5 October 2021

Silver lining to payroll tax cloud

KnowCents Tax

Practices should be looking closely at their structures in the wake of a NSW decision to charge a western Sydney doctor-practice owner nearly $800,000 in back taxes – but individual GPs could be the winners after the dust settles.

Many doctors use a practice entity and pay this entity a service fee.

Whether such arrangements attract payroll tax depends on how state revenue departments choose to interpret the contract. In the recent NSW ruling they appear to be looking for certain words: “roster”, “leave entitlements”, “minimum hourly rate” etc, as these suggest more of an employee rather than contractor arrangement.

It is imperative to get this right, and given last month’s NSW ruling appears to be backdated, the time to do this is either now, or even better, five years ago. The penalties are such that many practices would likely go broke. The NSW case was a test case that is now likely to be applied more widely in NSW and in other states as well. 

I have worked in clinics where I believe the arrangement was one of a true contractor and I have also worked in clinics which might fall foul of these new interpretations. I have seen financial advisors disagree on these matters and so I think this might be a situation where all doctors need to be doing their own research and making their own informed decisions. 

Let us consider two extreme scenarios. On the one hand, we might have a clinic where all income from all doctors goes into a common account, the practice takes out a percentage and generates a “recipient-generated invoice”, the clinic sets hours, rosters, possibly minimum hourly rates, determines which room the doctor uses and other things that many would consider to be a contractual arrangement, but which may now no longer be so. 

On the other extreme, let us consider a shopping mall. There are multiple tenants in that mall, for example a real-estate agent, a bakery, butcher and a large supermarket. Each of those businesses, large or small, pays a rent to the owner of the mall. The rent might be worked out on a square metre basis, and the large supermarket will be paying a large amount of rent. Consider a hypothetical situation where all the income from that supermarket is paid to the owner of the shopping mall, the owner deducts 30% and then pays the supermarket what is left over. In this situation, who does the person stacking the shelves work for – the supermarket or the owner of the mall? This is the way many medical practices are structured.

Payroll tax is paid when the arrangement is one of an employer and employee. The only way around this situation is to have a true contractor arrangement. The model to copy is the shopping mall model – that is, the way shopping malls actually work, rather than in the scenario above. The supermarket is a separate business entity, as is the doctor. The supermarket collects all its income as does the doctor. The supermarket pays rent to the mall in return for certain services such as space and common heating and cleaning. The supermarket, not the owner of the mall, determines the roster for the person stacking the shelves – so to copy this model, it is the doctor who determines their roster, not the practice. The owner of the mall does not determine when the checkout person takes their holidays, nor does the owner of the mall pay any sort of minimum hourly rate. 

This can work very well in medical practices. Consider a group of specialists sharing rooms, who all have their own area of the front desk, and most their own receptionist though some are also floating, their own eftpos, their own bank accounts, different item numbers. 

In general practice there are some efficiencies; for instance, it is quite possible to share one eftpos terminal but to deposit money into different accounts. 

The first and most fundamental thing here is that all the income from each doctor must be fully paid to that doctor. The practice gets absolutely nothing from patients. So far, so good and this can work very well in general practice. Now, every couple of weeks the practice invoices the doctor for services provided by the practice. These services include taking calls, paying rent on premises, providing receptionist services, heating, lighting etc. 

Next, it is important to read the rulings closely and cease doing all things that state revenue consider to be evidence of an employer/employee relationship.

The doctor determines their roster. The doctor declares that they will be available on certain days and they will be going home at certain times on certain days. There is never a “minimum hourly rate”. If the doctor is not at work, they do not get any income. For holidays, the doctor needs to work out when they want to take holidays. The practice might kindly ask that not all doctors take the same weeks off each year and this is quite reasonable. However, the responsibility for any loss of cover rests more with the doctor than the practice, and it might be up to the doctor to ask their colleague in the next room if they will be able take over patient care while they are away. Such requests are likely to be reciprocated and indeed, this can help build professional relationships between doctors. 

Consider some positives. There is more of an arms-length relationship between doctors, which means that any medico-legal or PSR or PRP (or indeed, payroll tax) issues in the next room are not going to involve you losing your house. There is more freedom to set your own hours, work when you want to and go and pick up the kids when it suits you and not necessarily when it suits the practice.

But the biggest positive involves money. The doctor now gets 100% of their income. The practice fee might stay the same, eg 35%, but the doctor now has a lot more bargaining power if they first get hold of their money. One hears from time to time about overseas-trained doctors who have not been treated very kindly since they arrived here. Such doctors might look at what they are getting for their 35% service fee and might decide that there is a better deal down the road. Some might even do some quick sums and work out that if their spouse took some calls and did some paperwork they might even be better off. 

It is imperative that all doctors read the rulings closely. Any payroll tax bill that a practice has to pay might well be passed on to the doctors working for that practice, and these bills could be substantial. As a very first step, 100% of all income is going to need to go to the doctors and then the doctor needs to pay a service fee to the practice, and what is included in this service fee needs to be defined and it cannot involve any language that could be interpreted as an employee relationship. This likely is going to need rewriting of contracts. 

I foresee some huge benefits for doctors, particularly for overseas-trained doctors who will now be able to experience the freedom of receiving every dollar they earn and then choosing the best way to spend that money. 

Dr James Moxham is a GP in Adelaide

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2 Comments on "Silver lining to payroll tax cloud"

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David Dahm
2 months 1 day ago

After speaking to the barrister in the Dr Thomas case, one needs to be careful. Simply banking in the doctors name is not a silver bullet. Yes see a lawyer and understand the opportunity for fraud with no more banking controls due to seperate banking is a real issue. I used to be a KPMG trust investigations auditor, there are more challenges ahead for practices. Practices should also be consulting an experienced accountant and start asking the right questions.

Simon Holliday
Simon Holliday
2 months 5 hours ago

I agree with David Dahm. The banking is just one of a myriad of factors that could cause the relationship to be caught in the PRT net. Any supply of services by the putative contractors to the company “for or in relation to the performance of work” may make the relationship subject to PRT. Such a sweeping rule could see the tax officials find great creativity. The net could include contracting to comply with accreditation requirements or practice policies. The public would be worse off with PRT-proofed practices.