A payroll tax pulse check: Does the flow of money even matter anymore?
Unless you have been living under a rock or are very new to medical practice, you have most likely heard a lot of information about payroll tax over the past 12 months. It’s a hot topic, and there are a lot of industry commentators who are busily commentating on the issues for medical practices on the topic. There is so much to read, watch and listen to on the subject that you, like many others, may be overwhelmed and confused.
Relevant Case Law
Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 (‘Thomas and Naaz’) is a case that is often talked about in regard to payroll tax and medical practices, and justifiably so. The NSW Court of Appeal rejected Thomas and Naaz’s application to appeal the initial decision, which exposed Thomas and Naaz Pty Ltd to an almost $800,000 retrospective payroll tax bill. This was following the initial 2022 rejection of a tribunal appeal.
Although the application for leave to appeal was dismissed, the decision still provided some useful guidance for the many medical practices in Australia navigating the increasingly complex payroll tax landscape.
What can you learn from Thomas and Naaz?
The main commentary around Thomas and Naaz is about the doctors that were captured by the ‘relevant contract’ provisions of the Payroll Tax Act 2007 (NSW) (the ‘Act’). This determination was grounds for the $800,000 retrospective payroll tax bill. However, an important aspect of the case, not as talked about, is that payments to three contractors did not attract payroll tax and were not even considered by the court.
So, why didn’t the payments to these contractors attract payroll tax?
Well, it had to do with how the money flowed in the practice.
The majority of the doctors in Dr. Thomas’s practice were in an arrangement wherein Thomas and Naaz (the service entity) made a payment to them. Thomas and Naaz received the payments from the patients and then would pay the doctors 70% of the payment (deducting the 30% service fee). This flow of money was a key reason for the tribunal establishing that the contracts between Thomas & Naaz and the doctors were relevant contract under the payroll tax law. In contrast, the other three contractors, who were allied health professionals, were in an arrangement that did not engage the payroll tax or ‘relevant contract’ provisions as there was no such ‘payment’ from the practice liable for payroll tax.
The flow of money arrangement for these contractors was structured differently. They were paid fully by the patient and then remitted 30% back to the practice (as a service fee). Despite having relatively the same terms as the other doctors in the practice, their payments were not captured by the ‘relevant contract’ or considered by the tax audit. As stated by the Court, it was ‘clear from the position of the three practitioners who processed their own claims for Medicare benefits, there is a ready mechanism’ which avoids the payroll tax that may otherwise result under Division 7 Part 2 of the Act.
What does this mean for your practice?
This case indicated that if a contractor doctor receives payment from patients directly instead of billing via the medical practice, the practice may not be liable for a payroll tax bill on those payments. However, notable sections of the Act were not considered by the Court. For example, section 46 of the Act can deem payments from a third party to a contractor as that which was made by the deemed employer (i.e. considered to be ‘paid’ by the medical practice to the doctor) and therefore could potentially be subject to payroll tax.
Then came the rulings...
The clarity given by Thomas and Naaz was taken away by some State and Territory Revenue Office rulings and stances. The Commissioners for State Revenue in New South Wales, South Australia, and Victoria have aligned their positions on the payment of payroll tax by issuing similar Rulings about health practices that engage health practitioners as independent contractors. These suggest that the flow of money does not hold much weight when it comes to determining payroll tax liability. Queensland issued a separate ruling however, which provides a comparatively clear path forward, whereas the other states have not followed suit.
Many states issued retrospective relief i.e. in the form of amnesties, and some states have provided prospective relief for medical practices that meet certain bulk billing threshold.
Our Recommendations
Although payroll tax laws are not identical across the States and Territories, the legislation in most states is largely harmonised. Therefore, this decision and the rulings continue to emphasise the need to review current arrangements with doctors regardless of which state you are in. It is essential that all medical practices review their current arrangements with doctors, including practice owners who are doctors. It is important to ensure that your contracts accurately reflect the full extent of the arrangement with the doctor and should be comprehensive and up to date.
However, we note that payroll tax may be payable even after this review. Whether it is payable will be a matter individual to each practice and state. Importantly, it is noted that the SRO, in an audit, would take into consideration the facts and circumstances of each individual arrangement. Therefore, we encourage owners of medical practices to contact their accountants and legal advisors if they have any concerns about their payroll tax liability.
Next Steps
Check out You Legal’s Fast Track Solution for ‘Legal Advice on Payroll Tax Rulings’ if you would like specific advice about the different options available to minimise your risks. Our lawyers will work with you to discuss your medical practice and existing arrangements, the implications of the Rulings for your practice, and provide legal advice on these risks.