GP clinics are going to pay more payroll tax, which could reduce bulk billing

Preliminary bulk billing data released this week shows a 2.1% rise in bulk billing up to March. This comes after the government tripled the incentive payment for GPs to bulk bill concession-card holders and children under 16 for most consultations.

The new data confirms the December-quarter data, which shows the increased bulk billing incentive, announced in the 2023 budget, arrested the decline in bulk billing caused by the almost decade-long freeze in rebates under the previous government.

The decline in bulk billing rates was affecting access to care. About 1.2 million people missed out on or delayed seeing a GP in 2022–23, about double the rate in 2021–22. This negates the promise of Medicare: that Australians should not face financial barriers to accessing care.

But progress on bulk billing rates is being undermined by changes to state government tax rules.

About one-quarter of state government tax revenue comes from payroll tax. States have been looking around to increase tax revenue from any source and have tightened their payroll tax rules.

An increase in a practice’s payroll tax reduces its profits. Clinics will seek to make up the shortfall in revenue by other means – and this could include reducing the number of patients they bulk bill.

Read more: Medicare turns 40: since 1984 our health needs have changed but the system hasn't. 3 reforms to update it

What’s the change to state payroll taxes?

Payroll tax law is complex but essentially it says anything that looks or smells like an employee payment is subject to payroll tax.

But what if the relationship between the practice and the GP is a contractual one? What if the GP is a “contractor” and pays the clinic a share of fees but is not really an employee? It was thought such cases were exempt from payroll tax.

But in March 2023, this perception was shown to be a misunderstanding of the law. The New South Wales Court of Appeal ruled that where a practice has a “fee-sharing arrangement”, payments to those GPs are liable for payroll tax.

In the NSW case, this meant the practice billed the patient on a GP’s behalf. The practice paid 70% of the fee to the GP and retained 30%. Tax was payable on the 70%. GPs in the same practice who billed patients directly and paid 30% to the practice were not within the scope of the case.

To date, general practices had assumed contractual payments were not liable to payroll tax and so are now facing new ongoing costs and, in many cases, large back payments as well.

Some states have indicated they will clarify the law in the general practices’ favour, specifying what contractual arrangements may escape any payroll tax obligation. Some state revenue offices, such as Queensland, have issued public rulings to clarify obligations. However, this is not happening in every state, leaving practices uncertain about their obligations.

Even in the case of the Queensland ruling, practices may begin to disintegrate. They may stop sharing common services and quality-improvement activities (such as working together to improve monitoring of diabetes in the practice) to make it clearer that GPs are more like tenants and less like employees, to avoid being captured by the payroll tax obligation.

What’s this got to do with bulk billing?

General practice owners, who are increasingly big companies and private equity investors, argue that if they have to pay payroll tax, they will need to increase patient out-of-pocket fees to cover the cost.

This runs up against recent Commonwealth health policy and budget initiatives to encourage an increase in bulk billing.

So the benefits of the Commonwealth investment in bulk billing might be wiped out by state action, as bulk-billing rates start to fall again.

Read more: If you live in a bulk-billing ‘desert’ it's hard to see a doctor for free. Here's how to fix this

States vs the Commonwealth

The Commonwealth government recently announced a significant injection of funds into state public hospital systems, as part of a new five-year National Health Reform Agreement.

However states are reportedly not willing to recognise this as a trade-off against pursuing payroll tax on GPs’ contractual relationships.

The change in tax administration – of starting to chase payroll tax obligations of general practices – is a recent one with relatively small amounts of tax being raised at present.

So, the standoff is that a relatively new and expensive Commonwealth policy to boost bulk billing is being undermined by a relatively recent change in payroll tax policy by states.

What could the Commonwealth do?

The Commonwealth could be tougher on the states. The Constitution gives the Commonwealth power to make laws about “medical benefits”. Those laws would override state laws because of section 109 of the Constitution.

Of course, state governments might argue this is a law about taxation rather than about medical benefits, and so it is not a valid exercise of the Commonwealth’s power. However, past experiences show that carefully crafted Commonwealth tax legislation which effectively overrides state tax powers can survive a Constitutional challenge.

The Commonwealth’s position might be further strengthened if the law is specifically about bulk-billing payments, which are entirely Commonwealth payments and have no patient contribution.

The Commonwealth should use its constitutional powers to insist that, where a percentage of a bulk-billing payment passes through a general practice to a GP, that transaction is not subject to state payroll tax. This would reduce the amount of payroll tax a practice pays, so long as it bulk bills.

Such a law would not cost state governments much, because the payroll tax administration changes are only recent. But it would protect the Commonwealth policy of encouraging an increase in bulk-billing to support access to primary health care.

Read more: Why the pathology bulk-billing campaign is more about driving industry profits than saving you money