Payroll Tax changes set to impact the medical practices and healthcare sector

As a snapshot: the income of many health practitioners is generated from patient fees and it was widely thought that such income could not give rise to payroll tax. However, a number of recent Court and Tribunal decisions have created significant uncertainty in this regard and potentially threatens the viability of many medical practice entities.

We cover the changes, who is affected and the impacts below.

Background

For some time, it has generally been understood that because the doctor contracts the medical practice entity to provide services for them – and not the other way around – payroll tax does not apply.

A number of recent Court and Tribunal decisions have created significant uncertainty and has the potential to threaten the viability of many medical practice entities, which often operate on thin margins and retain little or no profit at the end of the year.

More broadly, if the Offices of State Revenue across the country assesses payroll tax on the basis of these decisions, it is a realistic and major risk that medical practice entities could face significant tax bills in the future and also retrospectively. With cash flow already tight across the sector, we could see a worse-case scenario where many medical practices may be forced to wind up because they can’t pay.

The knock on effect to the sector could be widespread and significant. For instance: doctors are prevented from providing their services for a period of time and the general public – ie patients – are put at risk; the potential for professional registrations and reputations of doctors – particularly those who are directors of the service entity – could be affected with the winding up of an entity; and certain State Jurisdictions may hold directors liable for unpaid Payroll Tax. Not to mention, this is on the back of the health sector still grappling with the impact of COVID-19, the biggest pressure test in a century for the industry.

What’s happened?

Below is a snapshot of the recent conclusions:

• Patients are ‘customers’ of both the medical practice entity and the doctor.
• The doctor provides services to both patients and the medical practice entity.
• Payment over to the doctor by the medical practice entity of patient fee income is subject to payroll tax.
• Possible exception is patient fees derived from Medicare bulk billing or Department of Veterans Affairs (DVA).

Who is affected?

These changes are set to affect any medical or allied health practice which has a service agreement with a medical or allied health practitioner and which, on an annual basis, ‘generates’ the following totaling more than the payroll tax free thresholds (generally in excess of $1million but as low as $700,000 in Victoria):

1. Salary and wages to employees; and
2. Patient fee income

What’s the response across the states?

The various Offices of State Revenue (OSR) are already issuing payroll tax assessments for as far back as 2016 on the basis of these decisions even though:

• The most recent decision was handed down less than six months ago.
• Most of these decisions are by Tribunals, not Courts, and, as such, depend heavily on the specific facts of each case.
• This most recent decision is being appealed to the NSW Supreme Court.
• There are inconsistencies between the various decisions.
• The impact of the decisions is not fully understood.

What can we expect next?

This is the $64 million question and it is difficult to answer at this stage. However, there are potentially a range of actions, none of which should be considered on its own, including:

• Peak bodies (eg. AMA, Royal Colleges), along with the medical, legal and accounting professions, lobbying and advocating for:
  
  • The OSRs to withhold action until clarity – eg a Supreme Court decision – is achieved
  • Legislative amendment
  • Prospective application of the decisions only
• Profession-wide reconsideration of appropriate changes to ‘standard’ service agreements, including whether such agreements reflect the fact that it is the doctor, not the medical practice entity, who is the principal of the arrangement.
• Medical practice entities increase the service fees they charge to doctors to cover payroll tax – for example, for GPs, the current rate of 30% of patient fee income could be increased, however, the rate is agreed by the ATO so this would require re-negotiation with the ATO.
• Doctors running their own practice, having patient fees paid directly into their own bank account (rather than that of the medical practice entity) and essentially only using the medical practice as a landlord. This is largely impractical and will cause significant inefficiencies and costs.

Working with clients

For many healthcare providers, especially those with medical practice entities, these changes could have a widespread impact on their businesses. For some, they could face a significant retrospective tax bill, with payroll systems unable to keep up with future obligations. We are working with our clients to stay across the latest developments and restructuring their payroll tax systems accordingly. We help clients to look across their businesses to find opportunities to unlock capital, as well as ensure they are tax optimised in what is a fast-changing environment.

Learn more about how our Payroll consulting & Award compliance services can help you

Visit our Payroll consulting & Award compliance page