On 3 September in the decision Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, Dr Jawahar Thomas, who runs four practices in Western Sydney, was found to owe the state $795,292.95 in retrospective payroll taxes.
The key assertion by the commissioner was that despite doctor contractors holding themselves out as individual sole traders, co-located on the same premise, their income was still deemed a relevant contract and the manner in which the money flowed to their accounts was subject to payroll tax.
Like most general practices operating throughout Australia, including all the corporate practices, Dr Thomas was billing, on behalf of his doctors, patient fees and charging a flat 30% service fee on everything the doctors had billed.
The decision lays bare the very real possibility that nearly every GP practice group of relative size, and all corporate groups, may be up for large payroll tax bills for those doctors who have always been thought of as “tenants” or “contractors”, not employees attracting the tax.
For over three decades across Australia, the arrangement set up by Dr Thomas has been one of the most common type of arrangements, set up with an intent to make the relationship between the practice and doctors operating out of that practice not one which would typically attract payroll tax.
Most practices have learnt even these days that regarding and treating doctors who operate in your practice as a “contractor” can be construed in many circumstances as an employer-employee relationship that might attract payroll tax, so they have made adjustments to contracts, and various other elements of the practice setup, even practice website marketing and advertising.
But this ruling has deemed that the main determining issue is how the money flows into a practice bank account, and then out of it to those sole trader doctors who work at the practice.
In this case the money flow in a single practice bank account appears to be the most important factor in the NSW commissioner’s determination.
One factor in favour of general practice might be that this decision is a less authoritative tribunal, not court, decision and that the case is not far off the arrangements seen in a favourable general practice decision two years ago called Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue, 25 July 2019.
In the Homefront Nursing case, when GPs bulk-billed Medicare and assigned the patient responsibility to the government and not the practice, it appears to have been a key argument, demonstrating the doctors’ individual clinical practice was separate from the practice, which was in the business of providing practice management support services for a percentage of the doctors’ gross fees.
Unfortunately in the Thomas case, this argument appears to have failed.
The commissioner spends little time in the decision explaining his reasons for knocking back the Homefront Nursing defence, and relies mainly on the Super Optical case and the “flow of funds/payment” argument.
The money trail and the fact of a practice having to use one bank account to pay its “contractors” was pointed to as a reason for the decision.
Most practices can alter the structure and optics around the nature of the working relationship between the practice and the doctors under a tenant type agreement, but because of banking rules it is almost impossible to produce a money flow that would meet the criteria established in the Thomas case which creates a requirement for payroll tax to be applied.
The Thomas decision establishes that if there is any flow of funds between the practice and the provider or anyone associated, this will be deemed a relevant contract where obligations are imposed such as restraints of trade in the contract of the doctors working in the practice.
Most contracts with doctors working on this basis in practices detail at least the basics of the work conditions and the work day, and this in itself may be enough to establish the relationship that under the Thomas decision requires payroll tax to be applied.
The barrister from the case has advised that the employee or contractor test is totally irrelevant. He told The Medical Republic that it is about how providers are paid and any obligations that are attached to the payment.
How the doctors are paid between associated bank accounts creates the problem. That constitutes a “relevant contract” for payroll tax purposes.
Ultimately the decision now leaves the majority of operating GP practices and contractors open to a large retrospective payroll tax bill.
Concerningly, the High Court had refused to hear the matter, which on spec would mean that it is only state politicians that can address the potentially explosive repercussions of the decision for GP owners, GPs, their patients and the healthcare system overall.
If the case ends up being upheld (there is already legal reasons it may be, including that the High Court has refused to hear the case) and acts as precedent, nearly every practice owner in the country will now be potentially exposed to a state government applying the interpretation and seeking to extract payroll tax in what everyone until now has assumed is an arrangement that shouldn’t attract payroll tax.
In the case of Dr Thomas, his practice is being asked to pay three years of payroll tax and his bill is nearly $800,000. But it is feasible for state governments to apply the ruling five years into the past.
Based on the ruling and how it has been asserted by the NSW commissioner, it is next to impossible for even an experienced barrister to help practices comply.
The rules are opaque; the ruling being based on the flow of money into and out of accounts, not on the facts of the operator-tenant doctor relationship, makes any ability to restructure to avoid payroll tax very hard or impossible.
Being subject to an audit can be a financially debilitating and demoralising experience.
They can be neverending. Some practices I know have been waiting for up to eight years for a multi-million-dollar decision. In one case, a practice website triggered a full-scale investigation because it said “Our Doctors” and “Our AGPAL accredited general practice”, implying to the government department investigating that there was a very clear intention of an employer-employee relationship in the practice.
Now nearly every practice in Australia will need to seriously rethink their setups, and even if they are able to make changes that will avoid being caught up in this precedent, they have retrospective payment to start worrying about.
It feels like the decision by the NSW commissioner has been made in a vacuum that is considering state income only, and none of the potentially distasterous flow-on implications that the decision could easily have for the stability of the entire national GP practice network, and then what effect that could have on patients, and the stability of the entire healthcare system.
I have written extensively about medical practices and complying with payroll tax for many years, and this decision comes as a shock to me, so I’m going to assume its going to be shocking for any practice that reads the case and understands the implications.
It’s important for those who practise as an independent medical or allied health contractor to know what type of practice they work with and what that means for them and their practice.
Regular readers will know that the use of the C word (contractor) is one trap that many practices initially fell into in this area.
When it comes to statutory authorities, structures like this can be like a red rag to a bull. “Tenant doctor” is a more apt description because a practice should act as the landlord providing support services and the practitioner is the tenant who purchases these services based on a percentage of the individual practitioner’s gross billing.
And if you aren’t a practice owner and think this is not your problem you probably need to think a bit harder as well. If your practice is forced to pay payroll tax you will likely be charged a higher service fee of some description to help cover the new tax. You might even cop an additional levy to cover retrospective payments.
The time to re-examine your agreement and practice arrangements in the light of this ruling is now.
This decision on how you pay your doctors may get you caught up in an audit and there is no clear solution to the problem at this point of time.
Unchallenged, it will have a significant systemic impact on general practice compliance costs, practice morale, valuations and succession planning.
All on top of covid.
The decision will almost certainly cause much confusion and angst among professional legal and accounting circles as it upends previous thinking on the topic.
The possible solution remains in your practice agreements and systems but there is a lot of work to be done.
If the ruling does hold over time practices will likely be forced to include their normal employee staff pays, e.g. for administration and nursing staff, with how they pay their doctors or healthcare workers. This means they would need to add and submit each month each provider’s patient fees net of service fees charged against their individual gross patient billings.
Payroll tax is payable when a practice exceeds a threshold that varies from state, from $650,000 p.a. to over $1.5m p.a. Payroll tax on wages, fringe benefits, and now “how much you have paid your contractors” can vary depending on location and threshold from 0% to 4.95%.
It does not matter if patient money is first banked in the contractor’s own bank account or the money is held in trust on behalf of the provider. Practices engaging in auto debit arrangements for a provider’s gross fees can be caught under the anti-avoidance provisions. If there is a doctor/director or employee connection you will fall foul of the rules.
The banking arrangements trigger the deemed relevant contract provisions that may give rise to this unexpected payroll tax liability.
Interestingly, this seems to fly in the face of how accountants, solicitors and real estate agents trust accounts work.
One might argue that if this is true, payroll tax should apply to them as well, which may help GPs politically.
Technically practices with over 60 doctors and providers would have to have a separate EFTPOS/credit card merchant facility at the front desk. This is impractical. It would be impossible to introduce affordable watertight fraud controls.
A key takeaway from this case is to remove obligations on the provider which may be deemed relevant contract – the “second supply”, i.e. the transaction between the practice and the doctor, the “first supply” being the doctor providing clinical services to individual patients.
But don’t panic
Take a deep breath as you are clearly not alone in this dilemma. Do not automatically notify your local payroll tax office. Think carefully. Find out more, you may find out your arrangements are not that bad, but could do with some fine tuning.
Remember court cases are more authoritative than tribunal cases.
One lawyer I had spoken to described this decision as “superficial”, saying it could or should be court-appealed. From time to time flip-flop decisions do occur. The Super Optical, Homefront Nursing and this Thomas case illustrate how contrasting decisions can be, even though the facts may appear similar.
Be prepared to keep clarifying your arrangements, when necessary.
Many practices use Mum and Dad and or traditional accountants and legal advisers. Many are totally unaware of the increasing complexity and nuances of the healthcare industry. You may find they are not obliged to let you know unless you ask – after all this is a state and not a federal tax.
You may be better served with specialist medical and health accounting and legal advisers who work exclusively in this area.
A more comprehensive version of article which includes more background and basic tips for approaching this issue is published at the Health and Life Blog: New Medical Practice Payroll Tax Ruling: How you pay your contractor doctors may affect your bottom line
David Dahm is a registered tax agent, CEO and founder of the national medical and healthcare chartered accounting firm Health and Life, and global founder and CEO of not-for-profit project the International Healthcare Standards and Ethics Board – https://www.ihseb.org/