Beware payroll tax pinkie-promises from revenue offices

12 minute read

No amount of AMA and RACGP buddying up to state revenue offices and self congratulation is going to change the law, or the chances of you getting an audit.

This week the RACGP in Queensland attempted what the AMA attempted in Tasmania earlier in the year: to get its state revenue office (SRO) to provide assurances that it won’t be targeting GP practices for payroll tax audits, and to consider changing the law altogether to exempt GPs from payroll tax full stop.

The Queensland branch of the college used a version of a not-so-elegant argument that goes a bit like this:

“Hey guys, this payroll tax stuff is really starting to hurt/worry us. I think you’re forgetting that we’re doctors, we’re here to help your people and we aren’t being treated so well at the moment by your federal masters. So if you don’t mind, leave us out of this whole payroll tax employee/contractor interpretation thing, or maybe just change the law so we’re are officially off the hook altogether. OK?”

Half of this argument is of course on the money.

GPs have their backs against the wall everywhere, and a retrospective payroll tax audit is more than likely to send a certain percentage of practices broke.

However, the compelling nature of the entire argument falls over pretty quickly if you are a believer in the rule of law, in particular case law, and the Westminster system in general.

If you’ve been following the case law on both state and federal cases in the last few years (here’s a list of some of the key cases if you’re that way inclined), you’ll know the law is becoming increasingly clear around payroll tax and service entities with respect to them offering tenancy or employment.  

If you’re running a practice where you aren’t employing doctors but are attempting to provide them services as a form of landlord (the doctors being your tenants) you have quite a few ducks to get in a row now. (Here’s a checklist but don’t take it as exhaustive or as any type of advice.)

Quite a lot of practices are getting professional advice, checking their current structures, contracts, financial payment flows etc. (this week some are starting to ask their tenants to get their own websites), and adjusting as quickly as they are able. Some are going to greater extremes by either hanging up their shingle altogether, or blowing up their old setup and starting again. Both these options, by the way, probably would not exempt you from an SRO looking backwards. 

It’s simply all pretty ugly, unfortunately.

But business can get like that.

And despite what the Queensland branch of the college is intimating, GP practices are businesses.

If you step back just for a minute and think about what is going on, it’s not the fault of state governments and their SROs. 

It’s simply the law. The law as described by judgements made in relevant jurisdictions on relevant cases. The judges in these cases aren’t working for the state governments. Yes, SROs in seeking to clarify their interpretation of the law are taking people to court and these cases have ended up in judgements, and precedents that favour them. But that’s not SROs behaving badly. It’s the system we all live in . It’s the law.

Blaming state governments for not taking into account that GP practices are facing the most serious existential crisis in their history, and suggesting that they need to either ignore the law, or perhaps even more unusually, change it for doctors, is not a winning strategy for the RACGP the AMA or their members.

In fact, it could be a dangerous strategy for some of their members.

If you’re a GP in Queensland or Tasmania and you accept the RACGP’s and AMA’s interpretation of communications they got back from their respective SROs on payroll tax, you might be lured into thinking that the payroll tax problem is going to be sorted out in time and you can relax.  

It’s almost certainly not going to be sorted out in the manner the college and the AMA would like.

Last week the RACGP told members it was going to make a case that the Queensland government (and we presume all state governments) should exempt doctor practices from payroll tax based on the idea that some healthcare providers are exempted from GST. 

State governments are almost certainly not going to ignore decades case law and legislation, or overlook the fact that most doctor practices are private businesses which get all sorts of other tax exemptions based on that structure. If they exempted doctors they’d have every other profession using service entities up in arms and probably taking them to court, not to mention give up hundreds of millions in revenue. 

Should we give the RACGP marks for trying at least? Or should we be wondering why the college is wasting time and resources by engaging in what amounts to fanciful folly?

No one is saying GPs should be not be given some sort of break by both state and federal governments.

As you may have read in a GP Crisis Summit white paper developed by the college, or as outlined very succinctly in an opinion piece this week by Dr Will Cairns, the government has let Medicare drift way off track from of the deal it struck with GPs and their businesses in 1984 and the public. That deal was that if GPs provided a public service for the community the government would provide them with a workable business model via bulk billing. The federal government has well and truly welched on the deal, leaving GPs in no man’s land.

This not-insignificant problem won’t be fixed by asking state governments to start changing the law just for GPs. Asking government to change the law on the grounds that you are doctors is the sort of thing that gets governments and the public upset with the whole doctor fraternity.

Doctors are special. But not that special. 

A big problem here is that state governments and their SROs aren’t making that very clear to the AMA and the RACGP when they engage with them. That’s because they don’t want to be seen to be unfair to GPs because they know everyone is starting to get upset at how badly they are being treated and they are playing a cool political hand.

They are doing this by sending vague and sometimes misleadingly assuring letters, like they did this week to the RACGP in Queensland, and they did the AMA in Tasmania earlier in the year.

If you read this correspondence – here is the Queensland SRO letter and here is the Tasmanian letter – the words are non-committal and mealy mouthed. There is certainly nothing as concrete as: we won’t be auditing GP practices for payroll tax.

The Queensland letter reminds me of how I came to think about working with English management when I was in a big global publishing company. They were universally polite to your face (which initially just confused me because I knew I was doing badly) but almost always they were laughing at you for being so naïve and scheming behind your back, while avoiding any unnecessary confrontation. 

The SROs aren’t laughing at the AMA or the RACGP nor are they scheming. They don’t have to.

But they are writing vague uncommitted drivel in the hope that the AMA and the RACGP will stop bothering them. They don’t want any unnecessary political fallout.

Think about the wording in this week’s letter assuring the RACGP that the QRO “is not specifically targeting medical practices in its compliance activities”.

They’re still going to target everyone who might have a structure that is dubious in the context of new case law on payroll tax, using significantly increased data matching and monitoring capability.

They don’t have to target doctors specifically. But the result isn’t any different. Lots of doctors are going to be audited.

Doctors are, through a long history of drifting along not paying enough attention to their practice structure setups, very high in SRO priority lists for getting audited.

Ironically, the RACGP and the AMA writing to them about it (Queensland and Tasmania) or holding webinars with SROs in attendance about it (NSW), reinforces in the minds of each SRO that they are truly on to something.

And with significant advances in technology in terms of data matching tools and analytics, SROs are able to conduct their auditing activities at far greater scale these days.

It’s awful. But it’s not just doctors copping it.

The other big pinkie-type promise from the QRO in its letter this week was that it would develop some formal guidance so everyone in doctor land would know where they stand.

A couple of big problems here.

Firstly, guidelines aren’t law either. In fact, guidelines from SROs can be distinctly misleading at times (we aren’t suggesting SROs shouldn’t try to help by publishing clarifying guidelines. They should). 

Recently, an extensive guidance video on payroll tax by the Victorian SRO (we would give you the link but it’s gone dead for some reason) attempted to provide detailed guidance specifically for medical practices. At one point in the video, the person providing guidance says that if your practice is charging more than 60% in commission to your tenant doctors, that will automatically mean you are an employer and you will be required to pay payroll tax.

As a result of this video, apparently quite a few Victorian practices dropped their tenant doctor fees backwards in order to not fall foul of this “guidance”.

As most GP owners will know, you don’t have to lose much more than 4-6% in fee income to start making some practices fall into the red.

But this “guideline” is patently wrong. It isn’t the law. It’s someone ad libbing inside the Victorian SRO.

In fact the law is very clear in stating that an SRO (or any other government agency) can’t involve itself in price-setting of any sort on behalf of commercial entities, and that a practice can set whatever fee it wants so long as it can prove it’s a commercial arrangement and competitive. 

So guidance, though not a bad thing, can’t be relied on entirely either. 

Another problematic part of the Queensland letter to the RACGP is this paragraph:

“As part of this process, QRO invites RACGP to provide QRO with details of any issues it has specifically encountered and/or other relevant details to inform drafting of the ruling. For example, details of common service and payment arrangements entered into with medical practitioners or other industry-specific issues.”

Not to be paranoid but any professional adviser is going to tell you that you don’t send an SRO specific examples of what you are doing wrong, or even what you think you might be doing wrong. Not that you want to obstruct anyone or any process, but they don’t need any more help in working out where to look and what for.

The AMA and RACGP representations to various governments on payroll tax so far appear to be pretty naïve.

Even if it was easy to change the law to make doctor businesses have “special” exemptions that other professional service businesses don’t have (it isn’t, obviously), the political roadblocks are gigantic. And you might end up with a very angry business lobby asking the public why doctors think they are so special.

None of this is to say that the RACGP and the AMA are barking up the wrong tree when they say to governments that GPs are in a crisis mainly of the governments making and governments need to start fixing it.

Clearly government needs to give a lot more thought to fixing the crisis way beyond its current token $250 million per year commitment in the Strengthening Medicare Taskforce (which won’t touch the sides of fixing the issues at hand).

If the government doesn’t start thinking more seriously on this problem soon, then there is nowhere for GP businesses to go, but do what businesses need to do to survive. They have to generate more money and absent reasonable rebates to run the deal that was made in 1984 for GPs, that means all sorts of things which will threaten the ability of GPs to offer consistent and continuous service to the community.

In short, it will mean the community service aspect of primary care will start going out the window (in some respects and parts of the country it already has), and with it so will any health equity we’ve managed to build in this system for the last three decades or so.

It might not be the intention of the college or the AMA, but when you read the newsGP reporting of this episode, and step back to consider what is actually feasible and sensible, it has the feel of grandstanding to members.

General practice isn’t being singled out and it’s not getting any concessions.

Payroll tax is the law. It’s going to roll on regardless what of the RACGP and the AMA do, want or say, barring the unlikely possibility that states get rid of payroll tax altogether.

But the biggest danger in representations like this from the college and the AMA is that GPs reading it lower their guard on payroll tax and don’t do the proper investigations of, and potentially remediate, their own setups.

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