Stop the patient payroll tax! The Victorian and South Australian Revenue Offices might be seriously misleading general practice with opinion they couch as if it is law.
According to the article Victoria rubber stamps payroll tax reform published recently in TMR, the Victorian revenue office told representatives of the Australian GP Alliance and the RACGP during discussions earlier this year that it considered every conceivable GP business structure to be liable for payroll tax.
If it’s true that Victorian revenue made this representation – I’m told it was checked with the key figures in the AGPA – then the peak bodies and every GP practice in the country that has struggled with this extraordinarily difficult issue need to take a big step back and ask themselves what is going on.
The statement is patently and provably wrong.
In fact, the Victorian state revenue office must know that it has already audited some practices for payroll tax and allowed those practices to continue to operate without the need to pay the tax because they assessed the structures as being compliant and not captured with its payroll tax framework.
Or, it didn’t want to risk testing the structure in court for fear it might end up with a legal precedent and law that showed every practice in Victoria how they might structure to avoid the Victorian Revenue payroll tax net.
Why do I know this?
I have been involved in some recent Victorian payroll tax cases concerning employee-contractor-like relationships, which were successful in the GP practice’s favour but never publicised due to confidentiality agreements.
Why the need for a confidentiality agreement? Can’t tell you. It’s confidential.
But I think everyone might imagine that if every time the Victorian revenue office audits a practice and it assesses that it can’t levy payroll tax (or don’t wish to test if it can in court) so it makes them sign a confidential settlement agreement, there’s a reason it might be doing that.
Practices are always concerned about their reputation and do fear being labelled a “tax rorter”. They may risk their ability to recruit and retain practitioners if this were to be publicly known.
Inadvertently this helps fuel a lay view that every practice is liable for payroll tax, in the absence of a contrary Queensland landmark ruling or court case. The Queensland ruling clearly states there are lawful arrangements that can apply. These same laws can apply anywhere in Australia.
Another reason for a confidentiality agreement could be that if all those practices who have been ticked to continue with business as usual not paying the tax were free to talk, you would not be able to make statements of the nature the Victorian revenue office did to the AGPA earlier this year about there being “no conceivable structure” that wouldn’t attract payroll tax.
Maybe the left hand of the Victorian Revenue office, like a lot of government departments from time to time, doesn’t know what the right hand is doing.
Or, a slightly more cynical interpretation, maybe it knows exactly what it’s doing.
No matter what is going on, saying something like this when it plainly is not true, can lead to significant and potentially catastrophic mid- to long-term business damage for a practice if it takes the statement as gospel. And many appear to be doing that.
Earlier in the year the SA Revenue office declared that in its opinion, every practice that had applied for a payroll tax amnesty had structures that would require them to pay payroll tax. This wasn’t quite the same. It’s possible all 283 practices (nearly 60% of SA practices) which applied were badly structured. But not every practice applied for the amnesty.
Practices considering their position on business structure and payroll tax are nearly always in a very difficult place.
A few state revenue offices have brought some relief to this position by ditching the threat of back auditing a practice. That is a huge relief and provides a lot of practices with breathing space to reassess their position.
Regardless, a practice that has drifted into a structure that does not pass muster on payroll tax compliance has some very difficult decisions to make.
One very big decision is to give in, continue with an existing non-compliant structure and start paying payroll tax, in whichever way each state wants you to pay it.
In a state like Queensland, which following the recent election has promised no payroll tax, that decision seems to be easy. Technically the new government is saying you are going to be exempt – there is no legislation yet, so no one really knows if there are going to be any gotchas like we see in the ACT, NSW, Victoria and SA – so on spec why would you spend money changing anything now?
But it should still never be considered an easy decision. It’s not.
Choosing not to adapt your structure and simply move into a payroll tax regime – whether you pay the tax or not – means that your practice is declaring to the Australian Taxation Office that your doctors are subcontractors, not tenants. In nearly all cases that means the ATO is going to treat your subcontracted doctors as being on “independent subcontractor and/or employee-like contractors” that are not tenant doctors.
What’s the problem here?
Nearly every other class of professional taxpayer who is assessed as being an “independent subcontractor and/or employee-like contractors” has to pay GST.
If you go here without proper forethought, you might be facing problems much bigger in the end than payroll tax has ever been.
If your doctors are clearly seen as subcontractors by the ATO and therefore on deemed employee-like contracts – which they will be if you go along with the state revenue offices and enrol yourself into their payroll tax regime – you risk triggering a financially crippling chain reaction of GST, superannuation and Fair Work liabilities way bigger than payroll tax.
The alternative of restructuring so you become a clean tenant doctor model which does not attract payroll tax – yes, to be clear, a business structure that does not attract the tax – isn’t easy either, depending on what your current set-up is.
But it avoids the two big problems of going the other way: payroll tax, and all the potential issues with the ATO of now assessing your doctors as subcontractors.
No matter which way you go, blindly folding to the whims of state revenue offices – in the case of the Victorian Revenue office, not just whims but misleading statements – is not the simple solution it is being sold as.
Notably, some of the peak GP bodies are selling this as a solution on behalf of the revenue offices, and trying to win brownie points with their members by pointing out that their lobbying got each state government to walk back the worst-case scenarios of a flat payroll tax with no outs and back audits in play.
The AMA and the RACGP did do this. But both organisations have not understood the broader implications of giving in to surrendering yourself into state and federal government taxes, including but not limited to, payroll tax, Workcover, Fair Work, superannuation, PAYG and GST.
In most cases the investment in restructuring to be not liable for payroll tax should outweigh any payroll tax or federally administered tax compliance burden over time and give your practice and patients peace of mind.
The other thing it would almost certainly do is significantly improve the value of your practice for sale one day and provide you with a hugely competitive advantage in terms of recruitment and retention.
What doctor wants to sit inside a practice that is struggling to provide their tenant or subcontractor with a framework in which they can be confident they themselves are not going to become ensnared in this mess of tax issues facing the sector?
This problem isn’t obvious in the sector yet but it will soon be.
If the ATO thinks that your practice runs subcontractors not “tenants” then it is not just going after the practice to fix up some missed GST and superannuation payments. The ATO will look at the individual returns of your doctors and if they don’t like what they see – like, why have they not been paying GST as the vast majority of subcontractors across the country do – they will come after them eventually.
To be clear about Victoria, it is entirely possible for GPs or any medical or healthcare facility not to pay any unnecessary payroll or other employee-like contractor tax under their existing rules.
Related
Poor legal and accounting literacy
Often practices, out of sheer fear, are unnecessarily volunteering to pay payroll tax because their advisers, respectfully, still don’t understand the rules and are having difficulty explaining the totality of their arrangements to their advisers or their local regulators.
This is far more complicated and expensive than ensuring you have the right model that does not attract payroll tax.
The idea of paying payroll tax was once misunderstood and inconceivable to most of the peak GP bodies. When I first started alerting the problem more than five years ago, I was told I was a scaremonger, even on occasion referred to as ‘Chicken Little’.
The next problem we have in this saga is that now the peak bodies have politically manipulated some states into various forms of concession on payroll tax, and now a lot of people see the problem as manageable.
Some of the big corporates are sitting back thinking, “OK, no one is going to back audit; Queensland is OK; NSW is manageable because we can bulk bill at 80% or over, the threshold in SA helps us … we think we can manage our way through this … accepting payroll tax”.
Through what though?
They are thinking in one dimension, namely, the state-based payroll tax dimension. They aren’t adding the complex layer that is federal tax law, particularly the laws associated with contractors and deemed employees.
That saga has not even started – unfortunately.
Complying with tax laws is not a popularity contest.
It is a contest of your evidence against an ecosystem of complex, inter-related, and unfortunately, overlapping state and federal laws.
Clarification of Victorian Revenue Office’s statement
By saying that the Victorian Revenue Office (VRO) considers “every conceivable GP business structure to be liable for payroll tax” the AMA and the RACGP are blindly reselling the propaganda of the state.
Certainly, the GPRA and the RACGP seem to believe the statement. But where is that statement in law, or even in regulatory guidelines? Where is a precedent case that confirms the statement is true or not true?
Why aren’t these peak bodies digging deeper and looking upstream at the dimension of federally administered tax implications?
We know that there are some audits that prove the Victorian Revenue Office statement is not true, but as far as we know the outcome of all of these audits seems to be confidentially self-imposed.
Would the Victorian Revenue Office officially come out and make the statement on the public record?
I would challenge a tax regulator to publicly state this and provide the legal authority that supports such an ambivalent statement. There are incomplete rulings and opinions, which is why we have courts that make the final call, not regulators or opinion makers.
It’s crucial to understand that tax regulators primarily administer existing laws rather than create them.
Role of tax regulators
Tax regulators, including the VRO, are tasked with administering and providing guidance on tax laws. However, they do not have the authority to create laws.
Like the federal and state parliaments, the Victorian Parliament is responsible for law creation, while courts have the final say in interpreting these laws when disputes arise. Their views can be challenged if you feel their position is not whole or complete.
One probable reason that state revenue offices pass practices on payroll tax audits is that they fear that if they took some of these practices to court and lost they would have a precedent opposite of the likes of Thomas and Naaz – one that proves beyond a doubt what structure complies with not having to pay payroll tax – which many practices do.
The legal system often operates behind closed doors, with many cases reaching settlements before trial.
This tendency to settle is frequently driven by a party’s assessment of their likelihood of success. Understanding that our legal framework is only sometimes synonymous with a justice system is crucial. Instead, it often favours those with greater financial resources or those with a stronger legal argument. You need both, which is why 98% of cases usually settle.
Consequently, in disputes against regulatory bodies, individuals may face significant challenges. These agencies might prefer to settle cases that don’t align with their interests rather than risk an unfavourable public precedent.
Alternative approaches and experiences
Contrary to the impression the VRO wants to project, clean alternative approaches to structure do exist for GP practices:
- Tenant doctor arrangements: legal and tax advisors have confirmed that genuine “tenant doctor” arrangements are not subject to payroll tax and related employee contractor-like on costs such as super, PAYG and GST.
- Written exemptions: some GP practices have successfully obtained written exemptions from payroll tax.
- Case-by-case basis: the VRO and other state revenue offices have shown flexibility in some cases, opting not to pursue further action or tax entire group practices.
Seek professional advice
GP practices must seek experienced legal and tax counsel, especially if current advisors need to become more familiar with alternative compliant arrangements. The complexity of the current legislation underscores the need for specialised knowledge in this area.
Disclaimer: I’m a chartered accountant experienced in advising medical sector businesses. I’m not a lawyer, though these opinions have been reviewed by lawyers for legal accuracy. I am not providing legal advice.
David Dahm is principal of Health and Life.
