Medical service agreements and payroll tax implications

A recent court case in Victoria involving The Optical Superstore may have payroll tax implications for medical practices paying medical practitioners and other health professionals under a service agreement.

Case background

The Optical Superstore is a well-known provider of optometry services to the public. The conditions in the service agreement with their optometrists included:

  • The optometrist occupied a consulting room in the store to supply optometry services;
  • All fees paid by patients/Medicare for optometry services were paid into The Optical Superstore’s main bank account and held on trust for the optometrist; and
  • Each month, the store would pay a “reimbursement amount” to the optometrist. The reimbursement amount was calculated by the optometrist submitting a timesheet showing the number of hours worked to the store manager for sign off, and an hourly rate being applied to these hours worked.

Both the Victorian Civil and Administrative Tribunal and the Supreme Court found in favour of The Optical Superstore who was held to not be liable for payroll tax.

However, the decision was overturned in the Court of Appeal, which ruled the payments made to the optometrists were wages and therefore subject to payroll tax under Victorian law, even though the optometrists are not employees under common law.

The High Court has refused The Optical Superstore’s application to appeal the most recent ruling.

Why are the payments deemed to be wages?

The following factors contributed to the outcome of the court case:

  • The optometrist’s payments were based on the number of hours worked – like common law employees;
  • The optometrist’s hours were approved by the store manager – like common law employees;
  • The patient fees earned by the optometrist were not held in a separate bank account or sub-account; and
  • A broader view of what forms a contract for work was applied by the judge. A contract for work means payments are subject to payroll tax as there is a connection between the payment provided to the optometrist and performance of work or provision of labour.

What does this mean for my medical practice?

It is critical for all medical practices to review the conditions of their service agreements, so that payments to medical practitioners are not subject to payroll tax. While the case is based in Victoria, 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 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 promoting itself as the provider of medical services; and
  • The medical practice promoting medical practitioners as staff or contractors.

Contact us

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