Last week’s PRODA story started zinging on doctors’ social media not long after being published, and has been zinging pretty much ever since.
It floated the idea that having to register or re-register your practice or individual contractor business for PRODA was not quite as simple as the government moving its infrastructure to the cloud so everyone could get paid faster (as the government mostly describes it).
It hit a nerve of some description, although it’s hard to determine what nerve precisely as, so far, the idea and the topic are still a little obscure. You have to join the dots on what is going on, then you have to believe that the dots have both been joined correctly and that there exists someone who has planned all the dots.
Responses to the idea that there’s a lot more to PRODA coming down the line than just a more efficient way to get your Medicare claim done seem to fall into four categories:
- PRODA? I’ve had a PRODA account forever, there’s nothing to see there
- WH has joined the dots the wrong way and doesn’t understand how all this works
- The government would never do that, would they, we’re doctors and we’ve worked this way forever?
PRODA has been around forever. But the government is requiring that everyone re-register for PRODA to enable its new web services (cloud) functionality regime.
When you re-register, you are in a manner updating an “understanding” with the government on how you as an individual doctor, or practice, structure your claiming and finances (when you think about it).
The government isn’t about to look at what you do with your new PRODA registration using the web today. But in time, it will be able to, and a lot of things have changed in the past few years about how governments view how doctors and their practices should be structured for tax and payroll tax.
We are going to design a survey to get a more quantitative take on where everyone sits on the issue, but the fourth response above seemed to be the most common.
That is probably a good thing.
As the saying goes, “failing to prepare, is preparing to fail” (Ben Franklin), and it looks like now is the time to start preparing.
Are the dots not joined the right way?
In a week of responses, we’ve seen a few “that’s dubious” and “I don’t think it works that way”, but on each occasion when we press down on the response, we don’t get any detail to debunk the possibility of what the new PRODA registration combined with the likelihood of universal e-invoicing in the future, and evolving government data matching capability, might be able to reveal about the way a lot of practices and their contractors (or “tenants”, as we’re told is a better description) are structured today.
Of course, I’m no expert. The problem here is that in terms of tax law, particularly as it might pertain to payroll tax and state revenue bodies, the experts are some combination of lawyers and accountants still trying to find the where the line is in a series of court cases, many of which never see the light of day because they are settled before they actually go to court. An increasing number of cases with state government revenue bodies and some federal cases are trying to establish where the line is on determining what is the right or wrong structure in terms of payroll tax, and other elements required by government for financial compliance.
Of course, in terms of the ATO, some things haven’t been quite right for a lot of individual doctor and practice returns for a long time now. But it hasn’t been something the ATO has been particularly interested in, or could easily put a finger on.
Directionally, the following all seems to be in play for “tenant” doctors, and their “landlord” practices once a web services regime with e-invoicing is fully in play.
- Technically, if you are an independent doctor who works within a practice, you should have your own ABN, and your own ABN-linked bank account, set aside only for your business transactions, much of which would consist of Medicare claiming. When you consult with a patient, all the money from the consult, mixed billed or bulk-billed only, should flow to your ABN-linked account first. After that, the practice where you “rent” space and “services” should invoice you and deduct their “rent”. Mostly, “rent” is being calculated on a percentage basis of your consult, which means in order to invoice correctly and in an automated manner your practice will need to see your banking. Technically, there probably should even be an invoice to the patient in this transaction as a record (specialists do this, so why don’t GPs?), to ensure that BAS can be calculated correctly.
- The tax return of a “renter”, calculated correctly, should take into account the full gross income, which includes 100% of the consult fee and not just the net income after commission deduction. The “rent” should be recorded as a deduction. That way, the BAS can be accounted correctly on the part of the “renter”. If you don’t do this, you are at risk of the ATO working out at some point in the future that you’ve declared only 70% of your actual income, and that won’t be pretty. Our media business has to pay 10% commission to media buyers and ad agencies on most of our revenue. We don’t record the 10% for purposes of our business P&L and planning, as we look at it as never being our money. But we have to record it as revenue for the business for tax purposes, otherwise our BAS would be all over the place. Same deal for doctors and their practice commission in terms of their income.
- Technically, if you are the “landlord” practice, you would need to ensure every one of your “tenants” has their own ABN and ABN-linked business bank account. I’m told you can forget about the recent idea of blind trust accounts (we wrote recently that you might have to do this, which just goes to show, we aren’t experts, so be careful). You would then need to get them to sign a permission form for you to transact on this account on their behalf. That is, you invoice them, based on their banking, and reach into their account and take your rent directly, all of which would be recorded in a trail of invoices and transactions. It all should probably be linked in the one accounting program for transparency of reporting for all parties. Unfortunately, in such a set-up, any renters taking cash payments represent a reasonably big hole in the system, and potential for fraud (that is, the cash can go anywhere as the practice, unlike the government, doesn’t have the data on the claim to follow the transaction trail).
- All “tenanted” doctors probably need their own PRODA account linked to their ABN. This is not the advice of the Department of Human Services (DHS) so far, so things are confusing. But a Medicare claim can be made by a practice on behalf of a doctor using only the practice ABN and bank account, if the doctor is an employee. A claim can’t be made for an “independent tenanted” doctor by a practice; the doctor must have their own ABN and ABN linked bank account to make a claim initially. Which seems to imply they will need their own PRODA account.
In a lot of practices around the country, this set-up is not in play currently. It hasn’t needed to be, as claiming for a tenanted doctor through a practice ABN or bank account is not a red flag for Services Australia or the Department of Human Services. They don’t care about tax.
It might have been a red flag to the ATO, for things such as the BAS calculations of “tenanted doctors”, and for payroll tax for state revenue offices, who might determine it is indicative of an employer/employee relationship.
But it hasn’t been visible to the ATO and state revenue offices in the past.
In the new web services regime, especially when e-invoicing is mandated one day, as it is likely to be, all the guts and gory detail of who invoices whom and what, using what ABN linked to whose account, will be there for other government departments to see, using data matching.
Would the government really go here?
If you think about how much work (and cost) all the above is going to be, for our corporates and the large number of practices set up the wrong way today, to set up to be compliant for this brave new world, you might ask: would the government really do this to doctors, especially in the context of the enormous strain they’ve all been asked to take during covid?
Some of you will already have a mirthless smile on your face.
Of course they will.
Not today, but moving forward, when the new web regime has been stress tested, and some test cases have been run, it’s just the law being applied as far as tax and payroll tax goes. It always has been. The only thing now will be that the technology in place will make the ATO and state revenue offices able to prove that either individual doctors or practices are not compliant, with hard and detailed data trails. Before, they had to find some sort of smoking gun, elect to do an audit, and try to join dots individually, a process that a doctor’s accountant and lawyer would often confuse anyway.
The horror of the new PRODA re-registration, e-invoicing and web services regime is that there will be nowhere to hide. There will be a data dashboard of sorts, with all the evidence in an invoice trail, and it will light up if the data isn’t how the ATO or state revenue office thinks it should be. It will be an algorithm.
Think of it like this: if the government really wants to monitor speeding on the roads properly, all it has to do is mandate access to your car’s GPS system. Of course, there would be some privacy concerns and a lot of hoo-ha if they tried this on, but the technology is all there to do it today if they wanted to.
PRODA and e-invoicing is the government putting a GPS in place for your financial transactions.
Does the government really understand the implications of what they are starting here?
The answer is that those that care about tax revenue do (the ATO definitely would have a good idea) and those that don’t care about tax revenue – people in Services Australia, the Department of Health (DoH) and the DHS – either have no idea, or if they do see it, they don’t see it as their problem.
You get a sense of the latter here when the DHS issues directives to patient management system software providers and doctors that, if followed to the letter of the directive, look on spec like they would make an individual doctor or a practice non tax compliant.
An example is the directive by the DHS in its PRODA instructions that you can use the PRODA account of the software provider if they have the right technology to make a Medicare claim. That doesn’t make sense in a strict tax compliance or Medicare claiming sense in that a practice or a “tenant” doctor can make a Medicare claim only using their own ABN.
Two other factors everyone should be thinking about here in determining whether a little bit of preparation isn’t going to hurt in the short term:
- How desperate do we think both federal and state governments are going to be in 18 months or so for more revenue?
- Our ATO actually prides itself on being one of the most digitally advanced and enabled tax offices in the world! As commissioner Jeremy Hirschhorn said in a speech in September, “using technology and data to drive compliance at the ATO, [leads] to significant improvements in tax performance”.
Post a federal election, and with the biggest budget debt burden in history thanks to covid, the environment can get more hostile in terms of taking it easy on businesses, which for all intents have not been doing things strictly to the letter of tax law for a long time now.
Is there any good news here for practices and their tenanted doctors?
The only good news might be that there is still a window of between 18 and 36 months before this new regime fully beds down, is tested, and might begin to operate systematically and in earnest. That’s possibly a reasonable amount of time to plan and change the structure of your practice or individual accounting.
A rate-limiting factor for the government and practices might be that all of the software vendors aren’t on top of this problem. Most aren’t even aware of it. When you ask about the e-invoicing tab in PRODA and the implications for their software in the future, there is a muted response. They haven’t even thought about what it might mean yet.
The two major practice-management systems in the country for GPs started life as automated prescription writers, not instruments of automated Medicare claiming and financial management.
As they grew, they have either built or acquired back financial ends to automate claiming, but the functionality has not ever really taken into account tax compliance at a state and federal level. They aren’t accounting systems written by accountants. They’ve never needed to be. Now they will. They will probably need to rely on much tighter integrations with real accounting programs such as Xero and MYOB.
Hopefully, the government will help our vendors in this process as it’s not going to be cheap or easy for them. Without them modifying their products, it will be a nightmare for practices because the processes will need to be as automated as possible otherwise the expense of compliance would be stupidly large.
A mostly one-off headache
If you amortise the costs over a couple of years of making the changes that look like they may be needed, it might not be such big financial impact for a practice.
And happily, the costs of restructuring to make sure you comply in this new regime are mostly one-off-type costs.
Here are the major things that you might need to do, most of which are one off:
- Get all your tenanted doctors to establish their own ABN and ABN-linked bank account, and then get them to sign off permission for you to operate to this account, for the purposes of your tenant agreement, with appropriate transparency on transactions.
- There will be some software costs here in setting up autopayments between all your doctors and your practice account, but once it’s going, it should be set and forget. Don’t be mean to your software vendor, by the way, and suggest they pay for it all, if you can. It’s a joint problem you both have.
- Probably, you will need to review most of your contracts with your tenants over time, even if you’ve already done that recently in response to state government revenue body cases on payroll tax. This can be a slow and cumbersome process, because naturally your tenanted doctors will be suspicious, and some of the smarter ones will see it as an opportunity to negotiate a better deal. That’s because it will be an opportunity for them to do that, and they probably should try, so think about that before you start the process.
- Even if you think you’ve got good contracts, there’s an interesting new payroll tax precedent created in the past few weeks that suggests that you may need permission not just to access your “tenant” doctor bank account, but also, to some extent, to manage how each “tenanted” doctor completes their personal tax return (see below). Yep, that’s crazy, right?
If you are a “tenanted” independent doctor working for a practice, you are likely to be able to get a little more freedom in this new regime, as any contract will need to be fairly clear in establishing how independent you actually are. After all, you’re just a “tenant” renting space and few services, carrying on your own business.
Mind you, it’s going to be swings and roundabouts. In this new world, you will need to give your “landlord” access to your ABN-linked bank account, and maybe even your personal tax return.
You aren’t going to get off scot free here.
The madness (and cost) of evolving payroll tax law
In a recent state revenue office pay office investigation, a large practice managed recently to fend off its local state revenue office for 80% of its claimed “tenanted” doctors, and was not required to pay back payroll tax for those doctors.
This is good news in that it is a large win for a practice against a state payroll body, in what constitutes good structure for payroll tax. So, practices are fighting back and winning.
However, there was a sting in the tail for the practice and other practices as a result.
The state prosecutor in this investigation found in favour of the state revenue office levying payroll tax for 20% of the doctors.
The prosecutor found that examination of the personal tax returns of those doctors found that their personal returns were submitted in a manner that indicated that they were employees, not contractors or “tenants”. It used this to levy the practice, even though the practice set-up for its tenant doctors was OK.
This investigation settled before proceeding to court. So probably no one is ever going to see what happened in detail.
But the precedent means that a practice can get theoretically hung now for payroll tax non-compliance based on the incompetence of the accountants of their “tenants”, who are submitting their tax returns out of synch with how the practice is treating them for tax purposes.
This new madness has a few important ramifications.
As well as having oversight and an ability to transact on a “tenanted” doctor’s ABN-linked business account, a practice may need, probably via its “tenant” doctor contract, to require that their tenant’s personal tax return be submitted in a certain way, and that they have an ability to audit that return so that they don’t get into trouble for what their tenant, and probably their accountant, are doing.
It all feels like it’s getting a bit crazy.
It also feels never ending, with judgments such as these creating extensions to governance that no one would have ever contemplated.
The problem now becomes: will some smart arse lawyer acting for a state revenue office in the future look at the control implied in a contract that manages how their “tenant” banks and how they do their personal tax returns, and ask a judge if this does not in the end constitute some form of employee/employer relationship?
Back to square one, I guess, if a judge one day thinks it does.
Things are getting out of hand for GPs and practices to the point where their representative bodies need to start thinking about how much this part of their lives is going to affect their ability to practice effectively as professionals.
At some point, the RACGP and ACRRM may need to ring up the DoH and DHS (no use calling the ATO we guess) and get some clarity on where all this ends.
This of course becomes very difficult if you have to also start negotiating with each state revenue office. They are all empires, all making different interpretations, state by state.
That’s a situation where surely the federal government has to examine on behalf of the general practice community how much more stress an already highly stressed general practice ecosystem can handle in a relatively short period of time following the stress of covid.
Unfortunately, mostly the federal government doesn’t trust or like doctors, and think they are well paid and whinge a lot. But in relative terms, you’d have to say that even this position might be tested.
If GPs go down, the whole health system would follow very quickly so the government can’t completely ignore what is unfolding.
It looks like if things move too fast, and with too much inter-governmental data matching furore and dysfunction, the damage to our general practice network could be bad.
DISCLAIMER: Unfortunately, I have to bore you all and say this. I’m NOT an expert (der). I’m just talking to experts and joining dots (some of which the experts are already joining for me). In fact, if my old and very competent company CFO (David) and my current accountant (David too, by coincidence) saw me writing this sort of financially complex stuff, they’d both fall off their respective chairs laughing. So you can’t take what you read here as some sort of advice, rely on it in any way, change things and then come back to me in the future and try to argue that I misled you in some way! Go and get proper advice from a good accountant, and maybe even a lawyer (ooh, I hate that) if you think anything here might be worth checking out. Please. And if it is wrong, please let me know and I’ll update the article for everyone accordingly. PS. Watch out for accountants or CFOs called Geoff.