Following a shocking determination by the Chief Commissioner of State Revenue in NSW, owners of general and allied health practices have been left wondering what it means for them.

The ruling, which was made on September 3, found that the owner of four GP practices in Western Sydney owed the state almost $800,000 in retrospective payroll taxes.

Although he had engaged his GPs as contractors (charging a 30% fee on doctors’ billings), the Commissioner deemed the nature of the engagement as equal to wages and therefore subject to payroll tax.

Several factors are cited as reasons for the decision, such as:Following a shocking determination by the Chief Commissioner of State Revenue in NSW, owners of general and allied health practices have been left wondering what it means for them.

  • Employee-like contractual obligations for doctors
  • Reliance on the doctors to conduct the business
  • An apparent probationary period on entering the contract
  • Payments being made “in relation to the performance of work”

A perhaps more surprising factor includes citing how money flowed between patients and the GP. As is typical in a practice, patients provide payment for services rendered which is then held in trust and distributed to GPs. In this case, the Commissioner deemed that monies paid to a single practice bank account which then flowed to GPs was proof that it met the criteria.

The ruling is the second of its kind in NSW, with a similar ruling also made recently in Victoria when the state government successfully argued that monies paid by the Optical Superstore to its optometrists was subject to payroll tax, a decision that went all the way to the High Court.

Their billings operated in a similar fashion to medical practices, but there were several processes in place that did not help. In summary, one might say that the optometrists’ situation looked like an employee situation and was therefore considered to be one. Again, the flow of funds was a key factor.

What practice owners can do right now

While practice owners are understandably rattled by the decision, and large corporates seriously concerned about these contingent liabilities, it’s worth noting that the ruling was made in a state tribunal. 

Early next year, banks are set to create an “Institutional Bank Holding Account” as a product. Proceeds from patients and Medicare can be deposited into this account which are not recorded on the ledger of the medical practice. Payments are then automatically made to doctors and then to the medical centre. 

This product will be particularly valuable for larger practices, as it prevents the service entity from gaining any “control” over the funds until each party is paid per the service agreements.  

There is software available that already performs this function called Surgical Partners. While it currently operates with a traditional trust bank account, this will likely evolve when the new banking product becomes available. 

Another option is to have a lawyer establish a trust account where all funds can be directed. The service agreements should then reflect that anyone who is a party to the service agreement is a beneficiary of the trust. The doctors, by majority vote, can remove and appoint the service provider. 

An opportunity to review business operations

Whatever avenue you decide, it’s a timely reminder to review the way you operate and the sustainability of your business into the future. 

We often find that medical practices struggle to make ends meet; especially where they predominantly rely on a bulk bill strategy. The cost of the premise, utilities, supplies, administrative wages, and so on leaves very little room for profit – let alone the ability to set aside extra funds to account for a potential payroll tax.

In these cases, we have successfully helped many practices establish new pricing strategies which ultimately increase profits and provide more breathing room for unknowns. 

Ultimately, there should be a re-think on how you engage practitioners, who does the billing, and how each of the parties – the practice manager and the practitioner – are paid.  These issues are at the heart of this recent decision.

These new rulings do indeed bring up many questions around existing GP practice models, and whether they are sustainable given recent actions by state governments. Such decisions, especially where the flow of money is a factor, could also have huge implications for businesses in a wide range of sectors which operate under very similar models.

Ideally, a professional body should attempt to seek clarity on the matter so practice owners across the board have a solid understanding of their obligations moving forward. But for now, it’s muddy waters to say the least. Following a shocking determination by the Chief Commissioner of State Revenue in NSW, owners of general and allied health practices have been left wondering what it means for them.

How can RSM help?

At RSM, our Medical Services team has experience in working with many practices. We can:

  • work through a process to review your contracts
  • provide points to consider and next steps when briefing your legal adviser on possible changes
  • explain your options to ensure the flow of funds is correct 
  • support you in involving practitioners with change management

For more information

To speak with a specialist at RSM, please contact our specialist medical business advisory team.