How Far is too Far? The Risk Practices Face in Avoiding Payroll Taxes on Payments to General Practitioners

Recent rulings issued by State Revenue Offices across Australia that detail how payroll tax will apply to medical practices, have made it increasingly likely that payroll tax will be payable on payments to contracted general practitioners in certain circumstances. The practical reality of this, is that many medical practices across Australia will need to begin paying payroll tax which will likely result in an increase to out-of-pocket patient fees. Unsurprisingly, medical practices have been wondering what they can do to avoid paying the tax. But how far can practices go in this regard? At what point should practices stop making changes to their arrangements and just ‘give in’ and pay the tax? What do they need to be aware of when making changes within their practice? Read on to find out.

The current state of play

There have been some welcomed changes to the payroll tax landscape recently, with South Australian, New South Wales and Victorian Governments announcing payroll tax exemptions for payments made to GPs who provide bulk-billed consultations. The extent of this relief will become clearer when it is passed through the respective parliaments. New South Wales for example, has legislated a general exemption for payroll tax payable on GP wages before 4 September 2024 and going forward, has introduced a ‘rebate’ for ‘employers’ for payroll tax payable on relevant GP wages if they meet the relevant proportion of bulk billed consultations (which is either 70% or 80%, depending on the practice’s location).

Despite the increased relief, a significant number of practices (particularly private billing practices) will still be impacted by the initial revenue rulings and hence be obliged to pay the tax. The rulings articulated various exemptions that may apply to medical practices and naturally, practices are eager to know whether they fall under one of these exemptions, whether their current arrangement makes them liable in the first place, or whether they can restructure their agreements or arrangements so that they will not be caught… but to what extent can a practice do this?

Avoiding tax, and tax avoidance

There are some key words that come to mind when we consider tax avoidance: illegitimate and contrived. This is important to remember, as not all steps to avoid tax will be considered ‘tax avoidance’ and there are genuine ways that tax may be legally avoided. Whilst the legislation varies between states, generally it is when artificial, blatant or contrived schemes are used to reduce or avoid liability for tax. If the sole or dominant reason for a person entering a scheme is to avoid tax liability, then it may be considered a tax avoidance scheme.

Similarly, the harmonised Payroll Tax Acts give power to the State’s respective Commissioner to disregard the exceptions and find payroll tax payable, where the ‘contract under which the services are supplied was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax’.

Where is the line drawn?

There is a paucity of case law on where this line is drawn between legitimate and illegitimate restructuring and rearranging. Given the provisions are relatively broad, it could be possible that a practice gets ‘caught’ when restructuring. However, industry experts have suggested that this is unlikely unless it is something akin to a sham, i.e. something that is very artificial, without any economic reason for doing it and/or does not reflect the true relationship between the parties. For example, an arrangement that is guided by unwritten secret deals or a document that is concocted without reflecting the true relationship between the parties, would be more likely to engage the provisions, when compared to genuine renegotiations of a contract or genuine restructuring with potential commercial justification.

Generally, it is well known that it is rarely the intention of a medical centre to be deemed an employer of practitioners - doctors are ultimately often intending to be their own bosses and not to be employed by any practice. Restructuring to make sure that this is captured in the contract, even if it results in changes to some fees or other arrangements, may not be sufficient to engage the anti-avoidance provisions.

The State Revenue office may look at the substance of the arrangement and determine that payroll tax is payable and/or the laws in this area could further develop impacting your practice’s position. Any attempt to conceal or misclassify payments in a fraudulent or deceptive manner could be viewed as tax avoidance, potentially resulting in liability.

Of course, it is not new that practices cannot avoid or reduce the amount of payroll tax they are liable to pay by splitting the business in order to claim multiple tax-free thresholds. Whether a business may be legitimately grouped, will depend on factors including common control or ownership and legal advice should be sought to determine whether your proposal is legal and viable.

I’ve had my agreements re-drafted and have changed the flow of money, do I need to worry?

Since Thomas and Naaz, many practices have restructured their services agreements and/or the flow of money within their practice to mitigate payroll tax obligations. This type of behaviour would generally not be considered tax avoidance if it is done legitimately and not in a deceptive manner.

Unfortunately, no agreement can completely guarantee avoidance of the tax. The substance of the arrangement (i.e. each parties’ conduct and/or how the agreement operates in practice) will likely be considered by the your state’s revenue office. While the Agreement can be drafted in such a way as to reduce the risk of the practice becoming liable to pay payroll tax in respect of the amounts paid by it to practitioners, the risk is not eliminated entirely and no lawyer can guarantee that payroll tax will not be payable.

What can I do?

It is very important that any restructuring of contracts or arrangements with the intention of avoiding payroll tax is carried out carefully and transparently, with the guidance of a legal professional, to mitigate the risk of potential legal issues. It is also vital that the terms of the agreement are reflected in practice.

You Legal can assist in navigating this developing area of law - to find out how we can help your practice, contact us here.