The recent NSW Payroll Tax Case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue has raised concerns in the healthcare sector about arrangements between medical centres and medical practitioners and potential payroll tax liabilities
Since The Optical Superstores Case in 2020 , the Revenue Offices in some states have taken a hard line approach to how the working arrangements between medical centres and medical practitioners should be categorised for tax purposes. Where the relationship between medical centres and medical practitioners was once deemed to be excluded from payroll tax, the Revenue Offices in Victoria and NSW have shifted their position and now intend to review many of those relationships.
This was on full display in the Thomas and Naaz Case, where the operators of medical centres in NSW were liable for $795,292.95 in payroll tax, as payments made to medical practitioners were found to constitute wages pursuant to the Payroll Tax Act.
This decision has put those in the healthcare sector on notice and demonstrates the importance of consistently reviewing agreements to ascertain whether these agreements contain any ambiguities that would subject the operators of medical centres to previously unforeseen payroll tax liabilities. More than ever, it is essential that operators of medical centres understand the importance of this case and the potential consequences for not remaining diligent.
Key facts about the Thomas and Naaz case
In this case, the applicant was a company that operated three medical centres in NSW. The GPs operated their medical practices from these medical centres with a written agreement between each doctor and the medical centre, at which they operated their practice. These agreements set out the terms and conditions of the relationship between the parties and included the terms of payment. The agreement provided that the medical centre would supply the rooms to the practitioners, as well as shared administrative and medical support services which is typical of a Service Agreement or an Independent Contractor Agreement (commonly used by medical centres and practitioners in the medical industry).
As is also typical, the medical centre handled the charging and collection of Medicare fees received in relation to appointments with a doctor. The patient would be “bulk billed” and would assign the Medicare benefit to the doctors. The claims were made by the medical centre on behalf of the doctor and the funds received were placed in a bank account held by the medical centre.
The medical centre then distributed 70% of the Medicare claims made for a doctor to that doctor on a fortnightly basis. The centre withheld the remaining 30% of the claim as a service fee pursuant to the written agreement.
The main legal issues
In this case, the Court considered whether the 70% of Medicare claim that was distributed by the medical centre to a doctor constituted wages and, accordingly, should be subject to payroll tax.
The fundamental issues in assessing whether the payments could be deemed as wages were:
- Whether the Agreements between the centre and each doctor could be deemed as “relevant contracts” pursuant to the Payroll Tax Act; and
- Whether the Payments were “amounts paid or payable during a financial year for or in relation to the person of work related to the [Agreement] for the purposes of section 35 of the Payroll Tax Act.”
Similar to the ruling in The Optical Superstore Case, the Court deemed that the payments made to the doctors were classified as wages. Subsequently, this meant that the payments fell within the parameters of the Payroll Tax Act 2007 and the medical centre was liable for $795,292.95 in payroll tax. It is likely that the decision will be appealed, however at the time of publication, it is not known whether an application for leave to appeal has been made.
Key learnings for medical centre owners and doctors
- All service arrangements and independent contractor arrangements for medical centres should be reviewed immediately;
- Service arrangement agreements should be clear on the role of the service provider in relation to the collection of patient fees and the practitioner’s obligation to pay service fees; and
- Doctors practicing within a clinic should retain a high level of autonomy as to the conduct of their independent medical practice.
These recent rulings demonstrate that the State Revenue Office is now interested in the relationship and payment arrangements of medical centres and doctors. In particular, they are focussing on how payments should be assessed for payroll tax purposes.
It is therefore critically important to review all current service arrangements and independent contractor arrangements in substance and form to ensure that correct processes and procedures are in place that accurately document the underlying relationship. Specifically, where a service arrangement is concerned and a medical centre is collecting fees on behalf of its doctors, the underlying document should be reviewed to reflect that the medical centre is simply a collection agent. Additionally, the doctor should not be directed in any way by the medical centre in relation to the conduct of their own independent medical practice.
It is important that operators of medical centres review their agreements immediately and seek advice if they are concerned about any potential payroll tax liabilities that may arise. Assessing arrangements now could potentially save operators of medical centres large payroll tax liabilities in the future.
If you would like to speak to someone about reviewing your practice agreements or to discuss the right legal structure for your medical practice, please contact Josh Flett for a preliminary discussion.
Disclaimer: This article was outsourced. DPM communications are intended to provide commentary and general information. They should not be relied on as legal or financial advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication.