Most GPs, other than hospital GPs, are not employees.
The industry standard is for each GP to run their own medical practice, billing their own patients, and paying a management fee to a host practice. The management fee covers all services the GP needs to run the practice at the site, such as the use of space, staff, reception and other common areas, including gas and electricity, stationery, computers etc.
The management fee only covers “group costs” and does not cover personal costs, such as professional indemnity insurances, cars, registrations, training, memberships and similar costs. By convention personal costs are paid by the doctor personally, largely because they are personal and differ from doctor to doctor depending on their personal circumstances.
The management fee normally ranges between 40% and 30% of billings and includes collecting cash from patients and insurers. In some cases, lower management fees occur but these are statistically unusual and normally connected to some other benefit arising, such as shared after hours care in a rural or semi-rural practice.
Whatever rate is determined; the host practice collects the cash payable to the GP, deducts its agreed management fee, plus 10% GST, and then hands the balance to the GP.
This sometimes looks like the host practice is paying the GP. However, this is not the case; the GP is technically paying the host practice, not the other way around.
This is an important point and means:
- the host practice is (probably) not liable for any negligent error or omission by the GP;
- the host practice does not have to insure the GP, under the Workcover rules or the professional indemnity insurance rules;
iii. the host practice does not have to deduct Pay As You Go withholdings from the net payments to the GP;
- the host practice does not have to pay mandatory superannuation contributions for the GP; and
- the host practice does not have to pay payroll tax on the net payments to the GP.
The following series of diagrams help explain the method of engaging doctors.
The first diagram below is the ideal legal structure and cash flow pattern. The GP banks his or her billings and then, on receipt of a tax invoice from the host practice pays the agreed fee on a timely basis.
Points to note:
- Host practice provides doctor with all services need to run practice at that site.
- Host practice renders a tax invoice for service fee plus GST.
- Ideally the doctor’s practice trust banks billings. But sometimes instead, the host practice, as explained at diagram 3.2,
- Banks all billings;
- “pays” them 100% to the practice trust; and then
iii. Renders a tax invoice to the doctors practice trust.
Or as explained at diagram 3.3, the host practice:
- Banks all billings;
- Deducts its management fee, plus 10% GST; and then,
iii. Accounts for the balance to the doctor’s practice trust.
However, in many practices, particularly larger practices with many GPs, it is difficult to have each doctor banking their own billings. In these cases, it may make sense to instead have the host practice bank all billings, pay them intact to the GP, and then have the GP pay the agreed management fee plus GST to the host practice.
This is shown in the following diagram:
The three steps are:
- Host practice banks all billings on behalf of the doctor’s practice trust (normally no GST);
- Host practice reimburses all billings to the doctor’s practice trust; and,
- Host practice renders a tax invoice for the agreed management fee, plus 10% GST, and this amount is then paid to the host practice by the practice trust.
In other cases, the host practice banks billings and pays the net amount on, deducting its agreed fee and paying the net amount only to the GP, as shown in the next diagram.
Points to note:
- PSI practice trust shows 100% in its accessible income computation;
- PSI practice trust claims deduction for management fee (ie 35%)’
- Host practice shows 35% in its accessible income computation;
- PSI practice trust claims 10% of 35% GST credit; or
- Host practice pays 10% GST on 35%
In each case the tax results are the same. That is:
- the GP includes all billings in his or her own tax return (or the tax return of a company or trust set up for these purposes);
- the GP claims a deduction for the management fee paid to the host practice;
iii. the GP claims a GST credit in the quarterly Business Activity Statement;
- the host practice includes the management fee in its tax return and shows it as a creditable supply in its quarterly Business Activity Statement.
Exceptions to the Industry Standard
There can be exceptions to the industry standard. Some GPs are engaged as employees, and paid a salary for their work. Government employees (e.g. military GPs), hospital GPs and locums are commonly engaged as employees. The employee GP’s salary is usually calculated as a percentage of their billings, or it may be a set hourly or sessional rate (a session normally runs for between three and four hours). Sometimes the salary is calculated as an annual amount, although this is unusual outside hospitals or government institutions, such as the defence force.
In a small minority of cases every GP in a practice will be an employee. This is normally more of a historical accident rather than a carefully thought out plan. It is payroll tax inefficient, exposes the host practice to a serious and uninsurable risk under the doctrine of vicarious liability, and is very financially inefficient for the GP.
Some practices use complex legal documents to engage non-owner GPs and to record the understanding between the parties regarding matters, such as:
- the range of services provided;
- the calculation of the service fee;
iii. the minimum hours each week and the minimum weeks each year;
- common professional standards;
- notice period for termination by either party;
- ownership of, and access to, medical records;
vii. contact with staff and patients post termination, and any other restrictions.
Most contracts will involve a “restrictive covenant” which seeks to stop a GP from working within a specified distance for a specified period of time once his or her engagement at the practice ends.
Many advisors dismiss these covenants as being unenforceable on the grounds that they breach the restraint of trade provisions in the Trade Practices Act. This is too simple; the reality is they may be enforceable, depending on the specific circumstances of each case.
There are not many cases on restrictive covenants involving just doctors. One expects doctors are too busy and too pragmatic to bother too much with these sorts of matters, and are more interested in getting on with the job than spending hundreds of thousands in litigation.
One case arose before Justice Palmer in the NSW Supreme Court of Appeal involving Idameneo (No. 123) Pty Ltd v Dr Teresa Angel-Honnibal in 2003. Idameneo (no. 123) Pty Ltd is part of the Primary Health Care Group of companies.
The court held that the enforceability of a restrictive covenant depends on:
- whether it is reasonable between the parties; and
- whether enforcing it is contrary to the public interest.
The plaintiff bore the burden of proof for whether the clause is reasonable between the parties, and the defendant bore the burden of proof for showing the clause was contrary to the public interest.
The court held that the party relying on the covenant must actively show that it was reasonable in the specific circumstances, having regard to the history and profile of the practice and the location of the practice. In summary, in this case the Court found on the facts that the restrictive covenant was unreasonable. However, each case is different and the Court certainly considered it possible that such a clause was enforceable.
Our view is restrictive covenants should be included but as a practical matter, outside the corporate medicine world, it is unlikely that a practice would spend any amount of money enforcing its rights.
We always advise doctors to observe these clauses and to do all they can to avoid a dispute.
A simpler, cheaper and more doctor friendly alternative is a letter from the practice setting out the terms of the engagement. This letter is just as effective from a legal point of view, and has the advantage of being unilateral (i.e. it does not require a counter-signature to be effective). It is less likely to damage the relationship: it is interesting how the tabling of a draft legal contract, and the implied or actual presence of a solicitor, can ruin what was a happy, friendly, effective and professional relationship, of mutual benefit and advantage.
We strongly recommend practices do not use long and legalistic contracts and instead use a simple and more user friendly letter, which the GP does not have to sign. This letter has exactly the same effect as a longer more expensive document.
A sample engagement letter could look similar to this:
Draft Tax Invoices
Australian tax law requires a service provider to provide the doctor with a tax invoice showing the service provider’s name, Australian Business Number, the pre-GST value of the services, the GST and the post GST amount payable.
One of the best tax invoices, and explanatory notes, we have seen was provided by Healthscope, a large corporate service provider, to its doctors, and these materials are reproduced here.
Please do not hesitate to contact us if you need any more information about how to engage a doctor, or if you have any concerns about your existing contractual arrangements.
Curve act as accountants and advisers for doctors, dentists and allied health professionals.
We bring a wide range of skills through technical expertise and practical experience dealing with the medical, dental and allied health industry. Our medical clients range from large corporate groups to an individual doctor, dentist or allied health professional. Each client receives exactly the same care and attention.