New Tax sting: Is your practice running like a brothel?

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A Brothel has to pay GST, withholding tax in cash economy case. A high-end brothel will have to pay more than $6 million after an unsuccessful bid to avoid tax and GST obligations relating to its sex workers.

Purely from an accounting and taxation viewpoint we examine the key issues. Those who would like to know more details see : HKYB and Commissioner of Taxation (Taxation) [2018] AATA 4770 (31 October 2018).

Most healthcare services are GST free except for medically unnecessary or contracted services e.g. corporate medicals, cosmetic and medical reports.  The principles raised in this decision to deem contractors as employees should raise some eyebrows if you have not documented your arrangements correctly. There are a lot of similarities to how medical and health practices are run and this Brothel case. See how you compare.

This issue affects contractor, locum payments, private practice arrangements, hire labour locum arrangement and any practitioners you are charging a service fee against their gross income.

Many medical and healthcare practices operate the way this brothels business model operates. It paid a percentage of the gross fee or a set formula and advertised an ‘all inclusive price’ on their website!  

Prices were fixed so clients could not ‘haggle’ the prices. There are many important lessons to be learned from this case that goes beyond this article.

Of repeated concern, as raised in recent health care practice Payroll Tax case and the role of websites is playing a critical part in audit detection and prosecution.

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Simply not referring to our doctors or providers (implying they are employees) to stating the doctors practising in this location is critical to how the Tax Office may view your employee and contractor arrangements. It is important patients can make individual appointments and providers can set their prices.

For this reason, we do not recommend any of the traditional off the shelf contractor arrangements. Such arrangements as the case below clearly shows they failed to demonstrate they had contractors due to unclear arrangements and structures that not even their own accountant understood or questioned. This is a lot more common than you think.

A key test is to ask your accountant to simply explain your structure and why it exists. If they cannot then it is time to start looking for one who can.

The case highlights key issues for your practice.

In this case, the customers were offered an all-inclusive price to see a sex worker. They were received by a receptionist who took their money and were directed into the correct room.  There were no other clear arrangements between the brothel owner or sex worker.

Need ABN or a TFN! 

‘ According to a decision by the Administrative Appeals Tribunal, the workers were treated as neither employees nor contractors.

That is, the brothel did not collect PAYG withholding tax, as is required with salary and wage earners, or demand they supply an ABN, as would need to be supplied for a contractor.

“There is no evidence either on the job sheets or otherwise that sex workers quoted their ABN to the applicant, much less that any had one,” the AAT said in detailed decision reaffirming the Tax Commissioner’s position.

“On the evidence, no sex worker gave the applicant an invoice relating to a supply to it by that sex worker, much less an invoice quoting that sex worker’s ABN.

Source: Brothel has to pay GST witholding tax in cash economy case

The case further highlighted the fact that website wording play a critical role:

“We regard the applicant’s website reference to ‘fully inclusive’ as particularly telling against its case that sex workers made a private arrangement with a client for the provision of a sexual service and that there is a separate arrangement with the applicant in relation to room hire,”

Source: HKYB and Commissioner of Taxation (Taxation) [2018] AATA 4770 (31 October 2018)

The case illustrates some more difficult aspects of what constitutes a ‘supply’ for GST purposes. It also shows the importance of getting the documentation right and implementing the business structure correctly as much larger implications arise from not getting this part right.


From our 27 years of experience with over 1,200 practice we are yet to find a practice that has been across all the details.

The devil is in the many details. It is about substance over form. No silver bullet exists, it is not just the right agreement, it is the business structure, business model, staff manuals,  training, accounting and banking systems, your tax returns and your stationary and website. You need to examine everything.

In fact this case highlights common mistakes we see that traditional accountants overlook. You cannot use your accountant as a complete defence.

Today it is easier to be detected with new instant Tax Office data matching capabilities across all State and Federal agencies. Relying on they will not find out or what your senior colleagues once did will not cut it. Believing it has not happened to me before and it never will or everyone is doing it is a foolish defence.

Doing nothing will become a very expensive experience. It is important to eat well and sleep well. You will have to spend some money to make money. Your practice is your greatest investment. It should be built out of bricks and mortar and not sticks. This is one area you should not try and cut corners and go cheap like many do. You should seek experienced professional help.

Hoping you will not get caught is not a strategy. It only takes one aggrieved staff member or patient or client and the house or cards could begin to fall like the Brother owners. It will be too late. Then you will have to start considering selling your house to pay the big accounting, legal, GST, super or Payroll Tax bills.

We recommend…

Consider a safer option. We call it the Westfield analogy. David Dahm the principal of Health and Life used to audit these types of arrangements when working at KPMG.

Establish a licence or serviced office arrangement where the provider holds a licence to occupy the premises from where he or she runs their practice and the licensor is the owner (or lessor) of the property, infrastructure and facilities and they charge a service or management fee that is clearly documented in a service agreement.

Banking and accounting arrangements should not be mixed anymore than does Westfield (the landlord ‘practice owner’) and Woolworths (tenant ‘provider’) use the same bank account and chart of accounts to record their income and expenses and business activity when selling a ball of lettuce. We see many practices continue to do this.

Legally your accountant is expected to do more work than you think!

The case noted the accountant  Mr Derrick was reckless and did not check the wording of the website or staff manuals or set up the trust ledgers or clearing or billings trust accounts correctly (your accounting fees will need to be higher if your accountant does not check these details:

‘In cross-examination, it became apparent that Mr Derrick had no idea whether the detailed operation of The Cytherean was at one with the PBR.

That is quite apart from his acknowledgment that it was contrary to general accounting practice, if one was receiving amounts to hold on behalf of particular persons (sex workers) not to maintain separate ledgers in respect of each such person and that he agreed that the applicant’s job sheets were imperfect as trust account ledgers. In the present context, to expect the latter would be just to counsel perfection in accounting practice but the former revealed an ignorance which was a serious lapse, given the importance which the PBR had assumed for Mr Derrick in his dealing with the applicant in relation to its taxation affairs.

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A clear and written audit trail must demonstrate how your providers can access money collected on their behalf. They must be free to service their customer or client and delegate this responsibility.  This is critical.


Finally if any of your practice staff from the front desk to the back office are interviewed by an investigator it is important they understand the nature of the relationship.

We have extensively covered key issues for medical and healthcare practices with checklists for more information see below:

  1. Doctors and Staff Contracts: Finally the video!
  2. 2018 Historic Doctors/Providers Payroll Tax warning – Checklist!
  3. More Audits and Unsustainable Compliance!
  4. 2019 New Medicare Laws expose practices to fraudulent billing
  5. HKYB and Commissioner of Taxation (Taxation) [2018] AATA 4770 (31 October 2018)

Please note at Health and Life, we are accountants and practice advisers, not lawyers.

Please seek specific legal advice in relation to your own circumstances. We cannot be held responsible for any errors or omissions in this article. This article is for discussion purposes only. We work closely with Peripheral BLue Legal an independent law firm familiar with these issues which can assist you if required. We can confidentially assist with your initial inquiry at no charge or obligation and make sure you receive the right advice.

For more information contact us at Health and Life or for a no obligation free consult.

(c)Health and Life Pty Ltd


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