Analysis
What GPs should know about payroll tax
In the first of a series of articles on payroll tax complexities, William Buck business advisory expert Paul Copeland looks at considerations for GPs.
The ‘independent contractor model’ is a common general practice business model in Australia.
In July, the appeal against one of the most high-profile payroll tax cases in recent times, Thomas and Naaz, was dismissed.
This decision resulted in a flurry of activity related to payroll tax and has implications practice owners need to be aware of so that they can take appropriate action – if required.
The case has already been widely discussed online and I would suggest practice owners are across many of the details.
Nonetheless, to briefly recap, Thomas and Naaz Pty Ltd operated three bulk-billing medical centres in New South Wales.
The independent contracting doctors practising at these centres had a written agreement outlining that Thomas and Naaz would provide administrative staff for ‘charging and collection of Medicare fees on behalf of the doctors’.
All but three of the doctors nominated that the medical centre would collect their patient fees, which were received into the bank account for the medical centres.
At the end of each period, the medical centres would pay the doctors 70% of patient fees collected from Medicare and would retain 30% as a service fee (after allowing for GST).
The NSW Civil Administrative Tribunal (NCAT) found that the agreements between the doctors and medical practices were ‘relevant contracts’ per the NSW Payroll Tax Act and that the payments were paid to the doctors by the medical centres in ‘relation to the performance of work’ under the contract.
NCAT concluded that the agreements were relevant contracts because:
- doctors were providing medical services not only to patients but to the medical centres.
- This was due to the agreements stating the doctors had an obligation to promote the interests of the clinics, were required to abide by their operating protocols, and would need to provide advance notices of planned leave which had to be approved by the centres
- there was a clear relationship between the payments and the provision of services by the doctors, rather than the payments being a return of funds already belonging to the doctors.
This decision reinforced concerns from practice owners about the potential impacts of payroll tax on their practice sustainability.
In particular, the fact that the working relationship between the contractors and medical centres was styled as a ‘service agreement’ has caused considerable angst, as the ‘independent contractor model’ is common among general practices in Australia.
Under this model, the GP contractors hire the service of the practice but negotiate their own fees and working arrangements, despite co-location with other GP contractors in the same building.
This set up involves the medical centre:
- collecting patient fees on behalf of the GP
- charging the practitioner a percentage service fee
- offsetting that fee against the collected income
- remitting the net sum to the practitioner.
Previously, it was widely thought that such an arrangement could not give rise to payroll tax. However, the impact of recent cases in Victoria and NSW – including
Thomas and Naaz – has demonstrated risks with this model, as medical centre owners have been found liable for payroll tax under the relevant legislation.
At this point, we feel it is important to note that the way in which the relationship between the practice and the doctors was recorded in the
Thomas and Naaz financial statements is different to how many practices record their income.
Crucially, in this instance, the relationship within the financial statements reflected that the doctors were contractors being paid as an expense of the practice.
Our main message for practice owners is to be alert, but maybe not alarmed.
There are also measures you can take to lower the risk of an audit and limit your exposure.
We would suggest the first step to reducing risk is to undertake a detailed review of the practice with an industry expert in relation to the payroll tax issue, as this is not something that non-professionals can do with a high level of certainty.
It is also important to understand the factors that are leading to the payroll tax audits and what could increase the risk of a review.
Anyone with concerns should seek a second opinion to ensure your practice is not at risk. If it is, you can take action to address any problems.
Likewise, if you find that you are at a very low risk, it can also provide some much-needed peace of mind during these stressful times.
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.
Subsequent articles in this series will look at issues for practice owners and independent contractors to consider, as well as broader issues in payroll tax policy.
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 host a free webinar on Thursday 27 October between 7.00 – 8.00 pm (AEDT) focused on what GPs need to know about payroll tax.
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