Payroll tax for medical practices

Key takeaways and considerations

1. Payroll tax is not just relevant for GPs, all medical practices including specialists and allied health have an exposure to payroll tax. 

2. Payroll tax legislation has largely been ‘harmonised’ across all states and territories (excluding WA) meaning that: 

• (a) The Thomas and Naaz Appeal Decision can be applied by revenue offices around Australia and should be considered by practices.
• (b) The Queensland Revenue Office’s (QRO) current interpretation of the payroll tax framework as set out in the Ruling can be considered and may be adopted in coming months in other states and territories (though it does not currently directly impact other states and territories).

3.  The Queensland Premier has indicated that revenue audit activity for medical practices in Queensland will be suspended until July 2025, and Business Queensland has stated that there will be a “payroll tax amnesty” (suspension) for GPs only and only on application (until July 2025), however, no other revenue offices have indicated that they will also adopt the same approach.

4.  All Australian medical practices should seek legal and accounting advice about their operating model and agreements with medical practitioners.

Access our medical practice payroll tax liability risk indicator checklist to help you identify potential “red flags’ in your arrangements with medical practitioners.

Background

Since December 2022, there have been two significant updates with Payroll Tax and its application to medical practices around Australia. Those updates are:

1.   On 22 December 2022, the Commissioner of State Revenue in Queensland provided a Public Ruling addressing payroll tax for medical practices in Queensland (Ruling).

Importantly, the Ruling applies to all healthcare professionals, including specialists, dentists and other allied health practitioners in Queensland and has potential implications for other states/territories given the similarities in their regulatory frameworks.

2. On 14 March 2023, the Thomas and Naaz appeal to the NSW Court of Appeal was handed down (Thomas and Naaz Appeal Decision). A copy of the decision can be accessed here.

While Thomas and Naaz were unsuccessful in their appeal, the NSW Court of Appeal has provided some valuable insights for other medical practices to reduce their risk moving forward.
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What was the position of practices before the Ruling and the Thomas and Naaz Appeal Decision?

Payroll tax is a state tax payable on “taxable wages” which includes payments made to employees as well as payments made to some contractors where they are engaged for their labour under a “relevant contract”.
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Prior to this Ruling and the Thomas and Naaz Appeal Decision, medical practitioners working in most medical centres were thought not to be subject to payroll tax as the medical centre and medical practitioners worked in two separate but inter-dependent businesses.

Importantly, the Ruling and the Thomas and Naaz Appeal Decision can be applied to all healthcare professionals, including specialists, dentists and other allied health practitioners and has potential implications for all states/territories given the similarities in regulatory frameworks around Australia.

Most medical practices typically operated on the following basis:
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• The medical centre provided administrative services to the practitioner who provided medical services to patients.
• Patient fees were typically collected on behalf of the practitioner as part of this service.
• A service fee was deducted from these fees with the balance remitted to the practitioner.
• Under a properly functioning and documented service agreement, payroll tax was taken not to apply as the practitioner was not providing services to the medical centre and therefore a “relevant contract” did not exist.

More recently, the revenue authorities around Australia have issued notices to medical practices requiring the payment of payroll tax in respect of payments to medical practitioners (generally, the doctor’s percentage of billings). There has been no change in the law. The revenue authorities have simply taken a different approach in applying the payroll tax law.
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Key comments from the Ruling and the Thomas and Naaz Appeal Decision

The Thomas and Naaz Appeal Decision provided some clarity after more than a year of concern for the medical profession after the New South Wales decision of Thomas and Naaz in September 2021 (which was subsequently upheld on appeal in July 2022). The appeal decision upheld the order for Thomas and Naaz to pay nearly $800,000 in payroll tax, as payments made under service agreements were considered taxable wages under NSW’s payroll tax legislation.  

While Thomas and Naaz were unsuccessful in their appeal, the NSW Court of Appeal has provided some valuable insights for other medical practices to reduce their risk moving forward. 

In particular at paragraphs [67] and [73] of the decision, the Court emphasised that:
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• the three practitioners excluded from the payroll tax assessment received 100% of their own medical revenue and then paid the practice its 30% service fee; and 
• adopting such a mechanism would appear to reduce the risk for medical practices of the payroll tax provisions being enlivened.

This decision did not consider all relevant terms of the payroll tax legislation and does not take away from the need to consider the totality of the practice’s arrangements with practitioners and to have a properly documented service agreement with practitioners. The Ruling attempts to provide some further clarity with several worked examples of where a relevant contract will and won’t exist for payroll tax purposes.

What the Ruling seeks to clarify

What the Ruling seeks to clarify is that:
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• A “relevant contract” will exist for payroll tax purposes where practices represent to the public that they provide patients with access to medical services of a practitioner
  – see paragraph 13 of the Ruling.
• If a relevant contract exists, all amounts paid to the practitioner will be wages for payroll tax purposes regardless of whether those funds are paid from a trust account or otherwise paid from money received by the practice on behalf of the practitioners
  – see paragraphs 45-49 of the Ruling.
• Practices should review their websites to ensure that the way they are advertising themselves to the public is accurate. The QRO has indicated that a medical centre advertising the services offered by the practitioners may be an indicator of a relevant contract. Many practices currently advertise the services of the practitioners so that the public know who consults from the practice and what services the public can access. One possible method to reduce the risk may be for each practitioner to have their own independent website for marketing and advertising purposes.
  
  A relevant contract will exist where:

‍What the Ruling doesn’t clarify

Unfortunately, the Ruling does not specifically consider an operating model where all the following occur:
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• The practice is engaged by the practitioner under a services agreement;
• The practitioner is not subject to any rostering or control by the practice;
• The practitioner wholly receives their own medical revenue direct from the patient and third-party providers. The practitioner then pays the practice for services provided; and
• The practitioner “owns” all their own patients and patient records.

Therefore, there remains some ambiguity for practices that are being engaged by the practitioners to provide administrative services under a “proper” services agreement.

What does the Ruling and the Thomas and Naaz Appeal Decision potentially mean for medical practices and medical practitioners?

Outlined below are some key high-level potential consequences:

• The revenue offices will likely be seeking payment of payroll tax from practices in respect of medical practitioners working at the practice regardless of their terms of engagement (e.g. service agreements).
• If practices want to retain a level of operational control over the work performed by medical practitioners (such as days of work, room allocation etc.) and want to protect their relationship with patients (ownership of medical records, non-compete clauses), the QRO has indicated its position is that the doctor’s work is then being performed “for or on behalf of” the practice and accordingly the practice will be liable for payroll tax.
• The QRO’s and Court of Appeal’s interpretation may extend into other states/territories given the similarities in their regulatory frameworks.
• The increased cost of payroll tax may have significant ramifications for medical practices and the community.

• A finding that payroll tax is payable does not automatically mean that income tax, leave and superannuation entitlements will be payable.  Liability for those amounts will need to be determined separately.

We can help you

We have prepared a payroll tax risk indicator checklist for you to use in determining your potential exposure for payroll tax. Download here.

We have also assisted with preparing for and responding to revenue office audits and investigations.

If you have any questions, or would like more information about how we can assist your practice, please call 1800 867 113, or to organise a confidential discussion at a time that suits you, please click here.

About the Author

Ben Ryan is a Senior Associate in the commercial and corporate law practice at Avant Law, based in Brisbane. Ben has been working with medical practices since 2013. Ben works primarily on commercial structuring and intellectual property matters to help clients achieve strategic and commercially sensible results. He pursued a career in law to provide reliable and honest support to those in need of legal assistance and enjoys working with clients to develop solutions-oriented legal strategy and advice.

Disclaimer: The information in this article does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of this content. The information in this article is current to 23 April 2023. Liability limited by a scheme approved under Professional Standards Legislation. Legal practitioners employed by Avant Law Pty Limited are members of the scheme. © Avant Mutual Group Limited 2023