8 October 2021

Payroll tax problem is going from bad to ugly

Comment Tax

You know those times in life you’re afraid to ask, but you really need to know, and you ask, you get your reply quickly, and you know immediately …you should not have asked?

Yesterday, a spokesperson for Revenue NSW got back to TMR about some questions we had asked on the Thomas and Naaz payroll tax decision.

We didn’t expect to get the answers we were after, and we didn’t, but we did get this and realised immediately we had played right into their hands.

We had given them a free pass to shoot over the bow of every practice owner in NSW (and possibly the country) with what felt to us like a chilling threat, but which they can now claim was a simple and plain letter response to a media enquiry. It reads as follows, with some translation in square brackets.

“Revenue NSW applies taxation laws fairly and equitably to all taxpayers without exception. [Guys, without exception.]

“Recent decisions by judicial bodies around Australia, including Optical Superstores in Victoria and Thomas and Naaz in NSW, have established that arrangements between a healthcare business and healthcare practitioners who provide services are potentially relevant contracts within the meaning of the Payroll Tax Act 2007. [How could there be anything wrong with either judgement or our application of the judgements? Like we said, we’re fair without exception.]

“Revenue NSW works with each business to determine which payments they make to healthcare professionals are liable to payroll tax, and whether any of those payments might qualify for an exemption. As part of the ongoing compliance audit program, Revenue NSW has reviewed several healthcare businesses to ensure compliance with NSW payroll tax laws. [We’re going through our doctor practices rolodex and we will get to you eventually.]

“Taxpayers who voluntarily disclose liabilities to Revenue NSW before an audit is initiated will have penalty tax reduced to nil. [If we get to you and you haven’t contacted us first, ding! Fines guys, and you know they can be up to 100% sometimes.]

“In circumstances where tax has not been paid through a misunderstanding of the law, Revenue NSW will consider waiving penalty tax and interest and will continue to offer taxpayers more time to pay to help businesses to continue to operate normally. [Guys, we aren’t monsters … just looking for more revenue in a fair and equitable manner in hard times ps, don’t forget the stuff we said above about fines]

The problem with Revenue NSW’s statement (once you get past the without exception fair nonsense) is that the Thomas and Optical Superstore decisions don’t establish anything other than that in these specific two cases there are potential issues. The statement, whether deliberate or not, attempts to cast the Thomas and Optical Superstore net far and wide, when its far from clear at this point of time whether many individual businesses run by GPs or corporates would fall foul of the Thomas precedent and a Revenue NSW interpretation of the payroll tax act. .

There is a lot of variation between businesses and how they set things up.

It’s possible in the light of this provocative positioning statement from Revenue NSW that some practices will want reach for the white flag, hoping to avoid a penalty at the least.

If any practices do, I’m told by various advisers that, without getting their situation properly assessed first by professional advisers, they’d be risking incurring payroll tax for a set up that doesn’t fall into the Revenue NSW net. It’s not Revenue NSW’s job to to check whether a practice that puts its hand up is actually liable for payroll tax or not. No one will be checking their setup closely against the detail of the Thomas decision and getting back to them if they’ve made an mistake. If you put your hand up, you’re going to incur the tax, and likely back taxes.

One advisor who was shown the statement but did not want to be named told TMR, “this is not a one size fits all decision. Practices should not overreact to this statement. It is not even based on a legal precedent [it’s only a tribunal]. Practices should get proper advice before they do anything. For many they might find it is business as usual once they get advice.” 

Another advisor pointed out that any practice thinking of changing their set up immediately to try to get ahead of the situation will also need to be careful they don’t end up looking as if they are attempting to avoid tax – that’s several degrees worse than not paying payroll tax.

This is an awful position for NSW government to place practice owners in.

When we broke the story of the NSW payroll tax decision just over a week ago, the initial assessment from our money editor, David Dahm, was that it looked pretty bad. Now, with some faint hope we will get to at the end of this piece, it’s looking a lot worse unfortunately.

A key issue is that the NSW Office of State Revenue is focusing now as much on the flow of the money into and out of accounts, as it has been the actual working and contractual relationship between a so called “contracted doctor” or a “tenanted doctor”, and the practice they were working for.

As things go with something potentially shocking, there is usually a frenzy of quick expert analysis to try and figure out what prompted the change, whether there has been some sort of bureaucratic accident in thinking on the part of the government that could quickly be fixed or clarified, and if not, where the inevitable loopholes might be that could be used to get around the problem.

We’ve seen quite a bit of this sort of activity over the week. Interestingly we seem to be ticking off the classic emotional patterns that follow sudden loss: shock, anger, and already, some early signs of bargaining from the AMA and from the boss of the new GP lobby group Australian Society of General Practice, Dr Chris Irwin.

Tellingly, we didn’t see much if any denial which usually comes first.

Everyone accepts there is a big problem, at least.

We asked the RACGP what it was doing about the problem and were told that while it was “aware of the recent case by Revenue NSW, it was unable to comment on legal matters”. Which is a pretty bizarre reply.

It’s not a legal case the RACGP is entangled in, it is a ruling by a state government tribunal that threatens the viability of many of the practices of their members. It’s one of the most impactful existential threats to the survival of their members’ businesses that has come up in years. For many practises, like that of Dr Thomas which faces back taxes and a fine totalling nearly $800,000 plus legal costs, it could end way worse than Medicare freezes.

What is the college executive thinking by keeping its distance?

The ASGP at least put out a press release calling on the RACGP and AMA to start advocating on the matter as they are the ones with the most political clout to start a bargaining process.

So far the RACGP is missing in action on this front.

James Moxham took an interesting tack in his piece this week as he sought to find some silver lining in the decision. He didn’t bother with shock, denial, or bargaining, instead going straight to an assessment of what the ruling might end up meaning for GPs who aren’t owners.

He describes quite well how distanced the working relationship between a practice and its working GPs would need to be in order not to qualify for payroll tax, and surmises that there would be a clear power shift away from the owner to the independent working GP in how things roll going forward.

It would mean, he suggests, things like:

  • A possible reduction in PSR and PRP exposure – presumably because a GP would not be subject to any pressures to do things that optimise practice income but attract the PSR’s attention
  • Better cashflow and positional monetary power – Moxham suggests that a big part of the solution will be a doctor first taking 100% of their income, before then remitting “rent and services” fees to their “landlord”, which makes sense in the context of the ruling
  • Generally, a much looser contractual relationship which offers more flexibility and freedom – things like stipulating your own hours of work, not having to adhere to minimum hours of work or rosters, not having to do PIP payment paper work, and so on

Moxham is probably right in his assertion that the working relationship in a lot of cases may need to be redefined and could provide a lot more flexibility and power to the working GP.

But that’s only one side of the overall equation, unfortunately.

If your practice has to pay payroll tax in the future on all its working GPs, and back taxes, the money to make up for that loss of profitability has to come from somewhere.

Even if the practice owner decides to cut things down the middle, and carry some of the pain for a “tenanted GP”, you can probably imagine they aren’t going to take all the pain.

Revenue pressure results in all sorts of other possible changes in how a group can operate which could affect a working GP – increasing pressure for mixed billing, for instance – although how a practice could even organise that with the GPs working at their practice now is not known.

As things stand this week, there is almost certainly pain of some sort coming for both owners and non owners.

Which would make you think that the colleges and the AMA should be examining any bargaining options they have.

The problem for the colleges and GPs might be that in this situation the colleges have virtually no bargaining power because their power lies mostly with the federal government, not the state governments.

This is a state-government-initiated attack on general practice, and because state governments don’t pay for or look after GPs, they’re more or less free to use GPs as pawns in a broader political game, if they wish.

If you want a hint of what the broader agenda of a state government might be in cornering the GP profession, then look no further than this week’s letter from all the state health ministers to the federal Health Minister Greg Hunt, requesting more funding for their hospitals to help manage a new and tricky phase for them in the ongoing covid crisis.

The Prime Minister Scott Morrison (still feels like a line from Mad as Hell), made the federal government’s position crystal clear when he described Queensland Premier Annastacia Palaszczuk as an extortionist.


Intractable positions on both sides, and GPs in the middle, reasonably defenceless against state governments, who, if you want to try to be fair, are facing off some pretty hefty bills for managing covid, and need to extract more money from somewhere.

On the one hand the state governments have found a perfect way to put the screws into general practice (which they don’t fund so no problem for them) and look like they’re just doing what they are meant to do, i.e. collect payroll tax and stuff – and on the other the federal government, where the colleges and the AMA do have some leverage, are describing state premiers as crooks.

The states are now in a position to use payroll tax as a bargaining chip in this not insignificant spat over state versus federal healthcare funding. It’s a way of clawing back some funding from the commonwealth health budget, or of putting a lot of pressure on the federal government to back off, “otherwise the GP gets it”.

TMR has been advised this week by insiders that Revenue NSW had multiple options it was prepared to use – not just the payments flow – in order to get a ruling in its favour in the Thomas case.

If this is true it is some confirmation that the Thomas decision is no accident. It’s a plan on the part of the NSW government which looks like it has been thought out quite a bit in advance.

I’m going to admit, this has the whiff of conspiracy theory about it, but whether it’s a planned tactic to lever the federal government or not, it works for the state government either way.

But in one of the ways, GPs turn out to be big losers and so potentially will our healthcare system.  

Hunt should probably pick up the phone to the new NSW Premier and, come next Monday, when we’re all allowed to go to the pub again, go for a beer to talk about it all offline, as it’s starting to get out of hand.

GPs aren’t what you’d call rolling in the cash at the moment, given years of Medicare pay freezes and now covid. It’s serious.

If the NSW government starts rolling through practices in a more systematic manner, which it is entitled to do, and other states start following suit, there goes the neighbourhood (as they say). The stability of the entire healthcare system will eventually be under threat.

When you boil the problem down it’s all about the money, or lack thereof.

Just as a practice manager will need to pass on costs of payroll tax to survive if they have to pay it, the NSW state government needs more money now to get through the next phase of COVID, where a shift from eradication to vaccination has the potential side effect of severe hospital blowout, and looking to a post-covid world, needs more sources of revenue generally.

It can either get that from GPs directly, and won’t cop the blame, because they don’t run GPs, or it can do a deal with the federal government and lay off the GPs, who have largely been propping up the system.

GPs aren’t always innocent victims.

They are in this instance. Someone high up needs to step in.


In the spirit of “not all is lost” here, I understand that, lucky for most practice owners, some of the major corporate GP owners stuck with the same problem are spending a lot on consultants, lawyers, accountants, and even software companies to solve it.

Of course, as Moxham says, read the cases, and as Dahm says, get a few opinions from some experts you trust for yourself. And unless you’re really certain don’t reach for the white flag just yet.

If what we hear the corporates have in mind works, it might pave the way for everyone else.

And if it doesn’t work, you can be pretty sure they are going to fork out the money to have the NSW decision properly tested legally over time, so there is eventually proper clarity of what you can and can’t do.

So as stressful as things are, truly, all is not lost just yet.

What is the corporates’ magic solution?

At the end of the day, whatever they come up with is necessarily going to be a pretty sophisticated mix of changes to contracts, and the money flow; but I’m told that if you read the ruling the way the NSW government has interpreted it, money flow is a very important new component of the interpretation that caught Thomas in the payroll tax net.

One possible solution to the money flow problem is setting up blind trusts for the GPs, where all their patients payments go directly out of the practice eftpos (or equivalent) into a blind trust, and the trust pays the money back into their accounts. The practice invoices the GPs, direct debiting them form from their account, as simultaneously as they can to co-ordinate with the trust payment. I have no clue why simultaneous matters, but technology makes it possible.  Apparently it can be done patient by patient using the right software.

In this set up practices never see the money of their GPs. It’s a very clean separation and much more like they are just being charged rent as they should be. The blind trust setup (again, don’t ask me why) also gets over issues that might arise from the patient payments going first into GPs account, which is something Moxhan suggested might work but apparently that has issues too.

Again, no DIY please. All this is hearsay so far. Get expert advice if you can.

I’m told that the major patient management system vendors are working with some of the bigger corporates now to get a solution that automates most of these processes, so stuff like having to pay each different practice GPs blind trusts separately, and then get them paid back, and handling the “rent” deductions from the GP accounts, won’t become a nightmare for practice owners.

So while the RACGP or ACRRM haven’t been sighted yet, at least you have some people in your corner here if you’re a small to medium independent practice.

Ironically, it’s your corporate competitors who are trying to come to the rescue.

All might not be lost yet.

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3 Comments on "Payroll tax problem is going from bad to ugly"

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1 month 28 days ago

The Revenue NSW is testing the waters with Thomas and Naaz’s case before it goes after every medical practice (both GP and other specialist practices.
The only way to atop this genocidal mission is to start a class action against NSW State revenue department.

Stephan Hellmuth
Stephan Hellmuth
1 month 28 days ago

We have been using Tyro with multimerchant facilities (Medical Director, Best Practice was a late comer to this) for more than 10 years.
The doctor’s billing went straight into their account and the service company issued an invoice for management fees a month in arrears.
The doctors are tenants and work their own hours and take holidays as they desire.
This has not been abused and has worked well in my practice.
The service company has a signed tenancy agreement with each doctor.
What more can be done?
BTW. No advice ever received from RACGP nor AMA.

memgoss Goss
memgoss Goss
1 month 28 days ago
The new age RACGP is missing in action from actually helping GP’s because it is too busy hindering Gp’s by “backing” PLAN2 and arranging sneaky “spot checks”. The payroll tax issue now raises another sleeping giant – every GP who has been a slave to the onerous contracts that those super giant corporates coerce you into, will now have a legitimate claim for 5 years back pay for holiday pay, leave loading, sick leave and superannuation. Those corporates treat you like an employee anyway, monitoring every second of your work activity. So, if it’s good enough for states to impose… Read more »