you do?

Do you give in and start paying your tenanted doctors as employees as the SROs would like (the ATO would love this too as employees pay them more tax)?

That has two very obvious problems, but the biggest is not what you think – that with approaching 5% more on your cost base you might go broke.

You can get over the 5% cost problem: start mixed billing if you haven’t already and charge a bigger gap, and find other ways to get more efficient to suck up the extra cost.

It’s not ideal for anyone – especially patients who will pay more – but most of us know it can be done.

No, your biggest problem would be putting all those doctors in the crosshairs of the ATO for a personal income tax audit going back seven years.

And, given no state revenue office has offered or even hinted at an amnesty for payroll tax, you could all still get audited for payroll tax going back at least five years anyway (Queensland won’t go back past the 2021-22 financial year).

If you think this is a horrible mess, so far it is.

But if you’re listening to the AMA or the RACGP you surely will either be getting more and more anxious or worse, thinking of giving up altogether in some way.

The AMA and RACGP position of “we’ll force the government to give in and make you payroll tax exempt” is a classic Mexican standoff: someone will get their head blown off if there are no alternatives offered in the negotiation.

We all know it’s not going to be the government.

That the peak bodies aren’t offering the government or their members anything else must be inducing enormous extra anxiety within the GP community.

Even if the government did give in, if you follow the logic above, you’ll just run into more tax issues.

At this point of time the RACGP and the AMA  are using their members as political pawns in this standoff tactic: “stop payroll tax or the GP gets it” (think bank robber with hostage and gun to the hostage’s head, but the hostage is actually the bank robber’s wife).

There is another way and while it’s not going to be that easy, there is likely a very good mid to longterm outcome for practice owners and tenant doctors if they end up opting for this far less risky strategy.

To start on this idea you have to accept that some things the AMA and the RACGP are saying about Thomas and Naaz losing their application to the NSW Court of Appeal and the Queensland payroll tax ruling are either wrong or misleading.

Firstly, Thomas and Naaz is one practice, with a very particular setup, which is almost certainly not the same setup as almost all other practices.

Despite this the AMA and the RACGP are running the line that because the court dismissed Thomas and Naaz’s application for leave to appeal (they had already lost their tribunal appeal last year), it’s all over red rover for everyone.

Who is everyone?

I personally am aware of a lot of practices which run a services-entity structure which, if they get an audit, they will almost certainly get through without a payroll tax liability.

How could I make this assumption?

Because I know a few other practices that have been audited recently and they had enough in order to get through.

You haven’t heard about these cases because once a state revenue office gives up on an audit, it doesn’t become public.

But it is happening so it can be done.

Which means the all-or-nothing outlook of the RACGP and the AMA is wrong.

How do the AMA and the RACGP make an assumption that every practice is exactly like Thomas and Naaz?

Have they got personal detailed information on the over 6000 GP practices running in Australia to make this determination?

As we pointed out earlier this week, Thomas and Naaz got a lot of things wrong: their tenant doctor contracts were wrong in some ways, their payment flows to those tenant doctors were wrong in some ways, and then, importantly, the optics of who was actually facing the public – the practice or the doctor – was wrong.

Many practices probably don’t have everything right (note: even the ones that have passed an audit have to keep alert and change and make changes when they see government change its interpretation of law … it’s part of the game).

But a lot will have some things right and a few things wrong, or vice versa.

A key issue with both rulings coming out of state payroll tax offices and tax cases, both state and federal, concerning employee vs contractor judgements, is that it is not one thing but the sum of the whole picture.

Some of the practices I mentioned that passed audit muster already did not actually have everything right.

Some had contracts and payment flows so tight that the particular state payroll tax office investigating didn’t go any further.

In one case, if they had, they probably would have found that the name of the practice and its centralised booking systems presented optics like it was the medical practice which was engaging the customer, not the individual tenanted contract doctor, as it should be.

The point I’m trying to make here is that if you’re a practice and you’re wargaming all of this on a big pin board in your back office – as you probably should be – then it seems to me that in a lot of cases the most obvious and sensible strategy would be to look at all these things the ATO and the state payroll tax offices are looking at, see whether you have holes and where they are, then start fixing them.

Given the complexities emerging around law and tax here, you’re going to need both an accountant and a lawyer who know what they are doing to mark your homework before you really start.

Which introduces another factor.

It is apparent that there may not be too many lawyers and accountants out there at the moment who are capable of marking your homework properly. Some practices have definitely been given bad advice.

But the key issues are now so obvious and immediate that I think you can expect many accountants and lawyers to be getting up to speed rapidly (or you’ll be able to sue them – not that this is any comfort).

Importantly, when you have bought your pin board, coloured pins and string from Officeworks, and you’re mapping out your options and strategies in that backroom, then make sure you put these pins into your calculations.

If you fix the holes you have and you end up a fully or largely compliant practice which meets the rules (and even whims) of state payroll tax authorities and the ATO while still running a services-entity model, then ask yourself:

  • How much more likely will you be to attract the best and most talented tenant doctors if you can offer them the safe harbour of a compliant and well run practice where they don’t have to worry about all this crap?
  • How much more will your practice be worth as a business if it is running a compliant services structure with the best, most talented and happiest tenant doctors on board, absent of all these worries?
  • How much better will all this end up for the patients once you and your tenant doctors get this horribly hairy monkey off both your backs so you can get on with practising good medicine?

I don’t know why the AMA and the RACGP haven’t put these factors into their thinking.

Yes, it’s going to involve time and money for a while for a lot of practices, and yes, some of it isn’t absolutely ideal for team-based medicine.  

But every issue that the state payroll tax offices are pointing to are solvable within most existing services-entity structures.

You have to do something. That something can’t be sitting back and praying that the AMA and RACGP Mexican standoff tactic will somehow work.

It feels a lot like that something is to map out where you are, get some good external advice for context, and start fixing your structure so you eventually comply.

If you do, it feels likely that the “safe harbour returns” of a good loyal workforce and much higher business value for sale one day, are there for the taking.  

There is one more potential issue, I suspect.

I’ve been reluctant to mention it because it can be read the wrong way.

While you may end up ragging on me for saying this because I’m not a doctor, that’s actually a good thing – I’m definitely on the outside looking in and maybe that can help with perspective (I have also run a lot of businesses big and small).

Go back to my answer on “would you change your name to avoid a tax audit?” and then think what you would do if David Dahm rang you up as your accountant and said change the name of your practice or maybe face an audit.

Your practice might have a lovely community-minded longtime name like “South Lovely Beach Family Medical Practice” or “Lovely Beach Medical Centre”.

So far most doctors who have been asked this question are horrified and on first run almost always say a flat out no.

My reaction was wildly in the other direction.

It is apparent now that changing the name of a practice is going to help in plugging some compliance holes.

So change your name if it’s in the red flag zone!

If you have a medical practice name that is a red flag now to a state revenue office in a potential audit case, surely the pain, personal disappointment and even possible commercial issues with patients not recognising you for a while are nothing compared with getting a five-year backwards ruling on payroll tax owing.

What is occurring here might, at least partly, be cultural (oooouch).

The RACGP and the AMA demanding that the government treat GP practices as very different from every other small business in a state and not tax them is partly cultural as well.

“Hang on, we are doctors, saving lives and the community … you need to be treating us differently … right?”

The argument, by the way, that governments don’t levy payroll tax on hospitals is moot: public hospitals aren’t businesses, they are state government institutions, payroll tax is a state tax, and it doesn’t make much sense taxing yourself.

GP practices are small businesses (well, mostly … GP corporates aren’t that small – this in some ways creates even more issues for the vast majority of small ones, because there’s a lot of potential payroll tax in dem dar GP corporate hills, but that’s another story).

I’m sure when you thought about going into medicine the words tax and technology never entered your thinking.

But tax and technology (I’m going to talk about technology next week) are probably the two biggest swing factors for general practice today in terms of future prosperity.

GPs are generally very community-minded and smart, sometimes to their detriment.

In the case of tax now, traditional community attitudes and in some respects the culture and context of being a doctor, have to be looked at with fresh eyes, if GPs are to survive and thrive.

Some changes are definitely on the cards here if you want to end up with a valuable “safe harbour” business, with a good future

Society and government aren’t viewing GPs like they used to, unfortunately.

GPs need to adapt, not dig in and put guns to their own heads.

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