OMG, I Have Received An Unexpected Payroll Tax Bill For My Practice – What The?!

There has recently been an update to the law in this area, please see this article for more information.

Over the past few years, the structuring of medical and allied health clinics has come under the tax spotlight, and there have been several notable cases where the business structures of these businesses have come under close scrutiny. Of particular interest have been arrangements where payments that are made to practitioners are paid under different methods, such as tenancy arrangements, with payments made therefore not subject to payroll tax.

Cases such as The Optical Superstore Pty Ltd & Ors v Commissioner of State (Review and Regulation) and Winday International Pty Ltd v Chief Commissioner of State Revenue both highlight the importance of correct, sound and solid structuring, to ensure that your practice remains on the right side of the payroll tax rules.

What is Payroll Tax & Why Is Structuring Important?

Payroll tax, as most are aware, is a state tax that is assessed on the wages paid or payable to employees by an employer. In Australia, the rates and thresholds that apply to Payroll Tax vary between each State and/or Territory.

In terms of the day to day operations of a medical practice, the practice is required to be registered, to lodge returns, and to make payment of liabilities at an agreed frequency (monthly, quarterly, or annually) to the respective revenue office in the Australian state and/or territory in which the wage payment is deemed liable.

Many General Practices operate where the GPs have their own patients, with no employment agreement in place with the practice, with the GPs operating under their own ABNs, with the practice having the role of collecting all of the payments made to the GP on the GP’s behalf, with the practice retaining a percentage of fees for the provision of this service.

This form of structuring can potentially create ‘grey areas’ in terms of the practice making the required payroll tax payments to the relevant state revenue office, with the grey area being whether or not payments made under these alternate arrangements are in fact considered payments related to work or performance and therefore subject to Payroll Tax or whether they are something else entirely and not subject to Payroll Tax requirements.

In the absence of sound structuring advice, your practice risks having an incorrect structure, which could leave the practice liable for Payroll Tax payments in the future.

What Happens When You Don’t Structure Correctly?

The recent case, The Optical Superstore Pty Ltd & Ors v Commissioner of State (Review and Regulation) is a great example of why correct practice structure is so important. This particular case spanned several years and has been through multiple courts before finally being resolved in the Court of Appeal.

The case concerned whether or not payments made to optometrists, paid as distributions from a trust account, who occupied consulting rooms under tenancy agreements, where they performed eye tests for members of the public, was subject to Payroll Tax as wages. The Commissioner believed that these distributions were wages and therefore issued payroll tax assessments to Optical Superstore, whereas the Optical Superstore believed that these funds were a return of the optometrist’s money, and were not distributed for the performance of work, and should therefore not be subject to payroll tax.

In both the Victorian Civil and Administrative Tribunal (VCAT) and the Supreme Court of Victoria the Optical Superstore was successful, with both the tribunal and the court agreeing that payroll tax was not triggered on such distributions or reimbursements. Unfortunately for the Optical Superstore, that was not the end of the matter, with the decision overturned in the Supreme Court of Victoria, Court of Appeal. The Full Court unanimously held that the payments made, were in fact related to the performance of work by the opt optometrists, who provided services to The Optical Superstore and patients under relevant contracts. Therefore finding against The Optical Superstore and in favour of the Commissioner.

An appeal of this decision with leave sought to the High Court was attempted, however, the High Court stated that the decision of the Victorian Court of Appeal was not attended by sufficient doubt to warrant the granting of special leave to appeal.

What About Other States?

Whilst this case was in Victoria there have been other decisions similar to the decision made in The Optical Superstore case. In NSW for example, Winday International Pty Ltd v Chief Commissioner of State Revenue, which concerned radiologists who paid a fee to the practice in an alternate agreement, were in fact employees of the practice and were, therefore, assessable for Payroll Tax.

As stated above, currently Payroll Tax is a state-based tax, however, the states are attempting to work towards a nationwide system, that is consistent, which again further demonstrates just how important these decisions are nationally, and how important ensuring your practice has the best structure going forward really is.

Where To From Here?

Currently, there is no “right answer” in terms of business structure, as even the State Revenue Offices in various states are unable to provide clear and definite answers. However, the easiest way to avoid any potential issues in terms of Payroll Tax going forward is to seek professional advice, from your financial planner or accountant to establish a structure that will be the most beneficial for your practice.

Now is the time, in light of these recent decisions to undertake a comprehensive review of your practices documents and set in place a “Will” for your business. This will ensure the longevity of your practice and minimise the risk of any potential issues.

WHAT'S NEXT?

The You Legal team works with medical practices of all sizes, across Australia to review and mitigate risk. If you think you may need to review your arrangements with your doctors, book a time to discuss your practice with one of our specialists. You can do that here.