By Crispin Hull*
Practice owners in at least four states are squarely in the sights of state revenue offices seeking payroll tax on payments made to GPs in their practices.
There have been a couple of frightening courts cases imposing payroll taxes on GP practice owners or like set-ups.
State revenue offices are getting hungrier as all revenue streams – payroll, GST and stamp duty – have been hit during the pandemic.
Obviously, practice owners have to pay payroll tax on wages paid to office staff who they employ directly, provided the total wage bill is over the threshold. The threshold and tax rates vary from jurisdiction to jurisdiction. In NSW it is 5.45% with a threshold of $900,000.
In the past, some businesses tried to avoid payroll tax by converting as many employees as they could into “contractors”.
This resulted in the states and territories tightening the rules. Sadly, this has resulted in businesses and contractors which hitherto had been assumed to be contract-based to be assessed by state revenue offices as an employer-employee relationship which attracts payroll tax.
Clearly, if payments to doctors were included, nearly all practices would be over the threshold and the rate is high enough to affect the practices’ viability. So, it is of major concern.
Unfortunately, the law provides that the onus is on the practice owner to show that their doctors are not employees but contractors.
Payroll tax law deems a much wider range of work-for-money relationships to be employment than other areas of law, such as workers’ compensation and the superannuation guarantee.
It deems as employment a contract under which a person in the course of carrying on a business Is engaged by a business to supply services, unless there is an exemption.
So, if a payment is made “for or in relation to the performance of work” it will attract payroll tax.
In effect, practice owners have to make sure the doctors are not engaged to supply services. It will depend on the circumstances of each case.
There are a number of conflicting cases about whether a medical practice arrangement is one of employment attracting payroll tax or one of a series of contracts not attracting the tax.
The trick for the practice owner is to make sure they have a contract with each of their doctors which makes it plain that it is the doctor who is paying and contracting the practice owner to provide a number of services, such as the provision of space and administration, and not the other way around. Further, the doctor should be free to see as many or as few patients as they want; that the doctors insure themselves and provide their own superannuation; work out their own hours; and set their holidays and other leave for which they are not paid by the practice owner.
That done, the very nature of medical practice – that the doctor works without supervision – should favour a conclusion that practice owners are not employers and the doctors are not employees (attracting payroll tax).
A critical matter is book-keeping practice. Collection of medical fees and payments to doctors should go through one account and all business expenses should go through a separate expenses account.
Amid this there is one major bright spot for practice owners. It seems fairly clear now that the Medicare component of any payment from a practice owner to a doctor would never be subject to payroll tax because Medicare rebates are money paid to the patient who then assigns it to doctor. That transfer could not be considered a payment by the practice owner to the doctor attracting payroll tax. It would not matter whether it went through the practice owner’s bank account.
That was an Administrative Appeals Tribunal decision. A higher court might take a different view.
Last year’s Optical Superstore case shows that practice owners still have a lot to worry about. In that case, the tax authority held that the practice owner was an employer and payroll tax was payable on amounts paid to the optometrists.
The Superstore appealed to the Victorian Civil and Administrative Tribunal which found that the consultation fees were held on trust for the optometrists and the payments to the optometrists were necessarily a return of their money. Accordingly, the payments were not “for or in relation to the performance of work” within the meaning of the contractor provisions of the Payroll Tax Act and thus were not subject to payroll tax.
The State Revenue Office appealed to the Court of Appeal. (They are hungry.) The Court of Appeal said that even though the payments were owed to the optometrists and had to be paid they were still payments “for or in relation to the performance of work” and tax was payable.
Practically though, it is a lot of money riding on legal nicety, especially if a practice owner gets hit with tax assessments for previous years plus penalties.
The range of choices for practice owners is not a good one. Do nothing and hope for the best. Get legal advice including draft contracts. Organise a template that all practices can model their arrangements upon. Or campaign for medical practice to be exempt from payroll tax given that the underlying nature of medical practice is one where a practitioner acts independently and is responsible to patients and professional standards bodies for the care they give.
Such exemptions exist, for example, Uber-style transport arrangements. Their drivers are deemed to be contractors.
*Crispin Hull is a journalist and a lawyer