On 11 August 2023, both Revenue NSW and Victorian State Revenue Office issued their long-awaited Rulings concerning the application of payroll tax to medical centres.
Importantly, the Rulings explain the broad application of the relevant contract provisions for medical centres as well as providing clarification regarding service agreements commonly used throughout the medical, dental and allied health professions.
In summary, the Rulings incorporate the decisions in the Thomas and Naaz case and the Optical Superstore case and seek to clarify the relevant contact provisions (potential employer/employee relationship). Therefore, under the common service entity approach, where medical centres gather patient fees and subtract service charges, the net payments to the practitioners will generally be subject to payroll tax unless one of the following three limited exemptions apply.
Exemptions Under The Rulings
Under the Acts, the three exemptions more likely to apply to a contract between a medical centre and a practitioner are:
1. The practitioner provides services to the public generally
This exemption is satisfied where:
- the practitioner who provided the services under the contract ordinarily performs services of that kind to the public generally in that financial year; and
- prior to claiming the exemption, the principal (medical centre) has applied to the Commissioner for a determination.
Importantly, if a practitioner practises at multiple medical centres but those centres are members of the same group for payroll tax purposes, the medical centre may not be entitled to the exemption.
2. The practitioner performs work for no more than 90 days in a financial year
If a practitioner performs work under a contract for no more than 90 days during a financial year, the contract is exempt for that financial year.
3. Services are performed by two or more persons
This exemption applies if a medical centre contracts with a practitioner, and the practitioner and at least one other person employed by or who provides services for the practitioner perform the work required under the contract.
When claiming an exemption, a medical centre must be able to substantiate the exemption with sufficient evidence.
4 Key Items To Consider
We recommend that practices undertake a thorough review of their arrangements to reduce the risk of an adverse payroll tax finding. A review should cover the following areas:
1. Practitioner Service Agreements
Like any contract or agreement, it’s only as sound as the information included in it. A poorly drafted agreement can leave a practice exposed. Ensure that the agreement does not provide for a regular ‘guaranteed’ minimum to a medical practitioner or any employee style connotations.
2. Documentation stating that doctors work elsewhere
Doctors working elsewhere and providing services to the general public outside of the practice may potentially be exempt. However, evidence to support this should be obtained.
3. Banking and practitioner payment processes
The use of a trust account or clearing account where the practice controls the monies and makes a payment to a Doctor now creates significant Payroll Tax Relevant Contract Issues.
The Ruling is notably silent on banking gross medical fees into the Doctor’s (Sole Trader) bank account where the Doctor also makes the ‘payment’ to the medical practice for service fees.
4. Advertising channels, including website and social media
Practices should review all advertising channels, such as their website and social media, to ensure that the medical practice is not promoting medical practitioners as staff.
The Rulings confirm that medical centres in NSW and Victoria now face the real risk of payroll tax liabilities that align with similar rulings in Queensland and South Australia. However, unlike their counterparts, Victoria and NSW have to date not introduced any amnesty provisions.
The recent payroll tax rulings have left a cloud of ambiguity over the medical sector, particularly concerning arrangements where medical practitioners receive fees directly to their bank account and subsequently pay a service fee to the practice.
While the rulings were anticipated to clarify this common scenario, example 12 provided in the Rulings regarding wages paid by a third party does not distinctly address the matter. This lack of clear guidance continues to pose challenges for medical practices and practitioners, leading to uncertainties in how they should approach their tax obligations.
It is worth noting from paragraph 67 and 71 from the Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 provides clearer guidance on banking arrangements and details of the three Doctors who were not included in the Relevant Contracts provisions. The case summary can be found here.
It is likely that payroll tax audit activity by the relevant state revenue authorities within medical practices will be a strong area of focus following these Rulings. It is important to seek professional advice regarding your practice arrangements and potential payroll tax liability.
Update
On 24 August 2023, the NSW Government announced a 12-month pause on payroll tax audits for GPs and their practices.
If you would like to speak with one of our Medical Specialist Advisors regarding your potential payroll tax liability, please do not hesitate to contact us.
Jarrod is the Managing Partner of Cutcher & Neale and heads up the Medical Accounting Services division within the firm. He has a passion for creating strong partnerships with clients that allow him to provide tailored advice so they reach their goals.
Jarrod has niche experience working with medical practitioners. His expertise allows him to guide clients from the initial stages of wealth creation as doctors in training, through to long-term wealth protection, tax planning, and retirement strategies.
