ATO practice audits and avoiding that ‘C’ word (Part II)

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In Part Two of this series, we look at practical examples of common mistakes that practices make in employing/contracting doctors.

This is Part Two of a two-part series on keeping your practice from running foul of the Australian Taxation Office – read Part One here.

Last time, I went over some common mistakes and red flags that might earn your practice some unwanted attention. Here, I will cover practical court case examples of what I commonly see practices get wrong. 

If you want to score yourself on how safe you are and what to do next, try my latest free, national 70-point practice self-audit Employee v Contractor v Tenant Provider tool

Key independent contractor court and investigation cases

The bottom line is to determine what the main characteristics of your arrangements are. Do your arrangements lean more towards an independent contractor or an employee? If your intention is to be an independent contractor, then it is important to put this in writing in an agreement and walk the talk. 

The following cases illustrate this point and may further indicate where you need to tighten up any loose areas. 

  1. Payroll Tax

Practices who are not employing or subcontracting doctors, and are using the Tenant Doctor provider model discussed, should ensure the following:

1.1 Do not sell items such as consumables that becomes your primary purpose of business

In the Super Optical payroll tax case, they had lost their appeal and the practice remained liable for payroll tax. Unfortunately, the taxpayer lost. As we write, we understand there are now general practice payroll tax audits being conducted in Western Australia, New South Wales and Victoria. 

1.2 Do not assign income 

On a positive note, Dr Simon Halliday, a medical practice owner who had endorsed our approach, had won most of his case in the Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue July 2019 decision. It was alleged his doctors were contractors and not employees for payroll tax purposes. Their billing arrangements were a key to their success. It was established each doctor “had not assigned” their income to the practice. For payroll tax purposes, there were no relevant contracts taken to be wages.

It was noted they did have to pay payroll tax on a guaranteed minimum top-up hourly rate work.

1.3 Make sure your website does not state “Our Doctors” 

The following wording triggered a $1.2m five-year payroll tax investigation.

On the General Practice website, it stated: 

‘In the ‘Our Doctors’ section of the website, it is stated that “the Practice has a highly skilled team of doctors able to assist with the management of all general medical concerns.

“Our general practice is accredited with the Australian General Practice Limited”.’

Your website should not imply it is providing general practice services. This is akin to Westfield the landlord not representing that it sells Woolworths fruit and vegetables for them. 

It is essential to check the tone of your website’s text so that it sounds like practitioners are not employed. They need to be seen and treated as co-located tenants, just like a Westfield store. 

To use another analogy, it should be no different to an independent accountant and lawyer operating on the same building floor. They should not be seen as the same service under one trading banner or name when holding out their services to the public.  

 2. Fair Work deemed independent contractor an employee 

The Uraidla Physio 2017 independent contractor case best illustrates all the key areas in law that could be used against a practice to deem their contractors as employees for Fair Work, income tax, super, PAYG and payroll tax purposes. 

This case reveals many mistakes we see in practice. Below, I have substantially quoted highlights from the case. It clearly explains the key characteristics a court would look for to deem your independent contractors as employees. The same criteria could easily apply in any income tax or payroll tax jurisdiction. 

A physiotherapist who lodged an unfair dismissal application with the Fair Work Commission (FWC) was deemed to have been an employee and not an independent contractor. 

Throughout the course of his relationship with Uraidla Physio, Mark Mitchell also provided services through his own physiotherapy business, as well as at another established practice. At the commencement of his relationship with Uraidla Physio, Mr Mitchell was asked by practice owner Nadine Schultz whether he would prefer to be an “employee”, in which case he would receive a set hourly rate, or a “contractor”, which meant being paid a percentage of his billings. Mr Mitchell opted to work as a contractor. 

After Ms Schultz wrote to Mr Mitchell in December 2016 advising him that his services were no longer required, Mr Mitchell contended that at the time of his dismissal he was actually an employee for the purposes of the Fair Work Act 2009 (FWA). 

Employee or contractor? 

  • There was no written contract in relation to his engagement – the only conditions discussed with Uraidla Physio were in relation to hours of work and the method used to calculate his payment; 
  • Uraidla Physio exercised both discretion and control over the nature of work that he performed;  
  • He believed that he was working in the business of Uraidla Physio rather than conducting his own business alongside that of the Respondent;  
  • Uraidla Physio exerted control over the hours that he worked and he had an ongoing expectation that these hours would continue;  
  • Uraidla Physio bore the risk in relation to the work that he performed;  
  • He wasn’t able to nominate another physiotherapist to perform his hours of work; 
  • Uraidla Physio provided all the stationery, software and equipment he needed; 
  • and there was a general arrangement that he was paid fortnightly, as he provided invoices sporadically at best.

The personal nature of the services provided would not tend to create goodwill for Mr Mitchell’s business.

The ruling and general law on employees v contractors 

The question to ask when determining whether a worker is an employee or contractor is ultimately whether the worker is a servant of another in that other’s business, or whether the worker carries on a business of his or her own account. 

The answer to this question comes from an examination of the relationship as a whole, in this case by reference to the factors noted above. 

It was found the arrangements were not formalised. The FWC noted that some of the types of transactions (such as the reliance upon invoicing and payments with consideration given to GST) that typify an independent contractual relationship were conspicuously absent in this case. 

When viewing the relationship as a whole, the FWC was satisfied that Mr Mitchell was an employee within the meaning of the FWA. 

Here are the main points we can draw from this case.

Substance over form

The terms and terminology of the contract are always important. However, the parties cannot alter the true nature of their relationship by putting a different label on it. 

In particular, an express term that the worker is an independent contractor cannot take effect according to its terms if it contradicts the effect of the terms of the contract as a whole: the parties cannot deem the relationship between themselves to be something it is not. Similarly, the subsequent conduct of the parties may demonstrate that the relationship has a character contrary to the terms of the contract.

On the other hand, where there is a high level of control over the way in which work is performed and the worker is presented to the world at large as a representative of the business then this weighs significantly in favour of the worker being an employee.

Whether the worker performs work for others (or has a genuine and practical entitlement to do so)

The right to the exclusive services of the person engaged is characteristic of the employment relationship. On the other hand, working for others (or the genuine and practical entitlement to do so) suggests an independent contractor. The key areas to focus on are:

  • Whether the work can be delegated or subcontracted.
  • Whether the work involves a profession, trade or distinct calling on the part of the person engaged.
  • Whether the worker creates goodwill or saleable assets in the course of his or her work.
  • Whether the worker spends a significant portion of their remuneration on business expenses.

If a practitioner is free to work anywhere, is a member of the profession, can set their own fees and pay a substantial fee in running a business they provide directly to the public at large, it is more likely that they are not an employee and an independent contractor. It is important to distinguish that independent practitioners (contractors) are in fact contracting the practice to provide support services. 

To the contrary, it would mean they were offering their professional services to the practice to on-sell to patients like a subcontractor. It is important to be clear about your working relationship. 

The entitlement to delegate or sub-contract work

If the worker is contractually entitled to delegate the work to others (without reference to the putative employer) then this is a strong indicator that the worker is an independent contractor. This is because a contract of service (as distinct from a contract for services) is personal in nature: it is a contract for the supply of the services of the worker personally.

Given the absence of any real formality in the relationship, this entitlement is difficult to ascertain. It is, however, apparent that the arrangement was a personal one and it would be a reasonable inference that Mr Mitchell could not delegate or sub-contract the work at Uraidla Physio.

The need for the work to be undertaken by Mr Mitchell personally is an indicator more consistent with that of an employment relationship.

The public presentation of the workers (uniforms and other badging)

The service was provided under the banner of Uraidla Physio. There was no uniform and the patients were seen by a professional physiotherapist and accounts were issued under the letterhead and accounting system of Uraidla Physio while referencing (where relevant) Mr Mitchell and his provider number. On balance, this consideration is more consistent with an employment relationship. 

To be treated more like an independent contractor, a practitioner should have their own letterhead and invoice with their own ABN, and a disclaimer stating the treating practitioner is responsible for all conduct.

The provision of invoices/periodic payment of “wages”

At some stage during the relationship, invoices were sought from Mr Mitchell by Uraidla Physio. The requirement for invoices, if such represents a bona fide business transaction expected by the parties, is more indicative of an independent contractual relationship. However, invoices were not provided by Mr Mitchell and ultimately were not required as the payments continued to be made based upon the billings issued for work performed by Mr Mitchell. The provision of invoices was not therefore a fundamental element of the arrangement and it could, and did, readily operate without such. In the absence of invoices, the proper treatment of any GST is unclear, and the evidence tends to support the notion that neither party took GST into account as part of their transactions.

This is why I recommend the Doctors Pay Calculator to resolve this concern. 

Payment on a cash receipts basis rather than on billings

There was, in general terms, a fortnightly payment to Mr Mitchell; however, this was generated based on the performance of actual services and billings issued arising from his work in that period. This is not generally consistent with the notion of a wage; however, I note that subject to any minimum award conditions to the contrary, there would be no reason that an employee could not be paid on such a basis. The fact that these payments were based on billings, and not on payments actually received by Uraidla Physio, is more consistent with the work being performed for the practice rather than Mr Mitchell.

The creation of goodwill and other saleable assets

I have found that, after the termination, Mr Mitchell could continue to provide services to at least one or more of the clients that he saw while at Uraidla Physio. Indeed, Ms Schultz facilitated such and this is a factor indicative of the personal nature of the services and that the work had some personal ongoing value for Mr Mitchell. This is an indicator more consistent with the notion that Mr Mitchell was working for himself, at least to some degree.

However, the fact that the services also took place under the umbrella of Uraidla Physio, and involved bookings being made by and with that practice, is a factor that tends to militate against the capacity for Mr Mitchell to generate any form of goodwill, in the sense that it could be valued or sold to another person or business. This aspect is more consistent with an employment relationship.

The proportion of remuneration on business expenses

There is no direct evidence about the proportion of remuneration that Mr Mitchell spent on business expenses. This would also be somewhat problematic given that Mr Mitchell was clearly conducting a business with respect to the other practices in which he was involved as the proprietor. In relation to the work performed with Uraidla Physio, other than the small investment made in bringing some minor equipment with him, he did not need to expend money to undertake any real administration of his business affairs as he was using the system provided by the respondent and being paid as a result of the billings generated through that system.

The non-payment of superannuation for most of the contract, and more importantly, the absence of any expectation that this would be done under the arrangements agreed by the parties, is also more consistent with the notion of an independent contractual relationship.

The big lesson: You cannot put lipstick on a pig

The courts have made it clear you cannot simply write a contract and your problems will go away. This is analogous to putting lipstick on a pig of a problem. You have to review your entire ecosystem from business models to structures, administration and accounting systems, marketing and staff training.

This should also be considered in light of the decision of the Federal Court in Roy Morgan Research Pty Ltd v Commissioner of Taxation. The Full Court endorsed the approach as “a matter which must yield in its significance to the nature of the whole relationship”. 

In Cai v Do Rozario, the Full Bench also confirmed the following:

The object of the exercise is to paint a picture of the relationship from the accumulation of detail. The overall effect can be appreciated only by standing back from the detailed picture that has been painted, by viewing it from a distance and by making an informed, considered and qualitative appreciation of the whole. It is a matter of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another.

The ultimate question remains as to whether the worker is the servant of another in that other’s business, or whether the worker carries on a trade or business on his or her own behalf: that is, whether, viewed as a practical matter, the putative worker could objectively be said to be conducting a business of his or her own of which the work in question forms part?

If the result is still uncertain, then the determination should also be guided by “matters which are expressive of the fundamental concerns underlying the doctrine of vicarious liability” including the “notions” referred to in paragraphs [41] and [42] of Hollis v Vabu


Determine what the main characteristics of your arrangements are. Do your arrangements lean more towards an independent contractor or an employee? Now is a good time to fix it once and for all. It is possible to have an independent contractor arrangement more aptly described as tenant doctors.

About me

I am a registered tax agent, former AGPAL surveyor with 10 years of service, and a chartered accountant for medical and healthcare practices in Australia. I served on the AAPM national Board and was the inaugural national Chair of the Certified Practice Manager CPM post nominal. I continue to provide accounting tax and practice management advice to many practices all over Australia.

Note: I am not a lawyer – please seek appropriate legal and accounting advice before acting on this information.

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