Appeal Denied – Medical Clinics & Payroll Tax: The Thomas & Naaz Decision
Thomas & Naaz Appeal Decision
Late last year, a New South Wales Civil and Administrative Tribunal (NSWCAT) decision saw a GP practice lose their legal battle over a large payroll tax bill, confirming that practices can be liable for payroll tax with regards to payments made to doctors who are engaged as independent contractors. Ever since the original decision by NSWCAT, the medical practice community has understandably kept a keen eye on any subsequent appeals. On 6 June 2022 NSWCAT denied the right to an appeal. So, where are we now?
The earlier decision: a refresher
In Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAP 220, Thomas and Naaz Pty Ltd was found to have owed the State almost $800,000 in retrospective payroll tax. This was due to payments to doctors being deemed by the Tribunal as assessable for Payroll Tax, as payments under a ‘Relevant Contract’.
This case has highlighted some practical issues in the manner in which this practice’s business was conducted, and also some issues with the drafting of independent contractor agreements, very common in the industry.
For more information about the facts of the original case, and NCAT’s reasoning, you can read our earlier blog article here: Independent Practitioner Arrangements: Payroll Tax Case.
So... what was the Appeal Decision?
Dr Thomas appealed the original decision on seven grounds, for example that it should not have found the doctors’ payments to be wages; it should not have found doctors provided services to the practice, but only to patients; and that its contracts were not “relevant” under payroll tax law. However, ultimately the Tribunal rejected the Appeal on all seven grounds.
What does this all actually mean?
This Appeal being denied has meant that the earlier 2021 decision holds strong, reiterating how important it is to look at the flow of money between the doctor and the practice. In the original decision, the flow of money was a key factor which resulted in the Payroll Tax Act being triggered (which is the section dealing with ‘relevant contracts’).
In practical terms, this means that owners of medical practices must be aware that they are at a higher risk of receiving a large retrospective payroll tax bill if their Agreements are not properly drafted and implemented. Consequently, it is important that current contracts in place are reviewed to ensure they are compliant. Agreements should accurately reflect an arrangement whereby the practice is providing a service to enable doctors to practice from their premises.
A key takeaway from this case is to remove obligations on the doctor which may be deemed a “relevant contract”, and to ensure distinction between the “first supply” being the doctor providing clinical services to individual patients, and the “second supply”, i.e., the transaction between the practice and the doctor. This is a practical consideration, and must also be documented correctly between the doctor and the practice.
The way the money flows between the practice and the doctor was of key interest to the tribunal, so accounting for the receipt of funds and payments to practitioners needs to be consistent with the agreement.
Payroll tax laws are not consistent across the States and Territories, but no matter where you live, this is an important decision to consider.
Also, this is not a Court decision and is a less authoritative tribunal decision.
Our Recommendation
This decision continues to emphasise the need to review your current arrangements with doctors (including the owners of the practice, where the owners are doctors), so our recommendation to our medical practice clients is to do exactly that. Essentially, does what you have in your contract reflect what you want in your contract and does it reflect the totality of the arrangement with the doctor? You should ensure that your contracts are well-drafted – meaning that they are up-to-date and comprehensive, constituting the full agreement with each party.
You Legal recommends undertaking a thorough review of any independent contractor arrangements to reduce the risk of an adverse Payroll Tax finding.
A review should cover the following areas:
1. Practitioner Service Agreements
2. Banking and Practitioner Payment processes
3. Accounting Treatment of practitioner payments
4. Any tax audit insurance cover
Importantly, ensure any tax audit insurance provides cover for state taxes such as Payroll Tax. Some tax audit insurance policies provide cover for federal taxes only, in which case they would not cover a payroll tax audit.
We encourage owners of medical practices to contact their accountants and legal advisor if they have any concerns about the contractual arrangement that you have in place for the engagement of medical practitioners.
Our team has extensive experience in providing advice and insights into best practices for medical services agreements. To discuss your contracts, contact our team here, and we will put you in touch with the best professional for your needs.
Interested in purchasing a new Services Agreement for your Independent Medical Contractor that has been updated following this payroll tax case? You can find our online solution here.