The imposition of payroll tax on medical professional fees is in reality a tax on Practice revenues.
In 2020 a case in the Victorian Court of Appeal confirmed the right for the Victorian State Revenue Office to charge payroll tax on payments made to medical professionals. The payroll tax appears to be payable regardless of the status of the medical professional being an independent contractor or an employee.
Since that precedent both NSW and Queensland have also been imposing payroll tax on General Practices apparently where they consider that the behavior of the Practice is more akin to an employer rather than a contractual relationship. In many cases retrospective assessments have been made.
In response Practices appear to have some unenviable choices:
- Avoid the payroll tax – Review contracts and payment processes with Independent GPs (IGP) and the way they represent the medical professionals working in Practices to avoid any perception of direction of the IGPs from the Practice owner(s). This involves accepting the risks associated with Practices becoming essentially serviced offices for Independent GPs including risks to provision of care after normal hours, collegiality and peer support, accreditation processes, and Practice leadership from Practice Principals.
- Retain the concept of a Principal-led Practice and pay the payroll tax either with GPs onsite as employees or as IGPs.
Noting that there is no guarantee that the first approach will actually avoid payroll tax what are the consequences of electing to retain the concept of a Principal-led Practice and pay the payroll tax?
The primary difficulty with this approach is that the Practices are not profitable enough to do this so they will need to increase revenue to offset the tax.
The most common model for IGP payment is the Practice charges the patient (either by bulk billing or private billing), places the funds into a trust account and pays the IGP a proportion of this and takes a smaller proportion as Practice income. A common split for these fees is IGP: Practice 65:35.
In the case of bulk billing a standard urban Medicare payment is $39.50 as the consultation fee and a bulk billing incentive of $6.50, total $46.00. $29.90 is paid to the IGP and $16.10 to the Practice.
State payroll tax rates vary widely from 6.85% in the ACT to 4.75% in Queensland (Table 1). Using the Victorian payroll tax rate of 4.85% this $29.90 transfer of the IGP fees to the IGP attracts a payroll tax rate of $1.45 ($1.63 in NSW, $1.42 in Qld).
However the $1.45 is paid from the $16.10 received by the practice so the effective rate becomes $1.45/$16.10 = 9%. This is in effect a revenue tax of 9% on the Practice. (Table 2 shows this revenue tax according to state legislation).
As there is probably not a Practice in Australia with a profit margin of 9% the revenue tax needs to be collected as additional revenue, either from the IGP or the patient.
One of the reasons for the GP shortages in Australia is the relatively low rates of remuneration in GP in comparison to other medical specialties so a 5% reduction in remuneration is unlikely to help this situation or make any Practice taking this option look attractive to GPs. Therefore the only alternate seems to be to seek the additional revenue from the Patient.
Under the Medicare legislation it is illegal to seek a co-payment from a patient while bulk billing. The impact of seeking a co-payment from a patient is that the patient must pay the full amount of the consultation fee and reclaim the benefit from Medicare (this is an automatic system, but the patient needs to have the funds to pay for the consultation in the first place). As the Practice is no longer bulk billing the revenue from the bulk billing incentive is no longer available and must also be recovered from the patient. To avoid having to share the payroll tax component with the IGP it would need to be separated on the patient invoice. A working title for this component could be State Medical Fee Tax.
Thus the patient must pay a fee of $47.45 (Victoria) and will receive $39.50 from Medicare. The Commonwealth Government payment of $6.50 is saved by the taxpayer and transferred to the patient.
If the Patient does not have the funds to pay the initial $47.45 they presumably need to present at a State funded clinic or a hospital emergency department (estimated cost $500).
The impact of the States seeking to collect $1.45 fee (Victoria) from a GP Practice saves the Commonwealth $6.50 and, if only 1% of those who were previously bulk billed present at a State funded clinic or emergency department, costs the State more than it collects.
A sensible approach would be for all States to immediately amend their payroll tax legislation to exempt medical professional fees from State payroll tax, and to support General Practice with a view to reducing costs in hospitals.
Table 1 State Payroll Tax Rates (PRT)
|State||PRT Threshold||PRT (Urban)||Variation|
|QLD||$1,300,000||4.75%||4.95% if over $6.5m|
|TAS||$1,250,000||4.00%||6.1% for taxable levels over $2,000,000|
|VIC||$700,000||4.85%||1.2125% for regional employers|
Table 2 Impact of Paying Payroll Tax – Bulk Bill Level Fee Recovery
|State||Standard Medicare Fee||Bulk billing Incentive||Total Income||GP Income||Practice Income||Payroll Tax Payable||% of Practice Income||Bulkbill Equivalent Private Fee||Patient Out of Pocket|
Table 3 Impact of Paying Payroll Tax – AMA Recommended Fee Recovery
|State||AMA Std Fee||Bulkbilling Incentive||Total Income||GP Income||Practice Income||Payroll Tax Payable||% of Practice Income||Total Private Fee||Patient Out of Pocket|