Health Alert - Payroll tax concerns for medical and healthcare providers

Payroll tax risk remains in the spotlight for private medical and healthcare providers following a series of recent cases.

A common misconception is that payroll tax is only a tax on salaries and wages paid to employees. In fact, it is also charged on payments made “for or in relation to the performance of work” under so-called “relevant contracts” in all jurisdictions except Western Australia. The rates of tax vary between states, but the standard rate is currently 5.45% in New South Wales and 4.85% in Victoria.

The application of this deeming provision is demonstrated in the outcomes of the Thomas and Naaz¹ and Optical Superstore² cases, explained further below. These remain the leading payroll tax cases relating to the common use of contractor and service arrangements with medical and healthcare practitioners in the private healthcare industry. They also highlight potential areas of audit activity by state and territory revenue offices, particularly for Victorian and New South Wales providers.

It is critical for private medical and healthcare providers to understand how these rules could apply to contractual and commercial arrangements with medical and health practitioners who operate from their clinics, and take appropriate steps to address the risks.

Optical Superstore

The Optical Superstore case related to payments made by the Optical Superstore optometry clinic to optometrists who provided optometry services to patients on their own account (and not as employees) from the clinic. Patient fees were collected by the “landlord” clinic “on trust” for the “tenant” optometrist. They were then paid to the optometrist’s nominated bank account, after deduction of a service fee which was retained by the clinic.

The payments collected by the clinic on behalf of the optometrist (including from private health funds, Medicare and patients) attracted payroll tax when paid to the optometrist because they were considered to be paid “for or in relation to the performance of work” under a “relevant contract” within the meaning of the Victorian legislation.

Whilst this case was believed to have a particular set of facts that would limit its application, the subsequent decision in Thomas and Naaz tells us otherwise.

Thomas and Naaz

In Thomas and Naaz, the medical centre operator entered into agreements with doctors who provided medical services to patients of its centres. Patients were bulk billed for the doctor’s services. The centre operator was authorised to claim, collect and reconcile the benefits payable to the doctors for the services they rendered to patients. The centre would then pay 70% of claimed funds into the doctor’s nominated bank account, and retain 30% of claimed funds as fees for administrative services rendered by the centre.

The NSW Tribunal favoured the judgment in Optical Superstore and held that the service agreements between the medical centre and the doctors were relevant contracts within the meaning of the New South Wales legislation. The payments to the doctors were held to be for or in relation to the performance of work and deemed to be taxable wages. The Tribunal found that the centre could not operate its business without the services of the doctors, who were not only providing services to the patients but also to the centre.

The medical centre operator appealed the Tribunal’s decision, however the appeal was recently rejected on all grounds.

5 key takeaways for private medical and healthcare providers

1. The legal ground has been laid for investigations and audits of other medical and healthcare providers with similar arrangements by revenue authorities. It would be wrong to assume that questions would not be asked of your practice.
   
   
2. Whether escalated investigation and audit activity would be politically palatable for government in view of other challenges faced by medical and healthcare providers and patient access to essential healthcare services remains to be seen.
   
   
3. Organise a legal review of all contracts, services and payment arrangements with medical and healthcare professionals operating independently from your clinics.
   
   
4. Seek legal advice as to any applicable exemptions, particularly if any health professionals operating from your clinics also work in other locations, or if you receive notice of an investigation or audit.
   
   
5. If there is a liability, then a voluntary disclosure prior to any investigation or audit should mitigate the risk of substantial penalties being levied in addition to any tax payable.

For further information or assistance, please contact Michael Gorton AM, Rohan Harris, Jonathan Teh, Felicity Iredale or Mary-Anne Flores.

Endnotes

1. NCAT Appeal decision in the case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220, which rejected an appeal of the decision made in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259.
2. Victorian Court of Appeal’s decision in The Optical Superstore Pty Ltd & Ors v Commissioner of State [2019] VSCA 197.