17 November 2021
Recent decisions in Victoria and New South Wales may have serious payroll tax ramifications for medical and other health practices that hold money on behalf of specialists engaged as independent contractors.
In a previous article, we referred to the decision in Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd  VSCA 197.
In summary, a “tenancy and agency” arrangement was in place which provided for Optical Superstores to pay its optometrists for looking after patients. The patients were consulted by optometrists in consulting rooms owned by Optical Superstores. The patients did not pay the optometrists directly but instead paid the optometrists’ fees (i.e. Medicare payments and patient fees) to Optical Superstore which held this money on express trust for the optometrists.
Optometrists were eventually reimbursed from this express trust on amounts worked out taking into account their hourly rate and the amount of hours worked (i.e. reimbursement was not based on the consultation fees derived) and deducting “occupancy fees” for using Optical Superstore premises.
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.
Since the Optical Superstore’s decision, there have been two more recent decisions in New South Wales which have also considered the payroll tax implications for medical specialists engaged as contractors.
Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue  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 these medical centres by Homefront Nursing.
There were two main categories of payments for services:
- Medicare and Department of Veterans Affairs (DVA) benefits (bulk billing receipts); and
- 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 in respect of each category.
Medicare/DVA bulk billed payments
The 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  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:
- Whether a service had been supplied by medical practitioners to the medical centre; and
- 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 to be 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 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 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 an indirect relationship between the provision of the services and the payments made by the taxpayer. 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.
What could this mean for you?
These recent decisions are a warning for medical and health practices to review the way payments are structured to any specialists they engage who operate from their practices.
Where medical specialists are engaged as contractors, based on recent decisions there is a risk that these specialists may be deemed to be ‘relevant contractors’ for payroll tax purposes. For amounts to be classified as taxable wages under the ‘relevant contract’ provisions, the payment must be ‘for or in relation to the performance of work’ under the contract.
Whether there is a ‘relevant contract’ in place depends upon the facts of the arrangement, and in particular, the nature of the benefit received by the principal in the context of their business.
Based on these recent decisions, we expect that the State Revenue Authorities will be focusing its audit activities on medical and health practices to ascertain whether engagements with medical specialists are payroll tax compliant.
Considering these decisions, we recommend that careful consideration be given to the terms of engagement for medical and health professionals to help ensure the agreements do not trigger unintended payroll tax risks.
As these decisions highlight, the terms of the service agreement you have in place with your medical specialists will be carefully analysed to determine whether these specialists are a ‘relevant contractor’ for payroll tax purposes.
If you think you may be affected, or know of someone who may be affected, please speak to your Findex adviser or contact the Tax Advisory team so we can conduct a health check of your employment taxes and payroll affairs to ensure you are doing the right thing.