Payroll Tax Rulings for Medical Practices Released - No Amnesty in NSW and Victoria

On Friday 11 August 2023, the State Revenue authorities of New South Wales and Victoria released their long awaited Payroll Tax Rulings on the application of the harmonised ‘contractor’ provisions for medical centres - PTA 041 (NSW) and PTA-041(Vic) respectively.

Queensland (PTAQ000.6.1) and South Australia (PTSA03) have issued similar rulings with one key difference – their State Revenue authorities have announced a payroll tax amnesty. Eligible medical practices will not be required to pay payroll tax in:

• Queensland up to 30 June 2025 (limited to payments to contracted general practitioners (GPs)) – provided the practice registers by 29 September 2023

• South Australia (limited to payments to contracted GPs) between 1 July 2018 and 30 June 2024 – provided the practice registers by 30 September 2023.

Revenue NSW and the Victorian State Revenue Office (Vic SRO) have solidified their payroll tax position for medical and allied healthcare practices (Medical Practices) following the recent decisions of:

1. Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Optical Superstore) with the High Court refusing the taxpayer's application for special leave to appeal: see 2020 WTB 6 [143]

2. Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 (Thomas and Naaz).

Payments made by the Medical Practices to its practitioners were ‘relevant contracts’ under the Payroll Tax Act (NSW) and the Payroll Tax Act 2007 (Vic) (Acts). Therefore, the payments were deemed taxable wages under the Acts and subject to payroll tax (See our previous article on these cases).

Both Revenue NSW and Vic SRO have not announced a payroll tax amnesty for Medical Practices.

Payroll tax for Medical Practices - Where are we at?

It is a misconception that Medical Practices are newly targeted. The harmonised payroll tax contractor provisions are broad and have been in place since 2009. 

Prior to Optical Superstore and Thomas and Naaz, Medical Practices with typical service fee arrangements, in which the practice collected fees from patients and subtracted a service fee to cover administrative costs, were regarded as outside the payroll tax regime. In recent years, State Revenue authorities have successfully challenged this position in the Courts.

After the Victorian decision of Optical Superstore and NSW case of Thomas and Naaz first decided in 2021 in favour of the Commissioner, both Vic SRO and Revenue NSW suggested that the contractor provisions might apply to Medical Practices. 

Now that the NSW Court of Appeal dismissed the Thomas and Naaz appeal of the NCAT Appeal Panel decision in March 2023, it is not surprising that payroll tax audits, and assessments may be issued for the last 5 years to Medical Practices operating a typical service fee arrangement.

What Medical Practice arrangements are caught?

The NSW and Victoria rulings (which are almost identical) provide that a typical contract between a Medical Practice and a practitioner is a ‘relevant contract’ where: 

1. the practitioner carries on a business of providing medical-related services to patients

2. in the course of conducting its business, the Medical Practice:

1. 1. provides members of the public with access to medical-related services

   2. engages a practitioner to supply services to the Medical Practice by serving patients on its behalf.

This includes arrangements where a Medical Practice engages a practitioner to practice from its centre or holds out to the public that it provides access to the practitioner’s services. 

For payroll tax to apply, the Medical Practice must make a payment to the practitioner. The rulings state that it does not matter if the practitioners are paid using money collected by the Medical Practice on their behalf (e.g. patient fees or Medicare payments). 

Money or payments from third parties may also be taken to be taxable wages under s 46 of the Acts (deeming provisions). The rulings do not address whether the deeming provisions apply if the practitioner paid the Medical Practice. In Thomas and Naaz at [67], three doctors processed their own claims for Medicare Benefits and paid a percentage of their fees to the Medical Practice. No payroll tax liability arose, since the deeming provisions did not operate.

Whilst the rulings list key features of a relevant contract, each contract must be considered on a case-by-case basis.

What medical practice arrangements might not be caught?

Some arrangements may also fall outside the scope of the contractor provisions. This includes a pure ‘tenancy’ contract, where a landlord leases a space to a practitioner who conducts their own independent medical practice.

Exemptions

The recent cases have brought to light that a typical medical practice arrangement operating in New South Wales and Victoria is likely captured within the existing payroll tax net, unless a payroll tax exemption applies.

The 3 most relevant exemptions to medical practice arrangements are:

1. The practitioner provides services to the public generally.

The rulings state:

1. 1. the practitioner must provide services of the same kind to other Medical Practices

   2. the provision of services to patients for or on behalf of a single Medical Practice may not satisfy the exemption. In Thomas and Naaz this argument was unsuccessful at first instance largely due to the taxpayer’s lack of evidence.

2. The practitioner performs work for no more than 90 days in a financial year

3. The services are performed by two or more persons. 

The rulings set out detailed examples of the above exemptions. However, in practice eligibility for these exemptions will depend on the actions of the practitioner and their arrangement with the Medical Practice.

The Takeaway

In most jurisdictions, State Revenue authorities have up to 5 years to issue an assessment or reassessment of a tax liability. Practice owners cannot afford to overlook the genuine possibility of State Revenue authorities imposing payroll tax on the payments that their Medical Practices make to practitioners.

Failing to engage early during investigations with State Revenue authorities (voluntary disclosure, reassessment or objection) could result in higher interest and penalties in addition to retrospective payroll tax. It is prudent for Medical Practices to consider the following:

1. Review existing agreements – Medical Practices should review their contracts with each practitioner having regard to:

1. 1. existing arrangements (covering the last 5 years for any unexpected payroll tax liabilities)

   2. future arrangements and obligations for payroll tax (see exemptions and considerations below).

The agreements in Thomas and Naaz contained a high level of control exercised by the Medical Practice over the practitioners. It is more difficult for State Revenue authorities to assert a relevant contract exists, where the practitioners carry on their own business without any control or influence by the Medical Practice.

2. Eligibility for exemptions – exemptions may be available where existing agreements are relevant contracts. Exemptions apply on a practitioner-by-practitioner basis and must be supported by relevant evidence.

3. Restructuring considerations – Medical Practices should review their current structures for payroll tax obligations. This involves considering the administrative practices of the relevant State Revenue authorities regarding any payments made to a practitioner.   

There may be reasons for Medical Practices to restructure depending on their arrangements with the practitioners. However, advisers must exercise caution by considering anti avoidance provisions and promoter penalties.

Please contact us if you require assistance to review your arrangements.

Authors: Lisa To & Hayley Constantine