What do practice owners need to know about payroll tax?

Paul Copeland

7/10/2022 3:41:21 PM

In the second of a series of articles on payroll tax complexities, William Buck business advisory expert Paul Copeland looks at considerations for practice owners.

practice owner looking at paperwork
There is a current window of opportunity for practice owners to undertake a payroll tax review of and take action to fix any problems.

Last week, we provided a broad overview of payroll tax in Australia when it comes to general practice, and why recent developments have caused some concern among the profession.
Before we go any further, there are a few points regarding payroll tax that are important for practice owners (and GPs) to understand: 

  • It is a state-based tax administered by the offices of state revenue (OSRs) in each state of Australia. The rates of tax and thresholds from which payroll tax apply vary across the states
  • Payroll tax is NOT a Commonwealth tax, nor is it administered by the Australian Tax Office (ATO), which has very little to no interest in it
  • It is administered on the payroll of employers and includes salary and wages payments, superannuation and payments to eligible contractors
  • Defining what is an ‘eligible contractor’ is the main area of contention for medical practice owners
Payroll tax thresholds and rates
The thresholds and rates for payroll tax vary across the states and territories with most having sliding scales.
State or territory Threshold Rate
ACT  $2,000,000 6.85%
Queensland  $1,300,000 4.75%
New South Wales  $1,200,000 5.45%
Victoria  $700,000 4.85%
Tasmania  $1,250,000 4.00%
South Australia  $1,500,000 4.95%
Western Australia  $1,000,000 5.50%
Northern Territory  $1,500,000 5.50%
An indicative table of Australian payroll tax rates.
However, it is important to note that thresholds and rates vary, and the above table is an indication of the starting point to which payroll tax can apply. Practice owners with queries or concerns should speak with an advisor to obtain specific information about their circumstances.
When considering the application of payroll tax, we have taken the approach to review this issue with some questions.
Is this a new issue?
No. The issue of doctors and payroll tax audits has been around for at least 20 years.
Formerly, many medical practices were paying their doctors as contractors. That is, the doctor was directly paid a percentage with GST added on top.
Over time, this model changed to the service fee model, where the practice charges the doctor a service fee for the services it provides. However, even today the occasional practice engages doctors under a pure contractor model. That is, they are paid their percentage plus GST.
The service fee model was originally adopted in response to payroll tax and, to a lesser extent, issues regarding the application of superannuation and statutory leave to doctor payments.
Fast forward 20 years and payroll tax is still an issue with medical practices.
Why is there a renewed focus on this issue?
There are several factors that have contributed to making payroll tax an issue today.
The pandemic
During this time, the ATO and various OSRs scaled back audit activity as their way of showing support for businesses during an unprecedented time.
This did not mean that issues were simply allowed to escape the attention of the authorities, rather, there was a timeout.
Now, with the various lockdowns and stimulus measures having ceased, audit activity is being ramped up and cases which may have been addressed over a longer period are seemingly all being addressed at once.
Recent cases
Two major cases concerning payroll tax – the Optical Super Store case and Thomas and Naaz – have generated some concern among GPs and practice owners. We covered the latter case – and its implications – in the first article in our series.
Information sharing platforms  
Doctors are not immune from the love of sharing information. There are numerous groups and online communities where information can be readily shared, and payroll tax has been a ‘trending’ issue for some time.
The size of the assessment from the Thomas and Naaz case and the obviously devastating impact on the owners and the business was the stuff of nightmares. Like many bad news stories, it was also shared widely.
The impact of this well-known case is being further fueled by other examples coming to light where practices are being assessed with large payroll tax bills.
The level of interest around this topic has been picked up by advisors and associations, including the RACGP and other colleges, which is keeping it front and centre.

Payroll tax concerns are not new for general practice.  

Are the offices of state revenue targeting GPs?
There does not appear to be targeted audit activity towards general practices without a ‘trigger’.
Almost all practices being selected for a payroll tax audit have been chosen through a process called ‘data matching’ (which I will explain below).
These data matching processes are applied to all industries and not just general practices or the wider medical industry.
The concern is that where an audit is being instigated, there is a high level of non-compliance. As such, there could be a redefining of the review processes currently in place and a sharper focus placed on general practice.
However, a widespread targeting of the industry has to be considered highly risky from a political perspective.
The big question: How is a practice or business being selected for a payroll review?
I spoke directly with a senior person in the Queensland OSR regarding payroll tax and the impression that the audits were being aimed at owners of general medical practices.
The response, which is reassuring from an industry perspective, confirmed that all their audit activity at the current time is being driven by data matching.
Data matching is the sharing of information between various state and Commonwealth departments which is then reviewed for anomalies and if a business – any business – is noticed during this process, they can expect a ‘please explain’ letter.
The primary source of the data matching is information shared by the ATO and more recently the Australian Securities and Investments Commission.
Largely, this information involves a practice recording the patient fee income they collect as sales income and the payments to the doctors as subcontractors in their tax returns. A seemingly minor issue which is causing so much damage to unsuspecting practices.
So, I can relax then?
That isn’t particularly advisable.
Think of it like this – in Queensland we tend to have a lot of storms. When a storm is coming, there is generally a warning, and we have time to take our things inside and prepare so that the damage isn’t as severe. 
Some people ignore the warnings and don’t prepare – sometimes these people are hit much harder than those of us who acted.
Like with so many business issues, practice owners tend to put payroll tax in the ‘too hard’ box or the ‘I’ll do it later’ box.  
It is much easier to do nothing and maintain the status quo. However, if you do this, your risks aren’t being addressed and other opportunities which may exist are not being ceased.
There is a window of opportunity to put your house in order, undertake a payroll tax review of your practice and take action to fix the problems that will otherwise lead to a larger issue.
And even if the storm passes you by, you lose nothing as you will have better systems and agreements in place for the future.
Final take-away
I have consulted with a number of practices who have been selected and have been issued large assessments.
The common factor among those practices is that their advisors were not industry specialists, which is a major reason that their tax returns weren’t prepared properly, their bank accounts weren’t being operated well and their service agreements could have been improved significantly.
They thought they had things in order, but unless you engage a professional, how would you know?
The information in this article is general in nature and does not take into account your personal situation. Members with concerns are encouraged to seek their own professional, independent advice.
The next article in this series will focus on issues for independent contractors to consider.
Members are invited to complete this short survey to share their views on the potential impacts of payroll tax on practice owners and independent contractors.  
The RACGP and William Buck are also set to hold a free webinar on Thursday 27 October between 7.00 – 8.00 pm (AEDT) focused on what GPs need to know about payroll tax.
Log in below to join the conversation.

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