BeInTheKnow: What are the implications of payroll tax cases?

Kelly Chard from GrowthMD

What are the things we need to be wary of when preparing RCTIs?

An RCTI is a tax invoice prepared by a recipient of services (or services). If a practice is issuing an RCTI to a doctor, this means the practice is preparing an invoice for services received from that doctor.

If the practice is running a true service/landlord entity arrangement, then the practice is providing services TO the doctor. In this case a normal Tax Invoice would be issued to the doctor for services and facilities provided.

If the Independent Medical Practitioner (IMP) works at several different practices does this strengthen their status as a non-employee?

If the IMP is considered a contractor under the applicable payroll tax legislation, there are then various exemptions and rulings that may apply to exclude some payments from being considered as taxable wages.

For example, in QLD, if a contractor is considered to ordinarily perform services of that kind to the public, generally, an exemption may be available. There are multiple factors that may be relevant here, including the range and number of clients a contractor provides their services to.

In today's environment, most doctors work on a room rental sort of agreement for independent consulting rooms. If the agreement says five days a week and they choose to take a week off, are we able to accommodate the minimum rental value from doctors in our contracts?

I think it is best to look at any charge with a commercial lens. If you are operating as a landlord and service provider, you have fixed costs which are ongoing even when a doctor is not using the room they have rented from you.

In this situation, it may be appropriate to have an agreement that specifies the "base rent" charged regardless of use. Of course, you would want specific legal advice on this for your situation.

Even if under the PRT threshold - implications for SGL, PAYG, and Leave entitlements if deemed an employee. Is that correct?

Yes, you are correct that there are other taxes that may be applicable to the varying type of doctor arrangements. We limited the brief discussion on the webinar to payroll tax, but of course, advice should be sought regarding the different types of tax legislation and how individual practice arrangements may trigger the provisions.

Clearly, it is a REAL problem in Victoria, where Payroll tax thresholds are much lower at $700,000, whereas approx $1.2M in NSW; we have sought legal and accounting advice already. Clearly, the Thomas v Naaz case was not representative of most GP practices that engage "independent doctors", and as such, the impact of this ruling on us is unreasonable.

My question relates to the "flow of funds". The issue of establishing a Clearing Account is vexed as it may be primarily "owned" by the directors. Could a clearing account be set up with ALL doctors as joint account holders of that clearing account?

This is a good question and one that is probably more suitable for a legal opinion. The joint account you suggest may reduce your risk to some extent; however, there are other complicating factors involved with doctors holding joint accounts and what is considered the legal and taxation arrangement between the doctors.

If the practice directly controls the transactions and monies in the account, then it may be that the effective ownership and control of the funds are still with the practice. I would suggest obtaining a legal opinion in relation to this set-up.

New Contract Doctors almost always ask for a guaranteed minimum income for a few months. How can we accommodate these requests without the risk of having a deemed employee?

Unfortunately, providing a minimum guarantee will create a relationship where the doctor is providing services to the practice - which creates a relevant contract type scenario that is then hard to change. Some practices might offer service fee/rental discounts for an initial term (think of this as a rent incentive given by a landlord to attract a tenant). You do need to be very careful in this area though, so please get your own legal and accounting advice.

Can we adjust existing agreements without being accused of evading tax?

Unfortunately, the answer is "it depends". Changing terms of agreements usually goes hand in hand with operational changes or business changes. Simply closing one day and opening the next day with a new agreement but no other changes are unlikely to be effective. I suggest you work together with your lawyer and accountant (hopefully medical experienced) to be confident that any legal agreement changes are reflected operationally and financially.

If the practice manager manages the doctor's separate bank accounts, does that make it less arm's length?

Also, if the doctors need to do all of this management, perhaps they would need to reduce the service fees payable to the practices as they are providing less service to the doctor's?

I agree that if the practice manager is in "control" of the bank accounts that this may not be an arm's length situation, however, as each business owner would have the legal ownership of the account and monies, and there would be no "net payment" made from the practice, the separate bank accounts are likely to reduce risk.

Some may argue that fewer services are being provided to independent practitioners; however, my view is that other costs and services are always increasing, which means service fees need not reduce because of this one change. Please be mindful that changing bank accounts alone may not be sufficient to reduce your overall risk, and you should also consider other factors to reduce your risk. Get good independent advice from specialist accountants and lawyers.

Would this case lead to "retrospective "payroll tax collection, and how far back in time is it likely to go?

The state revenue departments can investigate historical compliance with payroll tax legislation - usually up to 5 years post lodgement, but this can vary depending on circumstances.

Marcus Wilson from Surgical Partners

If you go to the first option for the bank account for a collections account, whose name is this in? And which ABN is it linked to?

Historically these collection accounts have been in the name of the Practice owner/operator and linked to their ABN. Clearly, this has been raised as an issue in recent cases, and thus practices should seek professional advice about their circumstances.

Regarding separate doctor’s accounts. Could the practice manager be a co-signer on the bank account to reconcile and distribute funds?

We have seen a number of practices where the practice manager has both read access and payment approval access to individual doctor bank accounts. This does address the transparency issue, but not the efficiency issue - digital matching is not achieved, for example.

So while this is useful in certain contexts and possible with appropriate consent, there are a number of obvious risks associated with bank account access that may concern the doctors and have potentially related implications for the practice.

Sophie Christian from You Legal

What do you recommend are the risks regarding all this for the current "contracted" doctors besides the practice failing? Do you have a recommended GP (non-owner) contract?

The risk is that the GP contractor may be determined to be an employee rather than a contractor. The consequences are the same in that it may affect the relationship between the Practice and the contractor and the flow of money between the parties (i.e. payroll tax, superannuation, leave entitlements and other entitlements).

It is best to seek specific advice about your particular circumstances. Here are some resources:

• Independent Practitioner Arrangements: Payroll Tax Case
• Choosing your words wisely in independent practitioner arrangements

It is best practice for both parties to have clear expectations. We have a fast-track option to a Services and Licence Agreement here.

Can we adjust existing agreements without being accused of evading tax?

It is important that agreements are updated regularly to ensure that they are up to date with changes in the law and that they are reflective of the day-to-day working arrangements in place. You are right; you should be cautious of 'sham contracting.

Does You Legal specifically advise income and payroll tax advice?

You Legal does not provide tax advice.

Have You Legal fought and won any income or payroll tax cases?

You Legal has assisted clients with current investigations on foot. There is no outcome at this stage.

What are some of the biggest 'no no's as far as legal agreements are concerned?

There are a number of factors which I discussed which would be taken into account. There is not one single factor per se. However, some of the factors which were considered in the Thomas and Naaz case were: the scope of services and associated fees, the relationship between the parties, use of restraints, work hours, sufficient flexibility offered and a review of the flow of money.

You touched on the high court judgement of ZG vs Jamsek, where primacy was given to the contract, not the multifactorial approach, and the high court takes priority over state laws

Yes, we do have more information available on this and its impact. We have written a case on these High Court Cases, which you can find here.

What are the implications of this high court judgement over NSW state payroll laws? Will this overrule state payroll?

Sarah from You Legal recently did a Webinar on the topic of 'How do the recent high court rulings that clarify contract worker status affect medical practices?' It can be viewed here.

The biggest unresolved issue seems to be how PIP payments should be handled. Is it OK for the Service Entity to receive them (most PIP payments are for the Service Entity's activity)?

If patient fees are deposited directly into individual tenant doctors' bank accounts, does this affect the calculation of PIP/SWPE?

The manner in which the PIP payments are distributed can be addressed in the Services and Licence Agreement.

Please explain what you mean by a "licence" with the Practice.

Our Services and Licence Agreement incorporates a 'licence to occupy". This means that part of the services which the Practice is providing the independent medical practitioner is a "licence" to occupy a consulting room on the premises on a non-exclusive basis (i.e. a flexible basis). The licence governs the use of the consulting rooms.

What is the main difference between a license agreement and a traditional service agreement?

A Licence deals with the licence to occupy a consulting room as a part of the premises. This is a more flexible option than a sub-lease. The licence to occupy forms a part of the services the Practice offers to the independent medical practitioner.

Some services agreements may not have a licence component (i.e. telehealth services) or may be considered to form a part of the 'administrative services' and provide minimal information about the terms of any such use of the premises.

I paid for a new template from the AMA before 31/07/2022. Should I be concerned that the template is not up to date?

You may wish to contact the AMA to clarify if they took the Thomas and Naaz case into account. If you would like You Legal to provide tailored advice, you are welcome to contact us.

A key component of the Thomas vs Naaz appeal case ruling was deeming that contractor Doctors are providing services to the Practice, not directly to the public, as opposed to the previous focus on the flow of money.

Would this mean that even if we move to have receipts paid directly to the Doctors (to mitigate payroll tax liability) and the Practice only collects service fees from Doctors in future, could revenue still assert that the amounts retained by the Doctors after service fee has been paid to the Practice as payroll for payroll tax purposes?

As we discussed, there are a number of risks to take into account. There is not one single risk. The services provided and the manner they are provided are also relevant and would be taken into account.

The aim is to minimise the risks as best as possible (including factors relating to services offered and the flow of money), noting that there is a risk that an adverse decision may ultimately be made (determining the independent medical practitioner is, in fact, an employee). We are hoping that the State Revenue Offices will offer additional guidance to practices in the near future.

Is there an action list we can be emailed to assist?

We do not have one to offer you. We recommend that you review these blogs and webinars, which assist in logically going through the relevant factors again.

• The 2021 Thomas and Naaz case
• The Thomas and Naaz Payroll Tax Decision: How Will it Affect Your Practice?
• Choosing your words wisely in independent practitioner arrangements

How much does it cost for a service agreement template? Your website says about $1800 per Agreement. Do medical practices have to pay this every time there is a change?

Our services are available here for Independent Medical Practitioners and here for Allied Health Professionals.