Payroll Tax and Medical Practitioners

A version of this article has also been posted on the Tax Technical website.

Recent developments in payroll tax in some Australian jurisdictions have raised serious issues for medical practitioners which may result in medical practice operating entities becoming liable for greater payroll tax based on various payments made to the medical practitioners themselves being included in the relevant payroll tax thresholds as if they were ‘wages’.

Payroll Tax Basics

Payroll tax is a state/territory-based tax assessed on wages paid or payable by employers where wages exceed a threshold amount. The threshold amount is set by each state and territory and may change each financial year. For the 2022 financial year, the thresholds are:

 So why is there a focus on medical practitioners?

Over the last three years, there have been 3 significant cases in New South Wales and Victoria that have challenged our previous understanding on how payroll tax applied to medical practitioners who work as ‘contractors’.

The ‘typical’ medical practice arrangement is:

In this arrangement, the medical practitioners are engaged by the medical practice as contractors. The medical practice provides the facilities and administration services, and the medical practitioners provide the medical services. The patients engage the medical practitioner through the medical practice operating entity, which collects fees for those medical services provided to the patients by the practitioner. 

Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue 

In Homefront Nursing, the taxpayer had two medical centres in Taree, NSW. The medical centres engaged general practitioners (GP’s) to perform medical services at the centres. A number of GPs were engaged through their own companies. 

Homefront Nursing and the GP would enter into an agreement, which included the following clauses:

• The company operated medical centres and had agreed with the GP to engage the GP for the provision of general practice medical services on behalf of the company at the medical centres;
• The agreement could be terminated on 4 weeks’ notice
• The GP was engaged as a independent contract and responsible for their own taxes and compliance
• The company agreed to pay the GP fees. The Fee was calculated with reference to gross earnings (being charges billed for general practice medical services, including payments from Medicare and Department of Veterans’ Affairs, for services to patients provided by the GP but paid to the company) and Consultation Specific Special Incentive Payments. 
• During the first 13 weeks of engagement, the minimum fee payable was set at $3,600 per week if 71.5% of gross earnings did not exceed that amount.
• After week 13, the company paid the GP 71.5% of gross earnings generated by the GP calculated at the end of each fortnight of engagement. The GP was required to invoice the company with a tax invoice inclusive of GST.
• The GP was entitled to 4 weeks leave of unpaid absence
• The GP was required to provide Services for a minimum of 10 x 4 hour sessions per week at the centres.
• The GP was required to provide the company with all such information and documents as the company may require, to keep and maintain all records required by law (which are agreed to be the property of the company and the GP was prohibited from copying or removing them from the company’s property)
• The GP was required to use their best endeavours to promote the interests and welfare of the company and the patients; and conduct services competently, professionally and respectfully.
• The GP was stated to retain full discretion to exercise professional judgement on medical services performed.
• The GP also agreed to share duties relating to after hour calls, on-call roster home visits, and nursing home visits. 

In providing administrative services, Homefront Nursing collected all bills. They handled claims by GPs on Medicare/DVA and directed Medicare and DVA to pay bulk billed amounts to a clearing account managed by Homefront Nursing. The money paid into the Homefront Nursing accounts were clearly identifiable as generated by a specific GP. Homefront Nursing retained an agreed percentage for the provision of their administrative services, facilities and staff at the centres, and paid the GP the remaining agreed percentage. No amount for tax or superannuation were deducted from the payments. 

The Revenue Office of NSW assessed Homefront Nursing for payroll tax for payments made to the GPs, on the basis that the agreements between the company and GPs were relevant contracts for the purposes of payroll tax.

The two issues in the case were therefore whether the agreements were relevant contracts as defined in the Payroll Tax legislation and if the payments to GPs were ‘wages’ (under s35). 

The Senior Member hearing the case held that the exemption under section 32(2)(b)(i) did not apply to the agreements with the GPs. The Senior Member view that Homefront Nursing was conducting a business of providing a medical centre, where GP services were ordinarily provided to the public and required for the ongoing business. However, s32(2)(b)(i) requires that the services are not ordinarily required by Homefront Nursing. 

The Senior Member held that the payments made to the GP’s that consisted of Medicare/DVA payments were not wages, and therefore did not meet the s35 requirement. However, top-up payments (like those in the first 13 weeks), would be considered wages, as well as third-party billings, such as for the preparation of legal and insurance reports. 

Commissioner of State Revenue v The Optical Superstore Pty Ltd as Trustee for OS Management S Trust & Ors

The taxpayer this case carried on an optical dispensary business, across a number of stores. Like the previous case, the taxpayer entered into contracts with the optometrists or their companies/trusts through which they operated. 

The agreements – referred to as Optom Agreements – stated the payment terms and obligations of the parties. 

The Optom Agreements included the following clauses:

• Trustee was described as ‘landlord’, and optometrist as ‘Tenant’ – with the ‘Landlord’ offering the ‘Tenant’ a contract to occupy the consulting rooms on a non-exclusive basis
• There was an ‘Occupancy Fee’ that was calculated with reference to an hourly rate and hours worked 
• Fees paid by the patients was to be paid to the ‘Landlords’ account, and the Landlord would then remit the funds to the Tenant less the occupancy fee
• The Tenant was required to nominate the Landlord as the recipient of any Medicare payments to which they were otherwise entitled to

In the first instance, the Tribunal held that; the optometrists’ consultation fees were held by the taxpayer in an express trust for the optometrists, and the return of money to the optometrists from an express trust was not ‘wages’ under s35(1). 

On appeal, Croft J of the supreme Court dismissed the Commissioner’s appeal that the “payment” did not extend to returning the money to the optometrists, where they were providing a service to a third party. Croft J held that the payments made to the optometrists were beneficially owned by the optometrists and distributed to them under express trusts. Croft J stated that the optometrists were not “paid or payable for or in relation to the performance of work” as required by s35(1) to be considered wages. 

On further appeal, the Court of Appeal allowed the Commissioner’s appeal, holding that ‘paid or payable’ for the purposes of s35 to determine wages simply means the provision of money. The Court of Appeal stated at [67]:

The ordinary meaning of ‘payment’ readily embraces a payment of money to a person beneficially entitled to that money. When the entitlement is recognised and the money is provided to the person, it has been ‘paid’ to that person. 

As a result, the express trust structure that was created between the taxpayer and optometrists did not circumvent the payroll tax provisions and the taxpayer was liable for payroll tax on those payments made to the optometrists.

Thomas and Naaz P/L v Chief Commissioner of State Revenue

This most recent case was decided in the NSW Civil and Administrative Tribunal in September 2021. The taxpayer operated three medical centres in NSW. 

Much like the two previous cases discussed, the taxpayer engaged GPs for medical services, either individually or through their entities, with an agreement. The agreement included:

• GPs provided with access to consultation room in the medical centre and shared administrative and medical support services,
• GPs were required to see patients, and patients paid the taxpayer for the services received
• The majority of the GPs assigned the taxpayer to deal with Medicare to obtain benefits for their services
• GPs were required to provide services on a five day per week basis, including weekend rotation
• The Agreement required the GP have certain qualifications and insurances, along with other general obligations, including:
• Promoting the interests of the clinics,
• Meet roster commitments,
• Sign in and out of each shift 
• Completing all necessary documentation for taxpayer’s operating protocols
• GPs were required to bulk-bill patients and pay 30% plus GST of billings to the taxpayer
• GPs were paid a minimum rate of $140 per hour (inclusive of GST) or 30% plus GST paid to the taxpayer (whichever was higher)
• A rostered day was nine hours with a one-hour unpaid lunch break
• Payments would be made to the GPS fortnightly, two weeks in arrears
• At the end of the first four weeks of the agreement and every fortnight, thereafter, amounts equal to 70% of the claims paid by Medicare were paid to the attributable GP
• GPs were required to provide notice for planned leave, and wer allowed a maximum of four-weeks leave per 12 month period
• A restrictive covenant was imposed that the GP could not practice within 5km from the medical centre for a period of 2 years after their departure.  

The issues dealt with in this case are identical to those in Homefront Nursing, being:

1. Did the Agreement meet the ‘relevant contracts’ requirement in s32?

2. Where the payments made to the GP’s wages for the purposes of s35? 

As concluded in Homefront, the Tribunal determined that the GPs were providing a service to patients as well as the taxpayer under the Agreement, and therefore met the ‘relevant contract’ requirement. 

On the issues of whether the payments were wages – the Tribunal considered the nexus between performance of work and payments. The Tribunal identified the following facts as indicators:

1. the GPs provided the services to patients

2. the patients assigned their medical benefits to the GPs

3. the taxpayer, on behalf of the GP, submitted the assigned claims for the medical benefits to Medicare 

4. Medicare paid those benefits to the taxpayer, and

5. the taxpayer retained 30% pf the amounts from Medicare and paid the remaining 70% to the GP

The Tribunal differed in their opinion in this case compared to Homefront Nursing. The Tribunal considered that these facts showed the relationship between the services provided by the GPs and the payments made by the taxpayer to the GPs. As a result, the payments to the GP’s were considered to be wages for the purposes of payroll tax.   

Both the Homefront Nursing and Thomas and Naaz cases had similar fact patterns, however the Tribunal came to different decisions – resulting in an unexpected payroll tax liability for a structure that was previously widely believed in the industry not to incur payroll tax liabilities. 

How can Tax Controversy Partners help you?

Firstly, it is important that you carefully consider your position as early as possible if you are thinking about entering into an agreement with a medical/allied health centre or setting up your own medical/allied health centre. 

Obtaining legal advice before it is too late is important. As expert tax lawyers, we can provide you with detailed advice on your circumstances, guide you through making the best choices for you and help you to manage any engagement with State and Territory Revenue Offices on payroll tax issues and with the ATO on Federal tax and superannuation issues.

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and based on understanding likely ATO/State and Territory Revenue Office actions. 

Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.