In the second in a series of articles on the complexities of payroll taxes, Paul Copeland, expert business consultant for William Buck, examines considerations for practice owners.
Last week we provided a broad overview of payroll tax in Australia as it relates to GP, and why recent developments have caused concern within the profession.
Before we go any further, there are a few things about payroll taxes that are important for practice owners (and GPs) to understand:
- It is a state tax administered by the State Revenue Offices (OSRs) in each state of Australia. Tax rates and thresholds at which payroll taxes apply vary from state to state
- Payroll tax is NOT a Commonwealth tax, nor is it administered by the Australian Tax Office (ATO), which has little or no interest in it.
- It is administered on employers’ payroll and includes wage and salary payments, superannuation and payments to eligible contractors.
- Defining what a “qualifying contractor” is is the biggest point of contention for medical practice owners
Social charges thresholds and rates
Payroll tax thresholds and rates vary by state and territory, with most having sliding scales.
|state or territory||Threshold||Assess|
|New South Wales||$1,200,000||5.45%|
An indicative table of Australian social security contribution rates.
However, it is important to note that thresholds and rates vary, and the table above is an indication of the starting point at which payroll tax may apply. Practice owners with questions or concerns should speak to an advisor for specific information about their situation.
When considering the application of payroll tax, we have taken the approach of examining this issue with a few questions.
Is this a new problem?
No. The issue of doctors and payroll tax audits has been around for at least 20 years.
In the past, many medical practices paid their doctors as contractors. That is to say that the doctor received a percentage directly to which was added the GST.
Over time, this model evolved into the service fee model, where the practice charges the physician a service fee for the services they provide. However, even today, occasional practice engages physicians under a purely contractual model. That is, they receive their percentage plus the GST.
The service fee model was originally adopted in response to payroll taxes and, to a lesser extent, problems with the application of superannuation and statutory holidays to physician payments.
Fast forward 20 years and payroll taxes are still an issue with medical practices.
Why is there renewed interest in this issue?
Several factors have contributed to making payroll taxes a problem today.
Meanwhile, the ATO and various SROs have scaled back their auditing activities to show their support for businesses during an unprecedented time.
This did not mean that problems could simply escape the attention of the authorities, but rather that there was a waiting period.
Now, with the various lockdowns and stimulus measures coming to an end, audit activity is ramping up and cases that could have been handled over a longer period all seem to be being handled at once.
Two major payroll tax cases – the Optical Super Store case and Thomas and Naz – have caused some concern among GPs and practice owners. We covered the latter case – and its implications – in the first article of our series.
Information Sharing Platforms
Physicians are not immune to the love of sharing information. There are many online groups and communities where information can be easily shared, and payroll taxes have been a “trend” issue for some time.
The size of the evaluation of the Thomas and Naz case and the obviously devastating impact on the owners and the business has been a nightmare. Like a lot of bad news, it was also widely publicized.
The impact of this well-known case is further fueled by other uncovered examples where practices are assessed with significant social charges.
The level of interest around this topic has been raised by advisors and associations, including the RACGP and other colleges, who keep it at the forefront.
Payroll tax concerns are not new to general practice.
Do state revenue offices target GPs?
There does not appear to be any audit activity focused on general practices without a “trigger”.
Almost all of the practices selected for a payroll tax audit were chosen through a process called “data matching” (which I will explain below).
These data matching processes are applied to all industries and not just general practices or the broader medical industry.
The problem is that when an audit is undertaken, there is a high level of non-compliance. As such, there could be a redefinition of the examination processes currently in place and a stronger focus on general medicine.
However, a generalized targeting of industry must be considered very risky from a political point of view.
The big question: How is a firm or company selected for a payroll review?
I spoke directly with a senior OSR official in Queensland regarding payroll taxes and the impression that the audits were aimed at GP practice owners.
The response, which is reassuring from an industry perspective, confirmed that all of their auditing activities at present are driven by data matching.
Data matching is the sharing of information between various state and commonwealth departments which is then reviewed for anomalies and if a business – any business – is noticed during this process it can expect a “please explain” letter.
The primary source of data matching is information shared by the ATO and, more recently, the Australian Securities and Investments Commission.
Much of this information involves a practice recording revenue from patient fees they receive as sales revenue and payments to physicians as contractors on their tax returns. A seemingly minor issue that is causing so much damage to unsuspecting practices.
So can I relax?
It is not particularly recommended.
Think of it like this – in Queensland we tend to get a lot of storms. When a storm is coming, there’s usually a warning, and we have time to pack up our stuff and prepare so the damage isn’t as bad.
Some people ignore the warnings and don’t prepare – sometimes those people are hit much harder than those of us who acted.
As with so many business issues, practice owners tend to put payroll taxes in the “too hard” box or the “I’ll do it later” box.
It is much easier to do nothing and maintain the status quo. However, if you do this, your risks are not taken into account and other opportunities that may exist are not eliminated.
There is a window of opportunity to get your house in order, undertake a payroll tax review of your practice, and take steps to resolve issues that would otherwise lead to a bigger problem.
And even if the storm passes you, you lose nothing because you will have better systems and agreements in place for the future.
I consulted a number of practices that were selected and received significant ratings.
The common factor in these practices is that their advisors were not industry experts, which is a major reason why their tax returns were not prepared properly, their bank accounts were not well managed. and their service agreements could have been significantly improved.
They thought everything was in order, but unless you hire a professional, how would you know?
The information in this article is general in nature and does not take into account your personal situation. Members with concerns are encouraged to seek their own professional and independent advice.
The next article in this series will focus on issues independent contractors need to consider.
Members are encouraged to complete this short survey to share their views on the potential impacts of payroll taxes on practice owners and independent contractors.
The RACGP and William Buck will also organize a free webinar Thursday, October 27 between 7:00 and 8:00 p.m. (AEDT) focused on what GPs need to know about the payroll tax.
Log in below to join the conversation.
William Buck, owner of a payroll tax practice
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