Payroll Tax & Your Medical Practice — What Should You Do?
By now the medical community is well aware of the recent pronouncement by the Queensland State Revenue Office in respect of payroll tax and medical centres. Issued on 22 December 2022 as a last minute Christmas gift, the pronouncement which takes the form of a ruling (PTAQ000.6.1), explains how payroll tax is applied based on the concept of a relevant contract, the exemptions which may apply and provides examples of common scenarios often found in the industry.
Importantly, the ruling applies not only to medical centres, but also to all medical-related and health professional businesses. As such, it is far-reaching in its application and will affect many businesses.
This follows on from The Optical Superstore Pty Ltd and Thomas and Naaz decisions that have impacted medical centres in Victoria and New South Wales already, with the other states and territories expected to follow suit soon.
The purpose of this article is not to provide you a summary of the ruling. For details, see our other article. Rather, the purpose is to provide you with a lens from which to view this development and decide upon the most appropriate form of action in your circumstances.
Your Choices:
Faced with the potential extra impact of payroll tax on payments to practitioners, medical centres can do a few things:
Do nothing and just accept an extra cost
Accept the extra cost and attempt to minimise its impact
Attempt to avoid the cost in its entirety
The choice is yours. Whatever strategy you choose does however have its advantages and disadvantages and in subsequent paragraphs, I will discuss each of these alternatives.
1.Do Nothing
You can in fact do nothing. If you choose this strategy, you will simply need to examine your arrangements with each practitioner to determine if there is a liability for payroll tax, determine the amount considered to be wages paid to the practitioner, then lodge and pay your payroll tax.
Simple!
Whilst a relevant and perhaps convenient (for the regulator) position to take, there is a significant downside, and that is cost.
The current threshold for payroll tax in:
Queensland is currently $1.3 million and the rate is 4.75% for businesses with a payroll of less than $6.5 million and 4.95% for those above the $6.5 million threshold.
NSW is currently $1.2 million and the rate is 5.45%
Victoria currently is $700,000 and the rate is 4.85%.
Now consider that practitioners are generally paid handsomely, and the potential liability can be substantial.
In summary, whilst simple and perhaps convenient, it is potentially costly as a strategy.
2. Avoid the Cost
It “may” be possible to avoid payroll tax on payments to practitioners entirely!
I use the term “may” and repeat it for effect!
There are some strategies around which, where they alter the relationship you have with your practitioners, may lead to the conclusion there is no relevant contract and therefore no payroll tax liability.
Consider this simplistic example:
Let’s assume you could avoid payroll tax by changing your contracts with your practitioners by:
Removing their restraint of trade
Allowing them to dictate the hours they worked
Allowing them to dictate the amount of leave they could take
Would you do it?
It’s a cost:benefit analysis for medical centres to consider, in exchange for a reduction in the liability for payroll tax. Am I prepared to allow practitioners this freedom?
In this instance, whilst you may save payroll tax, you may in fact cause other problems or costs for your practice. What happens if the practitioner leaves to go work in another practice closeby? What happens if the practitioner chooses to be away for 12 weeks consecutively?
For the record, this change alone would be unlikely in our opinion to be enough. With other initiatives, it may however suffice.
I continue to use the term may. The ruling is quite clear in that each case is separate and needs to be determined on its own facts. Until those facts are placed in front of a court, in circumstances similar to those which resulted in this ruling, you will never know for sure.
If in fact you would like to pursue this option, you need to:
Re-work your contract provisions with practitioners;
Determine (take advice) whether the revised situation will reduce/remove the payroll tax liability; and
Determine the costs/risks of adopting the new contracts in your practice.
3. Accept the Cost But Minimise the Impact
Lastly, you can accept the cost but minimise the impact to your practice through other strategies.
Let’s now assume we cannot avoid payroll tax at all. There are still some things to consider:
Can fees to patients be increased?
We are currently in an inflationary environment. Can and should we consider raising patient fees? How do our fees compare with other practices/practitioners? A price rise in the current environment may be acceptable and offset your payroll tax.
Can the split with practitioners be re-negotiated/amended?
If you hire an employee, as an employer you need to consider the total cost. That is, salary plus benefits, plus on costs and fringe benefits tax. Has the addition of payroll tax to the mix now changed the game such that we should consider a different split between practice and practitioner?
Can other costs to the practice be minimised or eliminated?
All businesses should consider costs regularly. Is this a catalyst for you to reconsider some of your overheads, so as to retain your profit margin?
Have you considered the definition of payments to the practitioner for the purpose of the ruling?
Not all payments are subject to payroll tax. Further, it may be possible to reduce payroll tax if you fully understand and follow the definitions and perhaps attempt to change the nature of what is paid.
In summary, if you can’t eliminate payroll tax, there are still other steps you can take to maintain profit margins in the practice.
What Should You Do?
There is much to think about here with this issue, including potential flow-on effects in relation to superannuation, WorkCover and more.
At first glance, it may seem to be purely a tax issue and there are certainly tax and legal aspects you should address. On deeper reflection though, I believe that the key consideration should be your business model. That is, whatever solution you choose, does the solution suit your business model and practice goals?
I encourage you to contact us to explore your situation and the right solution for you.