LEGAL UPDATE: Payroll tax in medical practices

LEGAL UPDATE: Payroll tax in medical practices

Recent decisions have raised concerns that a broader interpretation of payroll tax will mean more medical practices will be liable for payroll tax. How did we get here? HWL Ebsworth explains.

Payroll tax liability has been a prevalent issue for medical practices for some time. A medical practice will be liable for payroll tax if its payroll exceeds a threshold of $1.2 million in a financial year. Recent case law has made it clear that payroll is not just payable on employees but may also be payable on ‘contractor’ doctors. Revenue NSW may consider a contract to be a ‘relevant contract’ for the purposes of the Payroll Tax Act (2007), and their wages will count towards 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. However, there are key exceptions to payroll tax set out in section 32(2) of the Act.

If an exception applies, then the contract is not a ‘relevant contract’ for the purposes of the Act and payroll tax does not apply. Key exceptions that may be relevant in a medical context are:

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

(b) The services are performed by a practitioner who ‘ordinarily performs services of that kind to the public generally in that financial year.’ 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 independent contractors working at their premises, no payroll tax was payable on monies paid to them. 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. Here we focus on Thomas and Naaz. 

• Thomas and Naaz (the applicants) were directors operating multiple medical centres.

• Doctors entered into written agreements to use rooms, access shared services, and see patients. 

• Patients did not pay the doctors directly, but assigned their medical benefits to the doctors, 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 doctors. 

• Revenue NSW considered these doctors were employees and issued notices of assessment for five years including the 70% remitted to the doctors, amounting to over $795,000. Further penalties of 30% and interest were applied. 

The applicants objected on two grounds. 

First, on the basis that they were not relevant contracts under the Act.

Secondly, they argued that even if they were relevant contracts, an exception should apply, specifically the s 32(2)(b)(iv) exemption that a large proportion of the doctors were providing services to the public each year. The doctors were “free to provide medical services and other clinics, and many of them do so.” Evidence provided to support this included:

• a spreadsheet listing doctors who provided medical services at other practices;

• printings including details of income earned by those doctors; and

• letters of practice letterhead detailing where they consulted and details such as ABN.

The Commissioner rejected their objection, 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. In their view, the contracts were relevant contracts, and no exemptions applied.

Relevant Contracts

The contracts were ‘relevant contracts’ within the meaning of s32 of the Act as:

• the doctors were not just providing services to the patients but also the practice and its goodwill – factors contributing to this were that the doctors worked on a roster, had an obligation to promote practice interests and were subject to a restrictive covenant; and 

• the contracts were clearly ‘for or in relation to the performance of work,’ with a clear reasoning for this being the payment arrangement, providing a clearly indirect relationship. 

Exemption

In terms of whether an exemption applied, NCAT found that the evidence was not sufficient to negate their findings and prove that the doctor’s earnings were not relevant for payroll tax. 

Appeal

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

What does this mean?

The appeal means that the Thomas and Naaz decision (and Optical Superstore) are still applicable law, and if a medical practice cannot establish that the doctors working in their practice are independent contractors, the money paid to them may be deemed wages for payroll tax purposes and will contribute to the practice’s overall liability. 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.

Consequently, the Court may take a broad view of what constitutes a ‘relevant contract’ and can apply this to contractors. It is important to be aware of the specifics of your contractor agreement and whether certain provisions indicate a doctor may be an employee, such as dictating leave entitlements. 

If attempting to rely on exemptions, particularly the 90 day or providing services to the public exemptions, clear records should be kept that indicate the number of days a doctor has worked in a financial year, and written evidence should be kept showing they also work elsewhere.

All agreements with contracting doctors (and other allied health) should be reviewed and advice sought from accountants or lawyers. Revenue NSW did indicate that it would issue a Practice Note providing guidance about its approach; however, that has not been forthcoming, and we recommend that advice be sought now from accountants and / or lawyers regarding contracting arrangements.

Contributed by Romy Sirtes, Solicitor and Scott Chapman, Partner at HWL Ebsworth.