Are dental practitioners engaged under a service arrangements considered employees of a dental practice for the purpose of payroll tax? This is the question currently plaguing the dental industry.
Since September 2019, when the Court of Appeal of the Supreme Court of Victoria made its decision in Commissioner of State Revenue v The Optical Superstore Pty Ltd, there has been considerable uncertainty about the payroll tax position for dental practices.
Further, the recent NSW Civil & Administrative Tribunal decision in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue highlighted the potential issue for dental practices engaging dental practitioners under service arrangements.
Background
It is a common practice for dental practices to operate under service arrangement models. This is where a dentist engages a practice to provide facilities and administration services to them for a service fee. These arrangements are structured on the basis that the dentist is conducting their own business and performing work for their patients, with the support of the facility provider (the dental practice). As part of these arrangements, it was commonplace for the facility provider to collect the patient fees from patients on behalf of the dentist(s) and, after deducting a service fee, pay the balance of the patient fees to the dentist.
Under the provisions of the Payroll Tax Act 2007 (NSW), payments made under relevant contracts may be considered wages for the purposes of payroll tax. A relevant contract is one under which a person:
- supplies to another person services for, or in relation to, the performance of work; or
- has supplied to him or her the services of persons for, or in relation to, the performance of work.
Whilst the current payroll tax threshold in New South Wales is $1.2 million (FY2022), the inclusion of the dentist's net medical billings that are managed by the dental practice, can quickly use up the threshold.
There are some exemptions to the relevant contract provision, including:
- where the contract is a contract for services of a kind ordinarily required by the principal for less than 180 days in a financial year; or
- where the contract is a contract for the provision of services by a person providing the same or similar services to a principal under the contract for no more than 90 days in a financial year; or
- those services are of a kind not ordinarily required by the principal and are performed by a person who ordinarily performs services of that kind to the public generally.
Until the decision in Optical Superstore, it was thought that the payments by the practice to the healthcare provider under these arrangements are not subject to payroll tax — this is because the balance of the patient fees paid to the dentist already belongs to the dentist, and is only being held by the dental practice on trust for the dentist.
When the decision in Optical Superstore was handed down, the implications of the decision were unclear. However, the audit approach of the Revenue offices since Optical Superstore and the recent decision of the New South Wales Civil and Administrative Tribunal (NCAT) in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (Naaz) suggests that many more dental practice arrangements may now be potentially subject to payroll tax, due to recent interpretation of relevant contracts
Where to from here?
Revenue NSW have indicated that they, and potentially other State Revenue offices, are developing a guidance document on the application of payroll tax for dental practices. The document will reflect Revenue NSW’s current practice at audit that arrangements between dental practices and dentists are nearly always relevant contracts for payroll tax purposes, subject to an exemption being available.
It is likely that compliance within dental 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 would like to speak with one of the Cutcher & Neale Advisors regarding your potential payroll tax liability, please do not hesitate to get in touch.
