When Payroll Tax Applies, Should ‘Contractors’ Be Paid Super?
As a medical practice owner, understanding your various tax responsibilities and the employment entitlement obligations that flow from running a practice can be challenging. A big question that has been asked of us recently is regarding payroll tax and superannuation contributions for contractors, which has led to this article to help guide you. Australia is a federation, which means there are some laws and regulations that apply at the federal level for all Australians, and states and territories have laws and regulations that apply as well. So, while payroll tax is administered by state revenue authorities, superannuation obligations are under federal legislation overseen by the Australian Taxation Office (ATO). This means that a determination that your practice is liable for payroll tax does not automatically imply that you will be responsible for paying other entitlements, such as superannuation or long service leave. Let’s do a deep dive into this and explain why in more detail.
There is a common misconception that when a doctor (or health professional) works as a contractor, the medical practice is exempt from making superannuation contributions. Whilst this might be so in some cases, there are certain circumstances where, although an individual may be a contractor, the entity engaging the contractor could still be obligated to make superannuation contributions to the professional’s superannuation fund. As such, this article will explore the specific tests and criteria set at the state and federal levels, providing clarity on how to comply with both payroll tax and superannuation obligations. Understanding these complexities is essential for practice owners to avoid legal complications and financial penalties.
Understanding the Distinct Tests
Payroll tax is governed by an entirely different legislative and regulatory regime to superannuation. Whilst some of the same factors may be relevant to determining whether payroll tax or superannuation is payable, the tests are different, and hence a determination that payroll tax is payable does not necessarily mean superannuation will be too, and vice versa.
Payroll Tax: The ‘Relevant Contract’ Test
Generally, payroll tax is payable if there is a ‘relevant contract’. As payroll tax is a power of the States, each of Australia’s State Revenue Offices has issued different rulings as to how the ‘relevant contract’ provisions apply to medical practices that contract with medical, dental, and other health practitioners or their entities, and different eligibility criteria for exemptions and cut-off dates for amnesties.
These rulings contemplated the effect of decisions such as Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, which also considered the ‘relevant contract’ provisions. The interpretation in these Rulings of the relevant contract provisions makes it increasingly likely that a practice’s arrangements will mean that payroll tax will be payable on the payments made to doctors or health professionals (not just to the practice’s employees).
Factors such as how the practice is holding out the practitioner to the public (e.g., displaying them on their website as a ‘team member’) may make it more likely for the relevant contract provisions to apply unless an exemption applies. Similarly, an arrangement wherein the practice exerts a lot of control over the doctor’s work may suggest that they are engaging the practitioner to serve patients on its behalf, increasing the likelihood that it is a relevant contract’. Whilst the flow of money was previously a factor in ascertaining whether a relevant contract existed, the rulings suggest this is not as determinative as it was once thought to be.
The interpretation of the relevant contract provisions is just one factor - the nature and extent of a practice’s payroll tax liability will also be affected by the amnesties and audit pauses that have been announced in some states, as well as whether the practitioners are bulk-billing.
Superannuation: The extended definition of employee
As discussed above, the fact that a doctor is a contractor does not mean that the practice is not required to make superannuation contributions because there is an ‘extended’ employee test under superannuation legislation. This test, outlined in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGA Act), essentially provides that superannuation contributions are necessary when a person works “under a contract that is wholly or principally for the labour of the person”.
The High Court of Australia’s Stance
The High Court in ZG Operations v Jamsek [2022] HCA 2 (Jamsek) provided guidance and clarity on how section 12(3) is to be interpreted to determine whether a worker is an employee for superannuation purposes. It confirmed that the ‘employee’ must be an ‘identified natural person who is a party to the contract in their individual capacity’. In addition, to be considered an employee for superannuation purposes, the worker must not be paid to achieve a particular result (i.e. to complete a particular task). Where there is scope to work for other parties and to delegate, then this is unlikely to lead to a determination that the worker is an employee for superannuation purposes.
It is important to remember, however, that any determination at law will turn on the facts and specific circumstances of each arrangement. Certain factors will make it more likely for a contractor to be deemed an employee for super purposes, such as if they are paid for the number of hours worked or an inability to delegate or assign work freely. It will require a broad assessment, looking at the degree of control, independence, and the overall nature of the working relationship.
Jamsek also outlined that the ‘totality of the relationship’ is the legal rights and obligations derived from the contract between the parties. Whilst contracts are generally written, they can also be oral, or can be modified or implied by the worker’s conduct. Therefore, the mere labelling of the worker as a contractor in the contract will not determine how it is characterised by law.
For further detail on the Jamsek ruling and its implications, read our earlier article here: Do I need to pay superannuation to contracted doctors? Clarification after the Jamsek case
Key Takeaways for Medical Practice Owners
While a contractor may meet the criteria for being relevant for payroll tax purposes at a state level, it doesn't automatically imply that you have an obligation to pay superannuation contributions to practitioners. Given different tests will be applied, each obligation will need to be independently considered and assessed. The ATO has a superannuation guarantee eligibility decision tool that medical practices can use as a starting point to help work out whether the contractor doctor may be an employee for super purposes. You can find this here.
This is an area of law that is quite complex and evolving. Therefore, medical practice owners are strongly encouraged to:
Review and update agreements with doctors and health practitioners to ensure they clearly define and accurately reflect the nature of the relationship and the terms of engagement.
Consult with legal and financial professionals to understand and navigate the complexities surrounding practitioner classification and ensure compliance with your specific payroll tax and superannuation obligations.
By seeking professional advice and reviewing and updating their agreements, medical practices can avoid potential liabilities and ensure they effectively meet their legal responsibilities.
You Legal can assist in reviewing your current Services Agreements and provide advice on suggested updates. Alternatively, we have fast-track solutions for Practitioner Services Agreements available to purchase here.
For specific advice tailored to your medical practice, please do not hesitate to contact us here.