Payroll tax for medical practices

Key takeaways

The potential payroll tax implications of the 'services and facilities' fee arrangement model common in the healthcare industry has come under increased scrutiny following a series of cases in New South Wales and Victoria.
Medical practices should review their work arrangements with medical practitioners and the terms of their services and facilities agreements to identify areas of potential payroll tax exposure.
If necessary, medical practices should update their services and facilities arrangement in light of these recent developments. The good news is that there are practical steps that medical practices can take to help reduce legal risk.

Payroll tax¹ has been the subject of confusion and anxiety in the healthcare industry in recent years following the widely publicised Optical Superstores case² in Victoria and Thomas and Naaz case³ in New South Wales. The cases threw into turmoil the traditional understanding that the ‘services and facilities’ fee arrangements in place between medical practitioners and medical practices would not attract payroll tax liability for the medical practice

Liability for payroll tax is not confined to wages paid by an employer to an employee. Expanded statutory definitions of ‘wages,’ ‘employer’ and ‘employee’ extend payroll tax liability to payments made under broader arrangements in relation to the performance of work. In a similar way to superannuation legislation, the Payroll Tax Act 2007 (NSW) (PTA) and legislation in other States provides that certain work arrangements are deemed to be arrangements between an ‘employer’ and an ‘employee’ and, consequently, that payments made in relation to the performance of work under those arrangements will be deemed to be ‘wages’ attracting liability for payroll tax.

The healthcare industry cases

In Optical Superstores, the Victorian Court of Appeal held that Optical Superstore Pty Ltd (which owned and managed an optical store) was liable to pay payroll tax on payments made to optometrists engaged by the business. The business and its optometrists had entered into tenancy agreements, with rent payable based on the time the optometrists provided their services at the business’s stores. That arrangement was, in essence, a services and facilities fee arrangement. The Court of Appeal said that it did not matter that fees generated by the optometrists were held on trust by Optical Superstores for their benefit because the Payroll Tax Act 2007 (Vic) operated on ‘flows of money’.

In Thomas and Naaz, the Appeal Panel of the NSW Civil and Administrative Tribunal (NCAT) followed Optical Superstores in confirming that payroll tax liability can attach to service and facility arrangements. Thomas and Naaz concerned a business comprising three medical centres from which various general practitioners operated. The general practitioners entered into written agreements with the practice, under which the practice agreed to provide rooms and shared administrative and medical support services (e.g. nurses, reception and administrative staff). The general practitioners bulk billed their patients and directed Medicare to pay all benefits to the bank account of the medical practice. The medical practice then paid the general practitioners 70% of the Medicare benefits received and retained 30% as payment for its services.

NCAT found that payroll tax was payable by the medical practice on the payments it made under this arrangement to the general practitioners. The tribunal had close regard to the terms of the agreements in place between the general practitioners and the medical practice, including the fact that the general practitioners:

provided services five days per week and had weekend rotations and roster commitments;
were required to promote the interests of the medical practice (including by not diverting patients away from the medical practice);
were required to abide by the medical practice’s protocols and complete all necessary documentation for that purpose; and
were subject to restrictive covenants.

Considering those matters, the tribunal concluded that “[i]n circumstances where such services were a necessary part of the [practice’s] business, the Doctors provided them not only to the patients but also the [practice].” The services were therefore work-related, and the agreements in place between the general practitioners and the medical practice were ‘relevant contracts’ attracting payroll tax

Key issues

Under the PTA, amounts paid or payable under ‘relevant contracts’ in relation to the performance of work will be taken to be taxable wages for payroll tax purposes. However, there are important exceptions.
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‍For example, where a medical practitioner provides medical services to the public at large, rather than just one medical practice, there may be greater scope to argue that payments made to the medical practitioner are exempt from payroll tax.⁴ This exemption is likely to have particular relevance to the engagement of medical practitioners who are genuinely operating their own business by providing medical services to the general public at multiple unrelated practices and/or hospitals.

In each case, the nature of the particular arrangements between an individual medical practitioner and a medical practice will need to be examined closely to determine whether payroll tax liability is likely to attach to payments made in relation to the performance of work under those arrangements.

Revenue NSW has foreshadowed that it will be releasing a new payroll tax practice note for medical practices, which should provide greater clarity on the issue for medical practices.

How can medical practices limit their exposure?

Medical practices can take a number of steps to limit their exposure to payroll tax.
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Such steps may include:

allowing medical practitioners to set their own hours of work and work at other unrelated practices or hospitals;
ensuring that invoices are issued to patients in the name of the medical practitioner (including their ABN), and not in the name of the medical practice;
ensuring that fees generated by a medical practitioner are either held in a separate account (i.e. a clearing account) opened for the fees generated by that medical practitioner only, or, probably more ideally, that patient fees are paid directly to the medical practitioner, who will in turn be invoiced by the practice for services and facilities provided;
avoiding advertising the practice as the provider of the relevant medical services and that the medical practitioner is a part of that practice;
limiting any restraints of trade on the medical practitioner in the services and facilities agreement to non-solicitation, rather than non-competition; and
ensuring the practice has written agreements in place with each of the medical practitioners to whom services and facilities are provided, and that such agreements are regularly reviewed.

In circumstances where a practice fails to pay the correct amount of payroll tax when it falls due, the tax default can be subject to both interest and penalties under the Tax Administration Act 1996 (NSW).

In summary

Medical practices should review their work arrangements with medical practitioners and the terms of their services and facilities agreements to identify areas of potential exposure and update their services and facilities agreements to mitigate legal risk.

We can help you

If you have questions, or would like more information about how these recent developments could affect your business, please call 1800 867 113 or to organise a confidential discussion with one of our lawyers at a time that suits you, click here

About the Authors

Stephen Schoninger leads the employment and workplace law practice at Avant Law, based in Sydney. Stephen has over 18 years’ experience practising exclusively in employment, industrial relations and discrimination laws. Stephen is called on for his ability to plainly advise on and pragmatically apply legal principles to manage and resolve complex issues arising in the workplace. Stephen advises employers and employees in the private and public sectors on all areas of workplace law and is an experienced litigator of work-related claims. Stephen also conducts workplace investigations and delivers workplace compliance training. He regularly presents seminars on topical employment and workplace law issues.

[1] From 1 July 2022, the rate of payroll tax levied in New South Wales increased from 4.85% to 5.45% of the wages paid or payable by an employer that exceed the annual threshold of$1.2 million
[2] Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (12 September 2019).
[3] Thomas and Naaz Pty Ltd (ACN 101 491 703) v Chief Commissioner of State Revenue [2022] NSWCATAP 220
(6 July 2022).
[4] See PTA s 32(2)(b)(iv).

Disclaimer: The information in this article does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of its content. The information in this article is current to 25 August 2022.