Checking Medical Service Agreements for Payroll Tax Implications

A recent case in New South Wales provides a crucial reminder to clients operating medical practices to carefully review their service agreements to ensure payments are treated correctly for payroll taxes.

Case background – Thomas and Naaz v CCSR

  • Dr Thomas and Ms Naaz operated multiple medical centres;
  • Doctors would enter into written agreements with the medical centres;
  • The medical centres provided rooms and medical support services (including nursing and reception staff) to the doctors;
  • The medical centre would, on behalf of the doctors, make claims to Medicare and receive the funds into a bank account held by the medical centre; and
  • The medical centres would retain 30% of the funds (as a service fee) and pay out the remaining 70% to the doctor. For the first 3 months, the doctors were paid the greater of a minimum rate of $140 per hour, or the 30% service fee.

The New South Wales Civil and Administrative Tribunal found that the medical centres were paying taxable wages and thus ordered to pay nearly $800,000 (the total of the payroll tax, penalties and interest) for the period 1 July 2013 to 31 March 2018.

Why are the payments deemed to be taxable wages for payroll tax?

The following terms of the service agreement were of note to the tribunal, as it required the doctors to:

  • Assign their Medicare benefits to the medical centre;
  • The doctors’ Medicare benefits were paid into the medical centre’s bank account;
  • Work on a five day a week basis, including weekend rotation;
  • Provide at least 6 weeks advance notice of planned vacations (limited to 4 weeks per year) that had to be approved by the medical centre;
  • Promote the interest of the medical centre (including not channelling patients away);
  • Abide by the medical centre’s operating protocols; and
  • Upon a doctor leaving the clinic, a non-compete clause stipulated that the doctor was excluded from working within a 5km radius of the medical centres for 2 years.

The Tribunal also reviewed the application of the payroll tax exemptions. The Tribunal found that the medical services provided by the doctors were a necessary part of the business, being a medical centre.

Dr Thomas argued that the payments were simply a return of doctors’ monies and that the doctors ordinarily performed services to the general public, however sufficient evidence was not produced for the Tribunal.

What does this mean for my medical practice?

It is critical for all medical practices to review the conditions of their service agreements to determine the correct treatment so that payroll taxes are not underpaid. While the case is based in New South Wales, payroll tax law contains similar provisions in other states.

The following list outlines examples of conditions in service agreements which could indicate the payments are made to employees and therefore will be subject to payroll tax:

  • The medical practice requiring the medical practitioner to work or attend at the practice at set times and days;
  • The medical practice requiring the medical practitioner to submit leave requests;
  • The medical practice issuing invoices to patients in its own name and ABN;
  • The medical practice receiving patient fees into the same bank account that it uses to pay expenses (ie: rather than paying into a separate bank account or sub-account);
  • The medical practice paying a regular minimum amount to the medical practitioner;
  • The medical practice enforcing non-compete clauses;
  • The medical practice promoting itself as the provider of medical services or requiring the medical practitioner to promote the medical practice; and
  • The medical practice promoting medical practitioners as staff or contractors.

Learn more

For assistance with reviewing your current service agreement and managing your potential payroll tax exposure, please contact Kristy Baxter on or (07) 3023 1300.