Health Professionals in the firing line
What a few months it has been for Health Practitioner businesses…
- State Governments lining up to attack Contractor Arrangements following some recent Payroll Tax rulings.
- ATO attacking profit splitting with the announcement of PCG 2021/4 – Allocation of Professional Firm Profits.
It is important to note, that both matters above apply to larger businesses. Essentially, health practices where multiple health professionals work from the one business (either as owners, or contractors).
Sole Practitioners, or situations where you contract through your own company/trust (no other employees) to a “Practice”, are not directly impacted by these measures. However, the health practice you work for might be impacted, which may ultimately affect your contracts for service.
Best practice structuring in the health space is to have the Health Professional (or their entity) providing the service directly to the patient, and then a separate service entity (“Practice”) charging the health professional for “room” or “facility” hire.
This arrangement has multiple benefits, one of which was, Payroll Tax rules didn’t apply to the payments made to the health professional.
Some recent cases have raised some concerns about whether this structure is still as effective against Payroll Tax. Specifically, where the terms of the contract or arrangement are “blurred”, such as:
- The Contract imposes conditions on the Health Professional similar to an employee (minimum hours, days of the week so-on); and/or
- There are “services” provided back to the Service Entity/ Practice like promoting the business/referrals, restrictive covenants, or the “ownership of patients” or goodwill remaining with the health practice.
Then in cases like the above, it can be deemed that services are provided in “both” directions.
Ultimately, this means that ALL of the Contractor/Health Professional payments are caught in the definition of “Taxable Wages” for Payroll Tax purposes.
This is regardless of whether that health professional is through an entity (company/trust) or not. Once those Taxable Wages are over $1.3million for Qld Payroll Tax purposes, the Health Practice would be charged 4.75%/4.95% on the payments (scaling “deduction” allowable).
This is quite a serious shift in the interpretation and applies to almost all health business types. It is therefore vital that if you run a Health Professional Practice, that your legal agreements are prepared by a lawyer with some expertise in this area and comply with the latest interpretation of the Payroll Tax rules.
It is expected that some further guidance will be issued by one of the States Payroll Tax Offices in the next week or so. We can also expect to see more action against businesses and court cases in the coming months, which should further clarify risk areas in contracts/arrangements.
ATO Game Changer – Allocation of Professional Firm Profits
A new “guideline” has been issued by the ATO which seeks to treat a greater amount of income as taxable in the health professional’s name, and less in the hands of related parties or entities.
Importantly, this is in addition to the existing Personal Services Income (PSI) Rules. Here is a quick summary:
- The Guidelines are just that, “Guidelines” and not actually tax law. Rather the guidelines help the ATO select “Audit Targets”. A covert way of achieving the same result some would say.
- Applies to larger businesses where they would normally pass the standard PSI rules.
- Won’t typically apply to businesses that sell a significant number of goods (Optometrists or Pharmacists for example).
- There are 2 “Gateway” tests to determine if you are an automatic risk, or whether you can apply the “Traffic Light” tests. Most clients will pass the Gateway requirements without too much hassle, though additional documentation is likely needed in Year 1.
- There is then a Traffic Light system (Green is good, Red is bad) applied via 3 tests (“factors”).
- The ATO expect supporting documentation for your assessment.
The Factors / Tests
|Risk assessment factor||Score
|Factor 1: Proportion of profit entitlement from the whole of firm group returned in the hands of the professional||More than 90%||More than 75% to 90%, inclusive||More than 60% to 75%, inclusive||50% or more to 60%, inclusive||More than 25% to less than 50%||25% or less|
|Factor 2: Total effective tax rate for income received from the firm by the professional and associated entities||More than 40%||More than 35% to 40%, inclusive||30% or more to 35%, inclusive||More than 25% to less than 30%||More than 20% to 25%, inclusive||20% or less|
|Factor 3: Remuneration returned in the hands of the professional as a percentage of the commercial benchmark for the services provided to the firm||More than 200%||More than 150% to 200%, inclusive||More than 100% to 150%, inclusive||More than 90% to 100%, inclusive||More than 70% to 90%, inclusive||70% or less|
The Traffic Lights – Don’t be in the Red column unless you have Audit Insurance and very good documentation.
|Risk zone||Risk level
(of an Audit)
|Aggregate score against first 2 factors||Aggregate of all 3 factors|
|Green||Low risk||7 or less||10 or less|
|Amber||Moderate risk||8||11 and 12|
|Red||High risk||9 or more||13 or more|
Reporting requirements or how the ATO intend to collect this information is still to be published. What we do know is that Tax Planning will be an important tool for professional service providers in the coming years to ensure you don’t inadvertently fall foul of these guidelines and end up in the “high” audit risk category.
The ATO Guidelines in full are available here. Examples are also provided in the PCG – Example 4 outlines some of the complexities in undertaking the effective tax rate calculations. Guaranteed to be complicated where the ATO are involved in its design!
Of course, if you are worried the above may apply to you or your business, please do not hesitate to contact us. It will be a standard discussion point for Holmans Tax Planning clients.
Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.