The Office of State Revenue’s current focus on the payroll tax status of medical and other healthcare practices who use service entities to provide administrative services (including collecting patient fees) requires you to act now or risk a payroll tax liability and higher interest and penalties.
The OSR is only prevented from targeting more practices due to a lack of resources, so medical accountants urge you to avoid taking comfort from the fact that you and others you know have not been targeted.
What is the issue you need to be concerned about?
The way medical and other healthcare practices are often structured is not commercially controversial. Arrangements commonly exist where the practices collect fees from patients, including Medicare benefits, as part of its administrative services and then pay the doctors and healthcare professionals, net of the administration fee and rent for using the practices facilities.
The long-standing view is that these payments to the doctors and other healthcare professionals are not subject to payroll tax. This was also a view accepted by the OSR, until last year that is.
In separate recent court decisions, one in Victoria and one in NSW, the courts held that in circumstances like the common arrangement referred to above, payroll tax did in fact apply to such payments. Having never been particularly happy with the longstanding view that payroll tax had not applied, the OSR has been quick to react and are now of the view that their hands are tied, and they are required to administer the law in accordance with the wishes of the court. This means your medical practices may now be subject to payroll tax.
What are the next steps?
It is fair to say that medical and other healthcare practices, as well as medical accounting professionals, have somewhat reacted in disbelief and have played a waiting game to see what the OSR will do next.
The OSR had promised a Practice Note to provide guidance on how they will apply the law. While the Practise Note has not been formerly issued, drafts have been widely circulated and the OSR is clearly seeking to take a hard-line view and are arguably seeking to overreach on the application of the court decisions to different and expanded circumstances to those considered by the courts.
Given this, the waiting game is no longer a sensible strategy, you must at least understand if you have an exposure and how much that exposure is.
You should review your arrangements with practitioners to determine what action is required to comply with the payroll tax obligations and to mitigate any risks of an adverse payroll tax finding arising from an OSR investigation.
This review should include consideration of the following:
- the nature of the arrangements between the practice and the practitioners and what documentation exists to support this;
- the collection of fees and payment flow between the relevant parties;
- rostering arrangements and the number of days a practitioner works for the practice;
- whether practitioners operate elsewhere and/or whether restraint of trades prevent this occurring; and
- whether practitioners engage others to do all or part of the work
Medical accountants suggest that addressing these issues proactively in advance of an audit from the OSR is a better approach than being reactive at the time of an audit.
For a start, there are several available contractor exemptions that practices may be able to rely on to exempt or reduce their payroll tax liability in respect of payments to practitioners. You don’t want to be reviewing the application of these exemptions under the pressure and scrutiny of an OSR review.
If you would like to learn more about the above issues or how this may impact you, please contact our team at Calibre Business Advisory and our dedicated medical accounting services team on (02) 9261 2177 will be more than happy to assist.