22 February 2023

Recent decisions in Victoria and New South Wales continue to have serious payroll tax ramifications for medical and other health practices that hold money on behalf of specialists engaged as independent contractors within Australia.

These decisions along with recent confirmation from the Commissioner of State Revenue in Queensland that medical centres in Queensland are likely to face significant payroll tax challenges, are a timely warning for general and specialist health practices to review the way payments are structured to anyone who operates from their practices.

Recent public ruling in Queensland impacting payroll tax compliance

The Commissioner of State Revenue through the publication of Public Ruling PTAQ000.6.1 (Ruling) confirms the Commissioner’s position regarding the application of the relevant contract regime to medical centres.

In short, the Ruling, which takes effect from its release date 22 December 2022, confirms there will be significant payroll tax pain for medical centre businesses in Queensland.

While it is expected that the Queensland Revenue Office will limit its audit activities to the 2022 financial year and beyond, an important update on payroll tax amnesty was announced soon after for contracted general practitioners.

Queensland payroll tax amnesty

Medical practices are liable to pay payroll tax on contracted general practitioners (GPs), and payments made to contractors may be taxable if their arrangement is considered a relevant contract for payroll tax purposes.

Given a potential lack of awareness of the payroll tax treatment of contractors among GPs, the Queensland Government will provide an amnesty on payments made to contracted GPs until 30 June 2025.

Medical practices that apply for the amnesty will not be required to pay payroll tax on payments made to contracted GPs up to 30 June 2025 and for the previous five years (2018-2025).

The amnesty is limited to contractor payments made to GPs and, for the purposes of the amnesty, a GP is registered as a general practitioner with the Medical Board of Australia.

The amnesty is not available to:

• other medical doctors or allied health professionals;

• medical practices that are already complying with payroll tax obligations;

• new medical practices; or

• non-medical businesses that are currently paying payroll tax on contractor payments.

If you are currently paying payroll tax on payments to contracted GPs, there is no change. If you are a new medical practice, you will need to comply. If you are an established practice and have not been paying payroll tax on your payments to contracted GPs, you may be eligible to apply for the amnesty.

Recent decisions in Victoria and NSW impacting payroll tax compliance

The ruling in Queensland comes off the back of recent decisions in:

• Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd [2019] VSCA 197

• Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue [2019] NSWCATAD 145

• Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259.

We’ve outlined some of the key takeaways from these cases to help you better understand how to manage the risk and limit potential payroll tax exposure.

Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd [2019] VSCA 197

Optical Superstores had a ‘tenancy and agency’ arrangement in place, which provided for paying its optometrists for looking after patients.

The patients were consulted by optometrists in consulting rooms owned by Optical Superstores but they did not pay the optometrists directly. Instead, patients paid the optometrists’ fees (i.e. Medicare payments and patient fees) to Optical Superstore which held this money on express trust for the optometrists.

The optometrists were ultimately paid from this express trust on sums calculated using their hourly rate and the number of hours performed (i.e., payment was not dependent on consultation fees collected) and subtracting "occupancy fees" for utilising Optical Superstore facilities.

The Supreme Court of Victoria, Court of Appeal overturned earlier decisions and held that the words 'paid or payable' should be construed broadly, meaning the transfer of the reimbursement amounts constituted an amount 'paid' for payroll tax purposes.

In a further development, the High Court refused to grant the taxpayer special leave to appeal against this decision.

Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue [2019] NSWCATAD 145

Homefront Nursing engaged general practitioners (GPs) to provide general practice medical services on its behalf under a service agreement as independent contractors at medical centres operated by Homefront Nursing.

The GPs were provided with administrative services, staff, facilities, and the plant and equipment necessary for the GPs at the medical centres operated by Homefront Nursing.

There were two main categories of payments for services:

1. Medicare and Department of Veterans Affairs (DVA) benefits (bulk billing receipts); and

2. Direct payments from patients (non-bulk bill payments).

In respect of the two categories of payments, the NSW Civil and Administrative Tribunal (NSWCAT) took a different position on each.

Medicare/DVA bulk billed payments

NSWCAT found that the GPs had directed Medicare/DVA to make the payments into Homefront Nursing's account as a collecting mechanism and as a matter of convenience. On this basis, the amounts representing the Medicare/DVA benefits paid by Homefront Nursing to GPs were not 'in relation to' the 'relevant contract' for payroll tax purposes.

Non-bulk billed payments

These payments were made by patients who made their own claims for medical benefits (private billings).

Patients paid these amounts directly to Homefront Nursing for services performed by the GP as contemplated under the 'relevant contract' between Homefront Nursing and the GP. On this basis, the amounts of non-bulk billed payments (less the percentage for services, facilities and staff) paid by Homefront Nursing to GPs were 'in relation to' the 'relevant contract' for payroll tax purposes

Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259

The decision in this case deemed medical practitioners engaged by Thomas and Naaz to be ‘relevant contractors’ for payroll tax purposes.

In Thomas and Naaz, the NSWCAT considered the following:

1. Whether a service had been supplied by medical practitioners to the medical centre; and

2. Whether the remission of monies from the medical centre to the GP, was a payment ‘for or in relation to the performance of work’.

The answer to both questions was in the affirmative.

The Doctors were provided with rooms as well as shared administrative and medical support, along with the collection of Medicare fees on behalf of the Doctors. The patients paid the medical centres and did not pay the doctors directly for the medical services provided.

In Thomas and Naaz, doctors were engaged under a written agreement by the medical centres operated by Thomas and Naaz.

Further, the wording in the written agreement between the medical centre and the doctors proved to be highly relevant in the NSWCAT’s decision.

An important feature of the agreement was the flow of funds, which involved Medicare benefits being held in a bank account owned and operated by the medical centre. From here, a subsequent payment from that bank account was made to the doctors, which was equivalent to 70% of the claims received from Medicare with the remaining 30% taken as a service fee retained by the medical centre.

The terms included in the written agreement included certain conditions which may be consistent with that of an employer/employee relationship as follows:

• The doctors were required to promote the medical centre.

• The doctors were required to meet roster commitments and be physically present during rostered sessions.

• There was a minimum rate per hour in the first three months of engagement.

• There was a leave policy with a requirement for four weeks leave for each per 12 month period.

• There was a restraint of trade of up to five kilometres for up to two years after the doctor left the clinic.

• The medical centre would retain ownership of the files.

• The doctors were required to abide by the protocols of the practice and complete all necessary documentation.

Further, income reported in the income tax returns and financial statements by Thomas and Naaz included all the billings of the doctors.

The NSWCAT found there was an indirect relationship between the provision of the services and the payments made by the taxpayer, but there was a clear relationship between the provision of the services and the payments with the availability of the Medicare benefits to the doctors as a direct consequence of the provision of the services and. In addition, it was found that the payments were “for or in relation to the performance of work relating to” the agreements.

The NSWCAT held that the agreements with the doctors were considered a ‘relevant contract’ between the medical centre and the doctor mainly because of the terms included in the service agreements.

Next steps for medical practices

Based on these recent public rulings and decisions relating to payroll tax, it is likely State Revenue Authorities will focus audit activities on medical and health practices, and if you operate a medical practice in Australia, you may be affected.

Given this, it’s critical that medical and health practices give careful consideration to the terms of engagement for medical and health professionals to help ensure the agreements do not trigger unintended payroll tax risks.

Our tax consulting team, with the assistance of your legal representative, can help your practice manage this risk and limit payroll tax exposure. To find out more, get in touch with us today.