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GP payroll tax: a solution for medical practices

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Last editedFeb 20245 min read

Medical centres in Australia will soon be liable for payroll tax on their GPs. These changes in legislation could have practices forking out additional tax if doctors are viewed as employees because of their payment processes.

Thankfully, medical practices still have options for structuring their billing process. Options that don’t leave them liable for payroll tax on their GPs. We'll explain how this works and how medical centres and doctors can follow the rules without paying more tax.

GP payroll tax: a solution for medical practices

GP payroll tax has recently become a thorny issue for medical practices in Australia. The issue revolves around the status of healthcare professionals in medical practices – are they independent contractors or employees? This distinction significantly impacts the calculation and applicability of payroll tax.

Payroll Tax, primarily a state and territory tax, is levied on wages paid by employers when the total wage bill of an employer (or group of employers) exceeds a specific threshold. Consequently, it directly impacts medical practices' financial health and operational efficiency.

Historical perspectives on payroll tax for medical practices

The historical stance on this for medical practices has been one of payroll tax exemptions for practitioners. However, recent legal and regulatory developments have led to a transformation in this perspective. For instance, recent court cases in various states, including Victoria, NSW, South Australia, and Queensland, have played a pivotal role in challenging the traditional view.

These cases have resulted in a paradigm shift, with state authorities asserting that medical practices must pay payroll tax on payments to doctors arising from contracts with medical centres. This shift has significant implications for the financial operations of medical practices and practitioners, necessitating re-evaluating existing financial strategies and structures.

What’s more, the evolving stance of state authorities is not uniform across the country. Each state has approached this issue with variations in thresholds, tax rates, amnesties, and audit activities.

For example, Queensland and South Australia have introduced specific amnesties for medical practices, with carve-outs for patient fees paid directly to GPs. It’s important for practitioners and medical practice owners to stay abreast of their respective states' specific regulations and provisions.

You should consider seeking professional advice to understand the nuances of payroll tax legislation to ensure compliance with the emerging regulatory landscape.

Enable your GPs to bill patients directly via GoCardless and optimise your payroll tax liability.

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Health payroll tax liability and medical practices

The liability of medical practices for payroll tax primarily rests on the nature of the legal relationship between the practices and the independent contractor doctors. If the contractual arrangements cause the independent contractor doctors to meet the extended definition of 'employee' under the payroll tax legislation, the practice could be liable for payroll tax on payments made to these contractors.

Operating under the 'Service Entity' model

The 'service entity' model has been a standard operational structure for medical practices, particularly in handling the financial aspects of the services provided by GPs. In this model, the medical practice acts as a central entity that collects the income from patient consultations on behalf of the doctors. After deducting a service fee (for room hire and facilities), the practice distributes the remaining income to individual doctors.

But with the recent changes in the State Government's position on payroll tax for general practices, the financial implications have become a cause for concern. The cost of a 4.85% payroll tax on the payments made to the doctors managed by a general practice will be difficult for many to shoulder. We could be seeing more forced closures and increased patient challenges in accessing healthcare services.

GP payroll tax updates

Court cases

Recent court cases have challenged the common understanding of the applicability of payroll tax in medical practices. Two notable cases, The Optical Superstore Pty Ltd v Commissioner of State Revenue and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, have both underscored the potential risks around payroll tax for medical practices.

Public rulings

Several state revenue offices, including Queensland, Victoria, and New South Wales, have released public rulings addressing payroll tax for medical practices. Although not law, these rulings reflect the revenue offices' interpretations of the law and their approach to audit activity.

Ramifications of payroll tax liability

Depending on a medical practice's legal and operational structure, payroll tax can impose a significant financial burden. Practices may face substantial tax bills for historical underpayments and must ensure their payroll tax returns reflect the position stated in the public rulings.

The potential payroll tax liability is not a new concept. But the recent attention from various state revenue offices and the implications of recent court rulings have sharply focused on this issue.

Payroll Tax Exemptions and Amnesties

Several states and territories have announced temporary relief measures for medical practices facing payroll tax liabilities. However, these measures vary across jurisdictions; not all offer full relief or amnesty.

Enable your GPs to bill patients directly via GoCardless and optimise your payroll tax liability.

Using Direct Debit to Manage Potential Payroll Tax Liability

As discussed, medical centres in most states will be liable for the payroll tax if they act as a 'hub' for the ‘flow of funds’ from patients and Medicare. The common financial arrangement in medical centres involves collecting patient or Medicare payments, deducting relevant expenses and paying the remainder to the GPs.

A simple way to avoid the payroll tax is for medical centres to use a Direct Debit payment collection service like GoCardless. Using GoCardless to collect payments, GPs can receive payments directly from patients, meaning medical centres can stop accepting patient and Medicare payments and paying GPs as if they are employees.

With GoCardless, the GPs themselves can accept their patient payments, and then the practice can charge the GPs room rental and service fees for practising there. In this way, it is possible to reverse the flow of funds so that the GPs pay the medical centres for services rendered and not vice versa. This enables medical centres to avoid any issues with the payroll tax.

Enable your GPs to bill patients directly via GoCardless and optimise your payroll tax liability.

Key takeaways

  • Keep up to date with legislation: Payroll tax continues to pose a significant threat to the operation of medical practices in Australia. Given the evolving legal landscape and the financial implications at stake, medical practices must remain vigilant, seek appropriate advice, and adapt their operations to mitigate payroll tax liability.

  • Adapt your billing and collections: One quick and easy way to mitigate payroll tax liability is by switching billing and collection to GoCardless and paying outpatient and Medicare payments directly to GPs, who then pay the medical centres for room hire and other services.

Enable your GPs to bill patients directly via GoCardless and optimise your payroll tax liability.

Frequently Asked Questions (FAQs)

What is the current stance of Australian state revenue offices on payroll tax for medical centres? Australian state revenue offices have reinterpreted the legislation and now require medical practices to pay payroll tax on payments to doctors resulting from contracts with medical centres.

How have recent court cases impacted the view on payroll tax for practitioners in medical practices? Recent court cases in various states have challenged the historical view and led to a shift in the stance of state authorities, now mandating payroll tax payments for medical practitioners.

What are the payroll tax amnesties and audit activities announced by different Australian states for GP practices? Several states have announced varied payroll tax amnesties and audit activities for GP practices, with specific carve-outs for fees paid directly to GPs by patients.

What are the implications of the Payroll Tax Act 2007 (NSW) on payments made under relevant contracts for medical practices? The Payroll Tax Act 2007 (NSW) broadens the application of existing payroll tax laws to encompass medical practices operating as ‘service entities’, potentially impacting the financial stability of general practices.

How do medical practices typically operate under the 'service entity' model in relation to payroll tax? Medical practices typically operate a ‘service entity’ model, where the practice collects consultation income on behalf of doctors and then distributes it to individual doctors after deducting a service fee, impacting payroll tax implications.

What are the potential implications of payroll tax decisions on the financial stability of general practices? Payroll tax decisions can significantly impact the financial stability of general practices, potentially leading to forced closures and exacerbating challenges to healthcare access.

How does the change in the State Government’s position on payroll tax for general practice impact the payments to the Doctor managed by the general practice? The change in the State Government’s position means that a general practice may have to pay 4.85% on the payments to the doctor managed by the general practice, impacting the financial burden on general practices.

What is the role of AMA (NSW) in encouraging members to seek professional advice regarding their arrangements in light of payroll tax implications? The AMA (NSW) encourages members to seek professional advice regarding their arrangements and has arranged for members to access a one-hour consultation with legal professionals to seek advice about their existing contracts.

How can medical practitioners mitigate tax liability and seek exemptions from payroll tax? Medical practitioners and centres can adopt a payment collection service such as GoCardless, which allows them to reverse the flow of funds, with payments going directly to GPs, who then pay the medical centres for room and facility hire.

Enable your GPs to bill patients directly via GoCardless and optimise your payroll tax liability.

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