HEALTH & LIFE’S BEST PRACTICE NEWS ALERT Current circulation:
6918
DATE: ISSUE NO:
28 February 2006 116
Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.
Writer in charge: Mr David Dahm CPA, BA Acc, FTIA, ASIA, FAAPM
Latest Update & News A New Baby Girl! Just to let everyone know, David and Veena had a new baby girl on the 15.2.06 her name is Alicia and came in at 8.13 pounds! Good work Veena and thank you to everybody who sent messages of support.
Website Upgrade & Free Website If you would like a free medical website please contact us. Sorry it is only available to medical practices, this is beyond our control. We have done a significant update to our own website with free offers of assistance on the web. Please have a look around and tell us what you think. Some added features include free enrolment as a member of our site and a broader range of news updates emailed to you on a regular basis in the areas you have a particular interest in such as superannuation. Please go to our website and click on “Click to Join” button. The client area will provide exclusive client access to practice checklists for restructuring the preparation of annual financial statements, Doctors Pay Calculator Tips etc. However clients will have to join as a member first by visiting our website. The new address is www.healthandlife.com.au
Get your Doctor/Provider Agreements in writing ASAP! The Problem The Tax Office has successfully prosecuted medical practices (in the last 2 weeks)! Practices that have been relying on a “gentlemen’s” agreements when contracting or employing doctors or service providers are unnecessarily falling foul of the law. The reality is unless practice arrangements are formalized and signed off in writing they are open to interpretation from the Tax Office and litigants. To do nothing, puts your practice in an indefensible position with authorities and you do not pass the “sleep test”. In the last 8 months there are three good reasons to have a WRITTEN and SIGNED service agreement with your doctors or providers. They are: 1. Recent Payroll Tax Audit Activity on medical practices in Victoria, NSW, QLD and SA. In February the Supreme Court ruled Symbion formerly Mayne Nickless (NSW) v NSW Office of State Revenue – declared its doctors as employees and not independent contractors. This sets a dangerous precedent for the Australian Taxation Office to recover unremitted group tax (or PAYGW) and super as well as higher Workcover premiums. 2. Service Trust Audits Grace Period Nearly Over practices have been given 12 months to fix up their arrangements this ends in May 06. 3. Medico-legal Claims Are Increasing practices employ inappropriate structures or arrangements that unnecessarily expose themselves to claims where no malpractice insurance exists. 1. Payroll Tax Audit Activity – Most practice are unaware if they are liable What are the most common mistakes! Many practices are unaware they are liable for payroll tax. There are cases that have been brought against practices going back 5 years for unpaid taxes and there are cases before the NSW courts. The Symbion formerly Mayne Nickless (NSW) case was ruled two weeks ago.100 of its doctors were deemed employees and not independent contractors of its 13 clinics and subject to payroll tax. The NSW Payroll Tax Act has imposed tax on payments to contractors who work solely or mainly for one employer for extended periods. The bottom line is payroll tax can only be levied on employee and contractor arrangements. In this case the practice was seen to be subcontracting the doctors services and not the other way around. A spokesperson has said a lack of documentation may have contributed to this outcome. Who are affected and why? As a guideline larger practices with over $1,000,000 in gross fees need to review their arrangements or practitioners who work for large practices need to check if they are affected. There are also penalties for failing to register for payroll tax. It has been reported a lack of written documentation is one of the main reasons for actions being brought against practices. This arises dues to inconsistent arrangements and administrative structures when practices engage with providers from the same practice. For example some doctors are treated as employees, some as associates and others contractors from the same practice! It does not make commercial or taxation sense.
What is payroll tax? Payroll Tax is a state tax in every state in Australia. The tax is based on a percentage say 6.5% of an employee or contractors remuneration exceeding a threshold say $800,000. So if the combined wages, super and fringe benefits of the group is $900,000 p.a. then a practice must pay $6,500 payroll tax p.a. ( i.e. $900,000 remuneration less $800,000 threshold x 6.5% tax rate). Below are the rates for 2005/06: NSW ACT VIC QLD TAS SA WA NT
Threshold $ 600,000 $1,250,000 $ 550,000 $ 850,000 $1,010,000 $ 504,000 $ 750,000 $1,000,000
Tax Rate in excess of threshold 6.00% 6.85% 5.25% 4.75% 6.10% 5.50% 5.50% 5.90%
The common mistakes practices make are: 1. Failure to include “contractor payments” in gross remuneration calculations, (including 9% super for unincorporated providers) and in NSW this includes service trust distributions to related entities; 2. Failure to “Group” related entities, practices that use service trusts or companies alongside a “related” partnership and/or practice companies that also employs or contracts providers can be grouped together for payroll tax purposes. This means practices must add up all remuneration in all the entities (not just the service trust) to see if they are beyond the threshold. Recent audit activity has focused on this issue. This is a common problem often overlooked by accountants who are normally only asked to deal with Federal tax issues and not State ones. 3. Failure to understand and document arrangements many practices are not clear on their own legal arrangements and fail to document them with appropriate employment and practice agreements and their administration systems do not reflect this. The bottom line is the remuneration calculation is based on the total employees gross salary, wages and benefits, including superannuation and unincorporated contractors of a “group”. In NSW this is extended to include service trust distribution payments to owners who operate related practices or entities. The difficulty is, identifying which practices that may be grouped. Some key ones include are incorporated practitioners that operate using a “ Dr xx Pty Ltd” after their name. They need to inform the practice of any remuneration paid for the year. The practice needs to report this income. This may be subject to commercial confidentiality, however the law still applies. How does the Payroll Tax Office know what practitioners are working at your practice and on what basis? They usually ask for the practices letterhead that lists the doctors in the practice. Our
preferred structures remove this requirement and “only the treating doctor” is listed on the letterhead and tax invoice, who is not an employee or contractor. 2. Service Trust Audits Grace Period Nearly Over LL. Last year we extensively reported the Tax Office were investigating service trust and entity arrangements and they had set down guidelines (not the law) on how practices need to review their arrangements. This grace period ends in 2 months. By now you should have in place written and signed service agreements with appropriate commercial mark ups and commercial terms and conditions. We do not agree that marking up wages by 50%, charging a 7% debt collection fee and then marking up other costs by 15% (commonly understood as the Phillips case) is correct or even relevant for the healthcare industry. There is no commercial “arms length” precedence for it within the healthcare industry. Most importantly it is unnecessarily complicated and most practice owners and their mangers do not understand the commercial rationale behind the formula. Furthermore the right administration systems e.g. Tax Invoices should be in place. All arrangements should be consistently applied and not mix of employees and contractors employed or engaged in the practice as described above. 3. Medico-legal Claims Are Increasing th
The following quote from the Australian Doctor 12 September 2005 revealsL “Legal claims against GPs have increased by 47% in the past 10 years, the Australian reports. Most claims are related to delayed diagnosis or misdiagnosis, indicating that health professionals must improve safety procedures and communication with patients. Victorian chair of the RACGO Dr Leanne Rowe said even when patients forgot to call their doctor for test results, the GP was still responsible for the delay in diagnosis”.
Clearly with a growing part time work force this is becoming a greater issue for practices to clearly set out the responsibilities of their healthcare professionals, when using the practice. Practices that employ inappropriate structures or arrangements may unnecessarily expose themselves to claims where no malpractice insurance exists. We have reported extensively on this issue in terms of types of structures. The basic arrangements to avoid are employees and contractors and partnerships make all practice owners liable for malpractice claims. Malpractice insurance does not traditionally cover these arrangements. If they do they are usually more expensive and do have exclusions such as employees and contractors and do not cover the entire structure. Provider contracts should contain explicit wording that exempts and indemnifies the practice for not following appropriate protocols set by the practice. Solution The good news is there are simple solutions to all the above issues and many practices do not realize they do not need to be liable for payroll tax, provider employer obligations such as super, annual, sick and long service leave and malpractice claims. All practices need to do is form an associateship with a service entity such as a trust, and execute service agreements where a
percentage of the gross receipts are paid to the practice as a management fee. The practice charges GST to the provider and not the other way around. Make sure a commercial rate is charged and commercial terms and conditions are used. If practice companies are involved or registrars please contact us for further information. So where do you go from here? (In order of priority) 1. Make sure your practice legal structure is correct and you understand it. Map it out on a blank page if you can. Consult your adviser or visit www.healthandlife.com.au for a free initial consult see “New Clients” section; 2. Put in writing all legal arrangements and contracts. We have template service and practice agreements. Visit www.healthandlife.com.au under “Products & Services”; 3. Ensure your administration or paperwork reflect the arrangements agreed to by all parties e.g. the practice issues regular service trust tax invoices see our Doctors Pay Calculator Program at www.healthandlife.com.au.. We can email example templates at no charge. The bottom line is, should your practice experience an audit or legal or tax problem, it is hard to back track your arrangements (we would not advise it). An audit is not the right time to restructure your affairs. Auditors will require proof the arrangements that you say are actually in place, are in place. The less evidence you have i.e. written documentation and administrative audit trails, the more questions they ask. Unfortunately there are no short cuts. The burden of proof is always on the defendant and where there is no proof then your arrangements are left open to challenge no matter how good your intentions are.
Which topics would you like to be covered? If there is a particular topic that you would like covered in one of our future News Alerts, please email pa@healthandlife.com.au and let us know what it is. We will then endeavor to cover your requested topic.
Do we have your email address? It is apparent feedback we are receiving that there are persons receiving this regular email who are not on our email list. If you are receiving this email ‘second-hand’ from another source, we would be delighted to receive you email address and we will add you to our list so that you can receive it first-hand on the day that it is sent. This invitation is open to all medical practices. Please send your email address to pa@healthandlife.com.au
Do you wish to unsubscribe from our list? Please email pa@healthandlife.com.au if you wish to be removed from out distribution list
Copyright Notice This email, including any attachments, is for the personal use of the recipient(s) only. Republication and re-dissemination, including posting to news groups or web pages, is strictly prohibited without the express prior consent of Health & Life Pty Ltd.
Disclaimer Notice Health & Life Pty Ltd’s Best Practice News Alert is designed as a comprehensive and up-to-date Accounting and Practice Management news service to alert readers
to the latest in practice and related developments affecting the medical and dental profession as they happen. It is published when there is news to report. No responsibility can be accepted for those who act on its content without first consulting us or obtaining specific advice.
Health and Life Pty Ltd (formerly acpm.com.au) Accounting & Practice Management Services. “Looking after your future� PO Box 8145 Station Arcade, ADELAIDE SA 5000 Telephone:
(08) 8415 5400
Fax:
(08) 8231 6767
Email:
pa@healthandlife.com.au
Web Site
www.healthandlife.com.au