Independent Practitioner Arrangements: Payroll Tax Case
Written by Sarah Bartholomeusz, You Legal Pty Ltd, and Matthew Holden, Brentnalls SA
There has been a lot of discussion about the recent NSW payroll tax which has seen a GP practice lose a legal battle over an $800,000 payroll tax bill. This case relates to the independent practitioner arrangements for engaging medical practitioners that are commonly used across the health industry.
The judgment has provoked much discussion in the health community, amongst Practice Owners, Associate Doctors, Practice Managers, and advisors to the industry including lawyers, accountants and consultants.
As always, the devil will be in the detail, and we need to understand this detail to be fully informed before reacting and implementing any changes.
We have worked with a trusted accountant for medical practices, Matthew Holden from Brentnalls and together provide this update to give further background and clarification regarding the issues at hand.
Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259
Dr Thomas (runs three practices in Sydney) was found to owe the state almost $800,000 in retrospective payroll taxes as payments to doctors were deemed to be assessable for Payroll Tax as payments under a “Relevant Contract.”
For the purposes of NSW Payroll Tax assessment, the key features of a “Relevant Contract” are:
They are a contract, agreement, arrangement or undertaking under which a contractor provides an employer with the services of a worker.
The individual who performs the work may be the contractor or another worker engaged by the contractor.
The independent contractor is deemed to be an employee.
The person who receives the services is deemed to be an employer.
Payments by the deemed employer that relate to the performance of work by the contractor are liable for payroll tax unless an exemption applies.
Despite the doctor contractors holding themselves out as individual sole traders, their income was still deemed a relevant contract & how the money flowed to their accounts was subject to payroll tax.
How?
Dr Thomas was ‘billing, on behalf of his doctors, patient fees and charging a flat 30% service fee on everything the doctors had billed’ (obviously this is not dissimilar to many general practices operating in Australia). The money flow seemed to be the key decider – money flowed into a single practice operating bank account then out of it to those sole trader doctors who work at the practice. i.e. The gross fees generated were paid into the practice’s operating account and the practitioner was paid their net remuneration directly from that operating account.
Importantly in the context of this case, in accounting for this flow, the gross fees generated were recorded as practice income, and the payments to the practitioners as an expense. This flow constituted a “relevant contract” for payroll tax purposes.
How should fund/payments flow?
Gross patient fees are collected by the practice on behalf of the practitioners and held in trust. From these funds, the practitioner’s net income is paid directly to the practitioner and the service fee is paid to the practice.
While the practice will deposit patient fees into a trust account it manages, it is done this way out of administrative convenience and importantly, the practice should never have ultimate ownership of those patient fees. A reconciliation at regular, pre-determined intervals (weekly/fortnightly/monthly) should be performed which disburses the patient fees to the relevant doctor while the practice invoices and retains its service fee, as calculated by the service contract with the doctor.
In accounting for this flow, the practice income is limited to the Service Fees charged for the services rendered to the practitioner. There is no expense recorded for payments to the practitioner.
In addition to the impact this accounting process may have on payroll tax obligations, it also has implications for income tax and GST, therefore it is important that the processes are correctly established and followed.
What it means for you:
Owners of medical practices are now more open to a large retrospective payroll tax bill where their doctor payment processes may appear to take on the form of a relevant contract (relevant to those doctors who have always been thought of as “tenants” or “contractors”, not employees)
It is important that practice agreements with doctors accurately reflect an arrangement whereby the practice is providing a service to those doctors to enable them to practice their profession, and not result in a quasi-employee arrangement.
Accounting for receipt of funds and payments to practitioners needs to be consistent with the agreement, and the practice should be able to demonstrate that patient fees it may collect on behalf of its doctors are not treated as general practice revenue.
The payroll tax laws are different in each state, however we understand all states have an interest in reviewing payroll tax and its application to medical practices.
While the outcome of this case is concerning, it is important to bear in mind that the High Court refused to hear the matter, and this decision is a less authoritative tribunal (not court) decision.
It is also important to remember there were some fundamental errors in the manner in which this practice was engaged with its practitioners and how it recorded payments in its books, which would have contributed to this decision.
A key takeaway from this case is to remove obligations on the doctor which may be deemed 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.
Our recommendation
It would be prudent for medical practices that have not recently reviewed their independent contractor arrangements to undertake a thorough review 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
In addition, as we expect Payroll Tax audits to continue to occur, potentially more frequently in response to this matter, it would be prudent for practice owners to review any tax audit insurance cover they hold. Importantly, they should ensure any tax audit insurance provides cover for state taxes such as Payroll Tax. We are aware of some tax audit insurance policies which 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 accountant or legal advisor if you have any concerns about the contractual arrangement that you have in place for the engagement of medical practitioners.
Interested to know how this applies to your practice specifically? You can contact us here:
who is sarah bartholomeusz?
Sarah is the Founder of You Legal. She and our network of lawyers bring their experience and training from leading national and international law firms and top in-house teams.
Who is Matthew Holden?
After qualifying as an accountant in 2000, Matthew spent some time in commerce and other Accounting firms before joining Brentnalls in 2005. He was made a Partner in 2012.
Matthew is a thinker, and constantly challenges himself and others who work with him to look at things differently. You will never hear Matthew or any of his team say that the reason for doing something is because it has always been done that way. Challenging the status quo has earned Matthew a reputation with his clients for providing innovative and practical strategies to overcome traditional business problems and achieve their goals.
Matthew enjoys working with clients who are enthusiastic about what they do. As a business owner himself, Matthew understands and enjoys the challenges and success his clients encounter in their pursuit of growth, profit, wealth, security and above all, fulfilment from their business.