Payroll tax risks for the medical and allied health industries
By Kathleen Jess, Senior Associate.
Engaging contractors can expose medical and allied health practices to significant payroll tax risks, even in situations where those contractors appear to be providing services directly to the public.
The medical and allied health industries have been the recent focus in the cases of The Optical Superstore Pty Ltd [2019] VSCA 197 (The Optical Superstore) and Thomas and Naaz Pty Ltd [2021] NSWCATAD 259; [2022] NSWCATAP 220; [2023] NSWCA 40 (Thomas and Naaz). The Victorian State Revenue Office (SRO) has issued Revenue Ruling PTA-041 (Ruling) to clarify the way in which it will apply the ‘relevant contract’ provisions of the Payroll Tax Act 2007 (Vic) (PTA) to medical centres.
The recent case law
Thomas and Naaz
Thomas and Naaz involved a medical practice operating three medical centres from which various general practitioners (GP) operated. Each GP had a written agreement with the medical practice, which provided consultation rooms from which the GPs provided medical services to patients. The medical practice provided administrative and support services to the GPs and instead of paying the GPs directly, the patients were bulk billed and their Medicare benefits assigned to the medical practice on behalf of the GPs. Medicare paid the claims to the medical practice and the medical practice paid 70% of those claims to the GPs, retaining the remaining 30%.
NCAT held, with the Appeals Panel and the NSW Court of Appeal also upholding, that there was a ‘relevant contract’ under the Payroll Tax Act 2007 (NSW) between the medical practice and the GPs and that the amounts paid by the medical practice to the GPs representing 70% of the Medicare claims from patient consultations were paid ‘for on in relation to the performance of work under a relevant contract’. As a result, the payments to the GPs were ‘taxable wages’ for payroll tax purposes.
The Optical Superstore Pty Ltd
The decision of Thomas and Naaz was not completely surprising, however, as it closely followed the Victorian Supreme Court decision of The Optical Superstore, which was based on uniform payroll tax legislation adopted by both Victoria and New South Wales. The taxpayer in The Optical Superstore carried on an optical dispensary business under a sophisticated arrangement whereby optometrists were engaged, either directly or through entities they controlled, to provide eye tests to members of the public on the taxpayer’s premises, for which those members of the public were bulk billed. Medicare paid the bulk billed consultation fees to the taxpayer who, under the terms of the agreement between the taxpayer and the optometrists (or their entities), held those amounts or part thereof on express trust for the optometrist (or their entity) and subsequently paid to the optometrist (or their entity) based on an hourly rate multiplied by the number of hours worked, less an occupancy fee.
The payments made by the taxpayer to the optometrists (or their entities) was held to be ‘for or in relation to the performance of work relating to a relevant contract’ and therefore subject to payroll tax. The Victorian Supreme Court held that it did not matter that the optometrists (or their entities) were already beneficially entitled to the money.
State Revenue Office Ruling PTA-041
To clarify the way in which payroll tax applies to medical centres, the SRO issued Revenue Ruling PTA-041 on 11 August 2023. The SRO confirmed that amounts paid or payable under a relevant contract by a medical centre will be wages for payroll tax purposes where there is a direct or indirect relationship between the payment and the performance of work.
The SRO stated in the Ruling that there was an indirect relationship in Thomas and Naaz due to the following characteristics:
- the GPs provided the services to the patients;
- the patients assigned their Medicare benefits to the GPs;
- the medical practice submitted the claims to Medicare on behalf of the GPs;
- the Medicare benefits were paid to the medical practice; and
- the medical practice retained 30% of the amounts received from Medicare and paid the remaining 70% to the GPs.
What does this mean for medical and allied health practices?
Many medical and allied health practices will have a Thomas and Naaz-type structure where the practice is making payments to contractors. Exemptions can apply to some contractors under limited situations, however, restructuring the relationship between a medical or allied health practice and its contractors is often the best way to provide some certainty about payroll tax obligations. Wisewould Mahony’s Tax Team can advise businesses in the medical and allied health industry on how to best structure agreements to avoid payroll tax surprises.
