Liability of medical practices to payroll tax

This article was published in Thomson Reuters Weekly Tax Bulletin on 8 July 2022.

The NSW Court of Appeal has advised that an appeal has been lodged (by the taxpayer) against the NCAT Appeal Panel decision in Thomas and Naaz and listed for directions on 12 September 2022. 

The NCAT Appeal Panel decision in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220 (Thomas and Naaz) released on 6 July 2022, has sounded warning bells for general medical practices.

The appeal was dismissed reaffirming the earlier decision (Thomas and Naaz Pty Ltd v Chief Comr of State Revenue [2021] NSWCATAD 259) in favour of the Chief Commissioner of State Revenue. Revenue NSW will release guidance on the application of payroll tax to healthcare practices. This is set to reflect their current audit practice that arrangements between medical practices and healthcare practitioners are nearly always relevant contracts for payroll tax.

This change means that many general medical practices must pay 5.45% on payments to healthcare practitioners that exceed the NSW payroll tax threshold of $1,200,000, subject to certain exemptions. Simply amending existing service agreements to demonstrate the healthcare practitioner is not an employee will no longer be enough to avoid payroll tax.

What is payroll tax?

Broadly, an employer who pays wages in NSW and whose total Australian wages exceed the payroll tax threshold must register for and is liable to pay payroll tax (see our previous article ‘NSW Payroll Tax: traps, tips & updates’). Under the provisions of the Payroll Tax Act 2007 (NSW) (Act) payments made under relevant contracts may be considered wages for payroll tax purposes.

Are medical practices payment arrangements subject to payroll tax?

Medical practices typically operate a ‘service entity’ model whereby each healthcare practitioner or locum provides medical related services to their patients. The healthcare practitioners include doctors, medical and allied health care specialists. The practice collects fees on behalf of the healthcare practitioner and distributes a share of the fees to the practitioner after deducting a ‘service fee’.   

Until recently, payments transferred to a healthcare practitioner or their entities were not usually considered to be ‘wages’. 

The decision of the Victoria Court of Appeal in Commissioner of State Revenue v The Optical Superstore [2019] VSCA 197 (Optical Superstore) upheld a broader interpretation of 'relevant contracts'. Optical Superstore held that the payments were for, or in relation to, the performance of work by the optometrists in providing services to Optical Superstore and patients under 'relevant contracts'. The amounts transferred were taken to be 'wages' under the Victorian Payroll Tax Act, with the effect that Optical Superstore was liable for payroll tax.

Thomas and Naaz affirms the position taken by Victoria. Payroll tax provisions were harmonised across all states and territories since 2009.

Appeal Panel decision

The Appeal was heard on 25 March 2022 with the taxpayer contending that the Tribunal erred in construing and applying section 32 and section 35 of the Act. The Appeal Panel dismissed the appeal on all grounds. 

The case illustrates the wide operation of the payroll tax 'contractor provisions'. The notices of assessments issued to the medical practice covering 5 years of payroll tax liability amounted to over $795,292.95. Penalties of 30 percent and interest were upheld with no remission. 

Facts of the original case

The taxpayer operated a business comprised of three medical centres. Various doctors operated from the taxpayer’s medical centres.

Under the arrangement between the doctors and taxpayer, the taxpayer provided the doctors with rooms at its medical centres and shared administrative and medical support services (e.g. nurses, reception, administrative staff).

The patients did not pay the doctors directly. The doctors 'bulk billed' each patient and the patients assigned their Medicare benefits to the doctors. The taxpayer, on behalf of the doctors, made Medicare claims and received funds into its bank account. The taxpayer retained 30% of the funds as a service fee and paid the remaining 70% to the doctors.

The issue was whether the payments from the taxpayer to the doctors were 'taxable wages' subject to payroll tax under the Act.

Reasoning of the Tribunal

The Tribunal’s decision turned on whether the payment of the amounts by the medical practice to the doctors fell within the contractor provisions in the Act. Payments are treated as wages if they are made under a 'relevant contract'.

Section 32(1)(b) of the Act provides a broad definition of relevant contract. The arrangements constitute relevant contracts where the taxpayer obtained the services of persons for, or in relation to, the performance of work.

The Tribunal rejected the taxpayer’s claim that, under the arrangements, the doctors merely supplied medical services to the public and paid a service fee to the taxpayer in return for rooms and support services. The Tribunal concluded that where the services were a necessary part of the taxpayer’s business, the doctors provided them not only to the patients but also to the taxpayer. This satisfied the ‘relevant contract’ definition under the Act.

However, section 32(2) provides exemptions from that definition. The Tribunal considered whether any of the following exemptions in section 32(2)(b)(i) to (iv) applied:

• The services are not ordinarily required by the taxpayer’s business

• The services are required by the taxpayer’s business for 180 days or less in a financial year

• The services are provided to the taxpayer’s business for 90 days or less in a financial year

• The Chief Commissioner is satisfied that those services are performed by a person who ordinarily performs services of that kind to the public generally.

On the facts, the Tribunal was not satisfied that any of the above applied. Unless one of these exemptions apply, it is likely that the payments from medical service entities to a healthcare practitioner will attract payroll tax.

The takeaway

These cases serve as a timely reminder for healthcare practices to review payment arrangements with their healthcare practitioners to ensure that they do not give rise to unexpected payroll tax liabilities.

Unless an exemption under the Act applies, it is likely that the payments from medical service entities to a healthcare practitioner will attract payroll tax.

Revenue NSW has confirmed that it will broaden its application of existing payroll tax laws to encompass medical practices operating ‘service entities’ applying audit resources for arrangements since the decision in Optical Superstore. Revenue NSW issued CPN 024: Interest and penalty tax guidelines in June 2022 outlining how it will apply penalties and interest.

Please contact us if you require assistance with review of your arrangements or payroll tax investigation by Revenue NSW.

Authors: Lisa To & Hayley Constantine