Would Your Medical Practice Survive a Payroll Tax Audit?

Four Areas that are Gaining Specific Attention by Revenue Offices and the Courts

Can you establish your practice as validly being exempt from recent Payroll Tax reclassifications by State governments and through an appeal in court? In this article, we’re highlighting four main areas that have come to the attention of State Revenue Offices, ATO and the appeal courts to determine whether healthcare businesses should be paying additional Payroll Tax.

Need more information about what’s going on? Start with our article: What is Going on with Payroll Tax for Medical Practices? – Plain Speaking Health

Healthcare organisations now need to be able to validly prove their structures, systems and process align to ensure they are not caught in the Payroll Tax net.

In basic terms, healthcare organisations that run as a ‘Services Entity’ now need to be able to prove that their doctors truly are ‘Practitioner Entities’ running as separate businesses – not just pseudo-employees of a ‘medical practice’. Organisations that cannot make this clear distinction and prove they operate consistently with it, could find themselves paying payroll tax on doctor earnings, along with back taxes and potential fines. And there’s a risk that afterwards, the practitioner entities could be audited as well.

A mistake in this area could literally put a medical practice out of business. The Queensland Revenue Office is all over this – as of June 2023, the Queensland State Budget included provisions for increased audit and debt collection. There are precedents of medical practices going to court and losing their appeals.

The good news, for GP practices at least, is that there is a 2-year moratorium for them to ensure they have implemented any change required to be consistent with their model. At this stage, this moratorium may not apply to other healthcare businesses – specialists or allied health.

The priority then, is for healthcare businesses to clearly understand and decide their business model on purpose, and ensure that they operate consistently with that model. Auditors and the appeals courts are looking deeply into practices, not just at their contracts, to validate the evidence that those contracts have been implemented. There are four main areas that are receiving attention, based on published cases. 

Four Key Areas to Establish and Validate Your Services Entity as being Payroll Tax Exempt

There are four core areas that need to be established to validate your business model and provide the proof that you’ll need that your practitioners are contractors, not employees for payroll tax purposes.

1. Assess your Business Structures and Legal Contracts with your Medical Practitioners

The foundation of your exemption from Payroll Tax is your business structure – in particular, a structure that has a “Services Entity” providing premises and support services, and then your doctors as individual “Practitioner Entities” providing the medical services to patients.

Your Services Entity provides the consultation rooms, administration, IT and other support services. A useful analogy is a Westfield Shopping Centre – it provides the space and the services for other individual businesses to operate (its tenants). It receives income from those other businesses for its premises and services, but does not receive income from shoppers directly.

The doctors are like the various retailers – the grocery stores, clothing stores, or cafes – within the Westfield. They directly interact with shoppers (patients), provide their goods and services (medical advice and treatment) and directly receive the payments (patient and third party billings). Your Services Entity should have formal agreements in place with the Practitioner Entities who directly provide medical services to patients, from your location, and supported by your shared services.

As a first step, you should ensure your operating model and your contracted agreements with practitioner entities are up to date and validly reflect the correct operating model.

We recommend that medical practice owners or managers directly seek specialised legal advice in this area.

2. Accounting Procedures and Flow of Funds

The key evidence that your operating model has been implemented is in the direction of the flow of funds between the entities, in line with your legal agreements.

To validly demonstrate the contractor arrangement, the Practitioner’s Entity must have the direct relationship with the patient, just like a retailer in a shopping centre. It is the Practitioner Entity that directly receives income, via its own ABN and into its own bank account, from patients and third parties such as health funds and Medicare. The Practitioner Entity then pays the Service Entity to supply their premises and support services.

This contrasts with the commonly adopted model of medical practices collecting income centrally, and then distributing it to doctors minus their service fee – this is now an outdated model and the days of “Recipient Created Tax Invoices” are now over, if you want to avoid Payroll Tax.

It is becoming easier for Governments to track the flow of money, as seen by the recent audits. More systems are now connected and provide the evidence for cashflow – even as simple as cross referencing which ABN and bank account is connected to PRODA accounts.

We recommend that you seek advice from an experienced accountant on your practice accounting processes and ensure your processes are set up correctly.

Your Services Entity provides the consultation rooms, administration, IT and other support services. A useful analogy is a Westfield Shopping Centre – it provides the space and the services for other individual businesses to operate (its tenants). It receives income from those other businesses for its premises and services, but does not receive income from shoppers directly.

The doctors are like the various retailers – the grocery stores, clothing stores, or cafes – within the Westfield. They directly interact with shoppers (patients), provide their goods and services (medical advice and treatment) and directly receive the payments (patient and third party billings). Your Services Entity should have formal agreements in place with the Practitioner Entities who directly provide medical services to patients, from your location, and supported by your shared services.

As a first step, you should ensure your operating model and your contracted agreements with practitioner entities are up to date and validly reflect the correct operating model.

We recommend that medical practice owners or managers directly seek specialised legal advice in this area.

3. Your Administrative Operations

Auditors and the courts have also looked into the way that practices operate to determine if they are truly separated as service entity and practitioner entity.

To align with your model, you must be able to show that you operate your practice as a services business. The better evidence you have of supporting the operations of the practitioner businesses within your practice – and not managing them as employees – the less risk of being lumped with Payroll Taxes.

Specific areas that could work against validating a Service Entity model have been:

  • Communications to, and about, patients coming with Service Entity branding
  • The practice requiring particular rosters for doctors
  • Doctors having to apply for leave
  • Practices having billing targets, or guaranteed base incomes, or top-up payments
  • Restraint of trade clauses in doctors’ contracts.

All these are examples of a practice behaving like they are managing a doctor as an employee – not them running their own legitimate business.

Evidence that you might have, or can create, that will support the individual doctors’ businesses within your practice could include:

  • incorporating your practitioner entities’ brands in the patient experience (in receipts, business cards, emails and text messages),
  • incorporating your practitioner entities’ brands in external relations (doctor correspondence, marketing and events), and
  • documenting the admin support processes and preferences for each of your different consulting doctors.

4. Your External Perception – Brands and Marketing

Your public-facing identity must align with your business model. In fact, recent ATO and High Court findings have specifically referred to the websites and marketing (or lack thereof) for the specific entities. Courts have specifically referred to a lack of website, signage as a key indicator that there is not a valid practitioner entity. There are three main areas in marketing that warrant close attention.

Your Services Entity Website

Your Services Entity needs to position itself as such. Its website and marketing are for a business-to-business market – attracting customers (practitioner entities) to avail themselves of the high quality premises and services. While you can advertise generally as a health precinct or health location to attract patients, like Westfield attracts shoppers generally, your services entity should not be offering its own clinical or medical services.

Your Practitioner Entities Need their Own Websites

All Practitioner Entities need their own website. The auditors and courts will seek to validate from publicly-available information that you are a legitimate business and have stated that websites are core to this. Their websites should be of a standard that is consistent with a professional healthcare service – it is their business that should primarily attract patients – not the service entity.

The Practitioner Entity Website and other forms of marketing should publicly make the ‘offer’ of services to patients.

The Practitioner must, on their own account, and not that of the practice, make an offer of services in the public arena. According to recent high court rulings, “a wide variety of activities can constitute making offers or invitations – such as print advertising, printing posters, radio and television broadcasting, public tender, having a website and posting internet advertisements – but all require the involvement of making public announcements” (Fortunatow v Commissioner of Taxation & Anor). This offer must be made by the Practitioner Entity.

 

Ultimately, through your branding, websites and marketing, your patients should be able to identify that their relationship is with the doctor, not with the services entity/the practice.

Where can I get help?

While there are experts in legal and accounting in this area, finding advice and support for marketing and operations that understands healthcare, let alone the detail of payroll tax avoidance, is rare. That’s why at Plain Speaking Health, we are standing as leaders in healthcare marketing and operations, and discussing and working with expert lawyers and tax accountants.  

We help health businesses align marketing and operations to their legal and accounting structures to avoid Payroll Tax burden.

Plain Speaking Health is a marketing and communications agency founded by a health professional, teamed by experienced professionals in the health, marketing, design, web development and ‘on the ground’ practice administration and operations.

Plain Speaking Health is your trusted advisor to help ensure your Services Entity and separate Practitioner Entities at your location to understand how Payroll Tax is being assessed and what you can do to lower your risk of a surprise Tax bill.  

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