Payroll tax on GP remuneration is not a burden that General Practice needs to face

There is cause for concern following a decision by the Court of Appeal of Victoria which has the potential for widespread implication for the payroll tax obligation of medical practices.

It is common practice for medical practices to engage General Practitioners under a model whereby the patients are clients of the GP and under a facility arrangement the practice provides facilities and administration services to the GP to enable them to service their patients from the practice premises. This includes, as part of the administration service, the practice collecting patient fees on behalf of the GP and, after deducting a management fee, paying the balance of the patient fees to the GP.

Under these arrangements, the typical accounting treatment is to recognise patient fees collected as a liability or "funds held on trust" (not practice revenue) and that the management fee is the only component of the arrangement that is revenue to the practice. It has never been considered that the payment to the GP would be treated as a expense to the practice that would be captured by the payroll tax provisions.

Alarmingly, the Victorian Court of Appeal has in September 2019 handed down a decision in the case of Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA197 that challenges this treatment and brings into the spotlight a view that these payments could be captured by the payroll tax provisions.

The Optical Superstore was an optical dispensary business. Optometrists, or entities associated with them, entered into agreements with the business under which the business provided, on a non-exclusive basis, consulting rooms for the optometrists to provide optometric services to the public.

Under the agreement, an optometrists consultation fees - both medicare and private patient fees - were paid to the business directly, who held the money on trust. The optometrist received a monthly payment, calculated by multiplying the number of hours worked by the applicable rates at the time ("the reimbursement amount"). In addition, the optometrist was liable to pay an "occupancy fee" for use of the consulting room, calculated as the total consultation fees less the reimbursement amount.

The Victorian Civil and Administrative Tribunal found that the consultation fees were held by the trustee on trust for the optometrists and that the payments to the optometrists were necessarily a return of their money. Accordingly, the payments were not "for or in relation to the performance of work" within the meaning of the contractor provisions of the Payroll Tax Act 2007 (Vic) and thus were not subject to payroll tax.

The Court of Appeal, however, has overturned that decision. They said that "the ordinary meaning of 'payment' readily embraces a payment of money to a person beneficially entitled to that money". It did not matter that the payer was obligated to make payment because the payee had a beneficial right to the money. Thus, even if the optometrists beneficially owned the moneys that were transferred to them by way of reimbursement amounts, these amounts when transferred were "paid" within the meaning of the Payroll Tax Act and were therefore subject to payroll tax.

Separately, in NSW another case is afoot in the matter of Homefront Nursing Pty Ltd v Chief Commissioner of Revenue.

Homefront Nursing Pty Ltd was the trustee of a family trust which operated medical centres in NSW. They engaged four GPs to perform services at their centres under a typical contracting service model.

The payment arrangement between Homefront and the GPs stipulated:-

  • GPs bulk billed Medicare and DVA and collected the fees by assignment of benefits from the patients;
  • Patients who were not bulk billed made payments directly to Homefront;
  • Patient fees were held in a clearing account managed by Homefront;
  • Homefront retained an agreed percentage as its service fee;
  • The net amount was paid to the GPs, without an deduction, as follows:
    • For the first 13 weeks the minimum fee payable was $3,600 per week if 71.5% of the gross earnings did not exceed that amount; and
    • After a 13 week period the GP was paid a fee of 71.5% pf gross earnings at the end of each fortnight.
The Commissioner issued payroll tax assessments to Homefront in respect of the payments to GPs. The NSW Civil and Administrative Tribunal have remitted the matter to the NSW Commissioner for reassessment in favour of Homefront. It is yet to be seen whether this decision will be appealed.

With a shortage of GPs in private practice driving a changing landscape for engagement of GPs and with arrangements such as guaranteed minimum payments and dynamic remuneration models at play, it is critical that practice owners watch this space and give strong consideration to contract terms and the practical use and flow of funds to avoid a hefty payroll tax burden. An assessment of payroll tax could add up to $30,000 in costs to a practice for each associate GP earning $500,000 and is a cost burden that a general practice does not need.

If you have any questions regarding the above, contact Director of Business Services and Taxation, Megan Smith at Alternatively, we have Specialist Health Sector Advisers in each of our offices. If you would like to speak to one in your location, call 1300 795 515.

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