Payroll Tax: An Update For Practices

Payroll Tax: An Update For Practices

The NSW Court of Appeal dismissed the application by Thomas and Naaz to appeal the tribunal decision. What are the implications for medical practices?

RECENT PAYROLL TAX developments have made it clear that a practitioner who has a contract with a medical practice may be deemed to have a ‘relevant contract’ with the medical practice, and money remitted from the practice to the practitioner may qualify as ‘wages’ for payroll tax purposes. A medical practice will be liable for payroll tax if its payroll exceeds a threshold of $1.2 million in a financial year. Revenue NSW may consider a contract to be a ‘relevant contract’ for the purposes of the Payroll Tax Act (2007), and their wages will be included in a practice’s overall payroll liability.

Legal background

Payroll tax is governed by the Payroll Tax Act (2007) (‘Act’). Under s32 of the Act, payroll tax may be payable if there is a ‘relevant contract’ in place for services in a financial year, and if those services/related wages are obtained and paid ‘for or in relation to the performance of work.’ This test is very broad, but there are key exemptions to payroll tax set out in section 32(2) of the Act. If an exemption applies to a practitioner, then the contract is not a ‘relevant contract’ for the purposes of the Act and payroll tax does not apply.

Key exemptions that may be relevant in a medical practice are:

(a) Where a practitioner has worked in the practice for less than 90 days in a financial year;1 or

(b) The services are performed by a practitioner who ‘ordinarily performs services of that kind to the public generally in that financial year’.2 For example, a medical practitioner that provides services to the general public by consulting patients at different locations or working in a hospital may apply for this exception.

Case law

Historically, if a medical practice had medical practitioners providing services to their own patients from the practice’s premises and paying the practice a service fee for services provided by the practice to the practitioners, no payroll tax was payable on amounts remitted by the practice to the practitioners. This was turned on its head in Commissioner of State Revenue v Optical Superstore Pty Ltd [2019] VSCA 197 and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259.

Focusing on Thomas and Naaz, the subject of the latest Court of Appeal decision, the facts are as follows:

• Thomas and Naaz (the applicants) were directors operating multiple medical centres.
• Practitioners entered into written agreements to use rooms, access shared services, and see patients.
• Patients did not pay the practitioners directly, but assigned their medical benefits to the practitioners, and the applicant submitted the benefits to Medicare. The applicant then retained 30% as a service fee, and the remaining 70% was remitted to the practitioners.
• Revenue NSW considered these practitioners were employees and issued notices of assessment for 5 years including the 70% remitted to the practitioners, amounting to over $795,000. Further penalties of 30% and interest were applied.

The medical practice objected on two grounds, namely that the contracts were not relevant contracts under the Act, and that exemptions applied to practitioners, mainly that they were free to provide services elsewhere. In support of this, the medical practice provided evidence that the practitioners had been working elsewhere as well as at the practice.

The Commissioner rejected the medical practice’s objections, and Thomas and Naaz subsequently applied to the NSW Civil and Administrative Tribunal (NCAT) to review the objection decision. NCAT upheld the NSW Revenue assessments, including the application of penalties and interest. The contracts were relevant contracts under the meaning of s32 of the Act, and no exemptions applied, noting that the evidence provided was not sufficient to negate findings that the practitioner’s earnings were relevant for payroll tax.

Appeal

Thomas and Naaz again appealed the decision, contending that NCAT incorrectly applied section 32 and 35 of the Act. However, the NCAT Appeal Panel reaffirmed the decision (Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220).

The decision of the NCAT Appeal Panel was then appealed to the Court of Appeal. The Court of Appeal handed down their decision in the matter on 14 March 2023, Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40: the Court of Appeal upheld NCAT’s decision. Importantly, the Court held it was correct that the practitioners were providing services to the practice as well as the patients, noting that the medical services provided were an integral part of the practice running its business, and that the contracts were clearly ‘for or in relation to the performance of work’, noting that there was a clear relationship where the practitioners had a contract and were paid to treat patients.

The Court observed that the practitioners who processed their own claims for Medicare benefits and did not receive the 70% paid to them by the applicant, but instead received the funds directly into their own accounts and paid 30% to the applicant as a service fee, were not included in the calculation for assessable wages. The Court noted that the Act extended the scope of concept of employer, employee, and wages. One element in which the deemed provisions operate is the making of a payment by the deemed employer to the deemed employee, and the approach taken by these practitioners to process their own claims meant that there was no payment from employer to employee and the deeming provisions were not engaged.

What does this mean?

The NSW Court of Appeal decision is applicable and enforceable law. If a medical practice cannot establish that the contracts of the practitioners working at their practice are not ‘relevant contracts’, the money paid or remitted to them may be considered deemed wages for payroll tax purposes and will contribute to the practice’s overall liability. In the 2022/2023 financial year if a practice exceeds the threshold of $1.2 million in payroll for a financial year, they will be liable to pay 5.45% in payroll tax for all monies exceeding that threshold.

It remains important to be aware of the provisions in service agreements and whether those provisions indicate a practitioner may be an employee for the purposes of the Act. If attempting to rely on legislated exemptions to payroll tax, particularly the 90-day exemption or providing services to the public exemptions, clear records should be kept that indicate the number of days a practitioner has worked in a financial year, and written evidence should be kept showing they also work elsewhere.

All agreements with contracting practitioners (and other allied health) should be reviewed and advice sought from accountants and / or lawyers. While it is unclear at this stage what the Government may do in response to the decision, the Court of Appeal decision indicates that measures including banking fees into separate accounts will be relevant when assessing the nature of the agreements or arrangements in place in your medical practice, and whether amounts remitted will be included for the purposes of payroll tax calculations.

1 Payroll Tax Act s 32(2)(b)(iii). 2 Payroll Tax Act, s 32(2)(b)(iv).

Contributed by Romy Sirtes, Associate, and Scott Chapman, Partner HWL Ebsworth Lawyers