Medical Practices and Payroll Tax: Thomas & Naaz Appeal Dismissed

On 6 July 2022, the NCAT Appeal Panel dismissed the appeal by the taxpayer in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220 (Appeal) (‘Thomas and Naaz’) confirming the earlier decision in favour of the Commissioner.

The Appeal by the Taxpayer arguing that the Tribunal erred in construing and applying section 32 and section 35 of the Payroll Tax Act (NSW) (‘the Act’).

The appeal was dismissed but importantly not on the original key issues decided by the original tribunal. The Appeal Panel found the taxpayer to be raising questions of facts rather than questions of law.

Therefore, this does not provide any further clarity on the issue of payroll tax exposure to medical and allied health practice owners. It is anticipated that the appeal decision will be further appealed to a higher Court.

To briefly recap the facts of the case, Thomas and Naaz operated three medical clinics in Sydney. A written agreement was entered between the practice and the practitioner which provided that the practice collected patient fees on behalf of the practitioners and charged a percentage service fee against the income collected. The net amount was then remitted to the practitioner.

The original NCAT decision held that the practitioners were providing services to the medical practice under the agreement.

The NCAT considered that this was clear from the following contractual terms:

1. that the doctors agreed to provide the services to patients from the facility five days per week pursuant to rosters and agreed to provide advance notice of leave, that could be no more than four weeks per year;

2. that the doctors agreed to promote the interests of the facility provider;

3. that the doctors agree to abide by the operating protocols of the facility provider; and

4. that the doctors gave a restrictive covenant that operated if they ceased providing services from the facility.

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

What does this mean for you and your practice?

The appeal decision is a timely reminder for medical practices to review their arrangements with their 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 medical practitioner will attract payroll tax.

Revenue NSW is expected to release guidance on the application of payroll tax to medical practices soon. It can be assumed that this guidance will likely reflect their current audit practice, that arrangements between medical practices and practitioners are nearly always relevant contracts for payroll tax.

Whilst we hope the Revenue NSW position will only apply on a ‘prospective’ basis, that outcome is unlikely, and similarly, any concessional approach to penalties/interest on retrospective exposures may not eventuate.

It is likely that compliance within medical practices is a strong area of focus over the next twelve to eighteen months, so it is best to be prepared and seek professional advice regarding your practice arrangements and potential payroll tax liability.

If you have any questions about your potential payroll tax liability, please contact the Cutcher & Neale team.