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In July last year, the Appeals Panel of the New South Wales Civil & Administrative Tribunal (“the Panel”) decided against the taxpayer in the Thomas & Naaz appeal. In fact, the decision was somewhat of an anti-climax, with the Panel effectively concluding that the grounds of appeal were erroneous – the Panel can only decide on questions of law, but they were only presented with questions of fact.
There was one positive comment though. The service entity in Thomas & Naaz gave doctors the option of Medicare benefits being collected by the service entity (and remitting after service fee to the doctors, as with direct patient fees), or the doctors collecting those benefits directly themselves. Three doctors chose to collect the benefits themselves. The Panel noted:
Payroll tax has been levied by the respondent only in respect of the payments made by the appellant to doctors from the Medicare benefits it collected in its bank account on the doctors’ behalf (i.e. the amounts equal to 70% of the claims paid by Medicare). No payroll tax has been levied in respect of the payments made directly by Medicare to the three doctors.
This comment suggests that patient fees collected by doctors fall outside the payroll tax net. This is an interesting and potentially very important issue that, surprisingly, has not garnered a lot of comment. The point appears to be that where payroll tax is applied to payments collected by the service entity (even if as agent or trustee) and remitted to the doctor – that is, if there is no “payment” by the service entity to the doctor – there is no payroll tax to be levied.
Of course, this comes with its own practical issues. Particularly, how can the service entity ensure that it collects its service fees from the doctors in a reasonable timeframe that gives it sufficient cash flow to meet its liabilities as and when they fall due. There may be a banking solution to this, but this is something to be explored.
Health care sector in crisis
Across Australia, almost weekly we are seeing media reports about crises within the health care sector ranging from ambulance ramping, the inability to get doctors to rural and remote areas, understaffing and insufficient funding of the public hospital system, the apparent “slow death” of bulk billing and increased pressure due to mental health (with mental health issues rising in the general population and in the healthcare sector).
An additional tax impost on medical service entities is another example. GP service entities already operate on very thin margins. There are many reasons for this, most being outside the control of GP service entity owners, including:
- The ATO placing a limit on the service fees that service entities can charge without risking scrutiny.
- The recent boom in wages, while at the same time a squeeze on labour supply.
- The Medicare rebate not keeping pace with inflation, meaning that the out of pocket cost for patients (where bulk billing does not occur) is increasing and putting extra strain on them.
If a service entity needs to stay afloat while paying payroll tax on patient fees, then either or both patient fees or the service fees charged to doctors need to increase. Unless this is done in a consistent manner across the profession, service entities will risk closing down either because they lose doctors and/or patients, or they can’t cover costs.
It is ironic that this squeeze on GPs is coming at this time. GPs have been the backbone of the response to the COVID-19 pandemic, with initial hits to revenue through telehealth, forced closures and then rolling out vaccines. In Queensland, a trial has given pharmacists limited diagnosis and prescribing rights, formerly the sole purview of GPs who have more extensive training. At the same time, a Queensland Government media campaign has been encouraging patients to visit GPs rather than presenting at public hospital emergency departments.
The latter makes economic sense because the statistics show that each non-admission presentation to a public hospital emergency department costs the Government $533. But rather than incentivising GPs, the government is making it harder for them to practice and then effectively taxing them $3 per consultation (based on an $80 consultation fee) for the privilege.
Progress is being made
Since the Panel decision there have been a series of discussions, meetings and other activities with the Queensland Revenue Office (“QRO”) and Queensland Government regarding the significant adverse impact that applying the cases would have to medical practices.
The good news is that just prior to Christmas we finally saw some progress. The bad news is that not all the progress is positive. Here are the highlights:
1. Public Ruling
On 22 December 2022, the QRO issued a public ruling setting out their view on the application of the “relevant contracts” rules for payroll tax to service agreements between medical service entities and doctors. Positively, we now have a formal public statement and some level of clarification.
However, the ruling is vague and high level, particularly around what the sufficient circumstances are for a service agreement not to be a “relevant contract” (but it is unfair to be surprised by this as QRO is a regulatory authority, not a lawmaker).
Unless a service entity decides to run the risk of QRO scrutiny and a potential audit, along with associated penalties and interest, it may consider the following options (among others):
- Assume all service agreements are relevant contracts and pay payroll tax on net patient fees (subject to pre-existing exemptions).
- Apply for a ruling from the QRO about their own service agreement to get confirmation as to whether they constitute relevant contracts or not.
Unfortunately, in our view the Ruling does not adequately address the issue of the “third party payment” provisions. While the Ruling sets out an example, we consider that it refers to a relatively clear fact pattern. However, as noted above, the more important question is whether it extends to the circumstance of the patient paying the doctor directly. Apart from the one paragraph in the Panel’s judgment, this remains untested.
2. Letter to AMAQ and RACGP
On 22 December 2022, the QRO issued a letter to both the AMAQ and RACGP referencing the issuing of the Ruling, and the positive news is found in the following statement:
“As a further matter, in view of the potential lack of awareness of the relevant contractor provisions amongst general practitioners, consideration has been given to limiting future QRO audit activity to a particular time period. Arrangements of this nature are not commonplace. However, in recognition that further clarity regarding the application of the contractor provisions was provided by the 2021 New South Wales Civil and Administrative Tribunal decision in the Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, I have decided that audit activity in relation to the application of the contractor provisions as they relate to general practitioners will be limited to the 2021–22 and subsequent financial years.”
Apart from the obvious positive outcome, there are a couple of other takeaways from this concession to limit audits to FY22 and future years:
- It only applies to Queensland service entities – we are yet to hear whether other State Revenue Offices will adopt a similar approach, but we hold out hope that they will to ensure that entities operating in some States and Territories are not disadvantaged compared to others.
- Is only made with respect to general practices – the series of cases culminating in Thomas & Naaz could also be applied to other medical service entities and allied health (e.g. dentists, optometrists).
- It is unclear what will happen for GP service entities which have already been audited for FY21 and prior years, as there is no technical change to the law, and the limitation is not binding on the Commissioner. Therefore, will payroll tax assessments be reversed and refunds of tax made? How might you feel if you were one of the unlucky service entities to have already been audited if you don’t receive the same treatment?
- The last couple of lines seem to suggest that it is “game on” in respect of FY22 and future years. GP service entities are now aware of the issue and have the QRO’s ruling, so they should prepare (refer above to possible approaches to take).
Where to from here?
There is still much more water to flow under the bridge yet. Discussions with the various State Revenue Offices and State Governments are ongoing. Thomas & Naaz is being appealed to the New South Wales Supreme Court of Appeal – while we won’t have an outcome until later in 2023, this will be a critical juncture as we finally get a binding Court decision applicable to general practice.
We remain hopeful that State & Territory Governments will see the folly of their reticence to legislate an exemption for medical and allied health service entities.
What is clear from the QRO Ruling is that the only sure way of payroll tax not applying is where one of the relevant contractor exemptions apply (e.g. 90 days, two or more persons test etc). As such, it is important for health service entities to start reviewing their onboarding and tracking of arrangements with practitioners through a payroll tax lens to best avail themselves to these exclusions where commercially feasible.
In the meantime, we strongly encourage all service entities to:
- Review their Service Agreements and compare them against the QRO’s Public Ruling – even though it is a Queensland ruling, we would like to think that there has been consultation with the other State Revenue Offices and a consistent approach would be adopted.
- Consider which of the approaches outlined above (or others) you are prepared to adopt including the analysis and application of the relevant contractor exclusions.
- Review patient fees and service fees to see what can be done to “share the burden” of payroll tax between the service entities, doctors and patients.
Consult with us if you have questions or need assistance including with QRO audits, calculating potential payroll tax liabilities, applying for private rulings or calculating service fees.
