A recent interstate payroll tax case decision may result in an uncertain prognosis for operators of medical businesses
A recent decision in New South Wales (NSW) in the case of Thomas and Naaz v Chief Commissioner of State Revenue (Thomas and Naaz case) has put businesses in the medical and allied health industries under examination with regards to the application of the payroll tax law.
In this case, payroll tax was found to be payable in NSW by a service entity on transfers of funds to the doctors working at the business under their own ABN. The transfer of funds found to be subject to payroll tax were the net payments of Medicare benefits collected by the medical practice for and on behalf of the doctors.
This case is important for businesses in the medical and allied health sector as it could mean that where the medical practitioner retains 60 to 70% of their billings, payroll tax may be assessed to the service entity on this amount. Where this is the case, the payroll tax would be calculated on an amount that may be in excess of twice the service entity’s revenue.
The decision of this case highlights the need for medical businesses to review their structure and service agreements to understand their payroll tax risk in the event that other State Revenue Offices apply the principles from this case.
Facts and findings of the Thomas and Naaz case
Thomas and Naaz operated three medical centres through a service entity. These service entities entered into written agreements with doctors. Broadly, the terms of the agreement between the individual doctors and the service entity were:
- The service entity would provide to the doctors:
- serviced rooms for the doctors to practice and see patients from
- access to shared administrative and medical support services
- assistance with claiming patient medical benefits from Medicare, including arranging the payments to be paid into the medical centres’ bank accounts before the amount less a service fee was transferred to the relevant doctors.
- The doctors agreed to:
- provide services on a specific basis which included meeting an agreed roster of days to work and providing advance notice of planned vacations
- vacation leave restricted to a maximum of four weeks’ vacation leave per a 12-month period
- promote the interest of the medical business
- abide by operating protocols
- adhere to a restrictive covenant if the doctor left the medical centre.
- Payment for the services provided to the doctors by the service entity would be made by the service entity retaining 30% of the Medicare benefits collected for and on behalf of the doctors (leaving 70% to be transferred to the doctors).
Based on the above facts and despite the legal arrangements, the Tribunal concluded that the services provided by the doctors to patients was in fact, performance of work for the service entity for payroll tax purposes. Broadly, this was primarily determined based on the significant level of control exercised by the service entity over the doctors under the written agreement.
This decision means that the doctors are considered “relevant contractors” for NSW payroll tax purposes. As such, the funds collected for and on behalf of the doctors less the service fee retained was found to be subject to payroll tax in NSW. That is the 70% of Medicare benefits transferred to the doctors was found to be a payment by the service entity for the services provided by the doctors (typically, this payment is treated as a distribution of cash as opposed to an expense).
What are the risks of a medical practitioner being considered a relevant contractor?
Although the Thomas and Naaz case relates to NSW payroll tax, the NSW payroll tax legislation ruled on in this case is similar to the Queensland payroll tax. As such, there is concern that the principles in this case may be applied in Queensland and/or other states.
Payroll tax imposed in Queensland can be up to 4.95% (or 4.75% for employers with total Australian taxable wages below $6.5 million) on the Queensland taxable wages. As such, subject to the facts of each agreement and operations between the service entity and the medical practitioner, if the agreement is considered a relevant contract for payroll tax purposes, the applicable payroll tax percentage will apply to the payments (being the reallocation of cash) made to the medical practitioner. This effectively means payroll tax may be payable on movements of cash from the service entity to the medical practitioner.
If payroll tax should have been paid on the transfer of funds to the medical practitioner, penalty taxes (default 75% of the shortfall) and interest charges, may also apply.
In the case of service entities whose taxable wages were below the threshold of $1.3 million (in Queensland) without considering the payments made to the medical practitioner by the service entity, this may also mean that the service entity then also becomes liable to be registered for payroll tax.
As the majority of cash received for and on behalf of the medical practitioner by the service entity is paid out to the practitioner, if payroll tax is payable on these payments this can clearly result in a significant cash flow exposure.
Are my arrangements potentially affected?
Payments made to contractors may be subject to payroll tax if the arrangement is considered a “relevant contract” for payroll tax purposes. Whether payments to medical practitioners are subject to payroll tax will depend on whether it is objectively the case that the work is performed under a contract to which services are provided to the service entity (rather than only to patients/customers).
Generally, the more that an association between the medical practitioner and the service entity reflects an employer-employee relationship, the greater the risk that payroll tax will apply. This is despite the fact that contractors may not be “employees” under general law, or for income tax or superannuation purposes.
Therefore, the payroll tax risk increases with service agreements with:
- a higher degree of control over the medical practitioner, particularly around how and when they deliver their services to patients; and
- requirements for the medical practitioner to promote the medical business as opposed to themselves personally.
The Thomas and Naaz case highlights the need for service entities to review their existing service agreements with medical practitioners and to understand if they have a payroll tax risk and if so, to what extent.
We recommend that the following steps are taken by service entities:
- review current service agreements and understand the risk of the transfer of patient fees from the service entity to the medical practitioner being subject to payroll tax in the applicable State; and
- consider future service agreements to assist with minimising payments received from patients being subject to payroll tax based on learnings from the Thomas and Naaz case.
If you would like assistance with reviewing your current or proposed service agreements for payroll tax exposure or have any questions, please contact Kylee Smith, Angela Stavropoulos, Kristy Baxter or your Pilot advisor on (07) 3023 1300.