Payroll tax for medical and other healthcare practices: clarity at last, what do you need to do?

By Anthony Bradica, Jim Koutsokostas, Todd Bromwich and Bradley White

The State Revenue Office Victoria and Revenue NSW (Revenue Authorities) have now confirmed, in the recently issued Revenue Ruling PTA-041 (Ruling), that payroll tax may apply to payments made by medical practices to their practitioners. This will be the case where the agreement between the practitioner and clinic can be properly characterised as a ‘relevant contract’.

What is a ‘medical centre’ is cast broadly by the Ruling, and refers to:

‘an entity that conducts a medical centre business (referred to as a ‘medical centre’), including dental clinics, physiotherapy practices, radiology centres and similar healthcare providers who contract with medical, dental and other health practitioners or their entities (‘practitioners’) to provide patients with access to the services of practitioners.’

For the purposes of the Ruling, medical centres include GP clinics and other healthcare centres, including optometrists, dental and allied health practices.

Overview of relevant legislation

Ordinarily, under the Payroll Tax Act 2007 (Act),^[1] payroll tax is a tax levied on wages paid to employees once the total amount of taxable wages exceeds a minimum threshold. However, where there is a contract for the performance of work, such as a service agreement or contracting agreement, a ‘relevant contract’ can exist that deems the parties to be employee and employer, causing the amounts paid or payable under the contract to be subject to payroll tax (unless an exemption applies).

The Revenue Authorities have concluded that a relevant contract will often exist between medical centres (and other allied health clinics) and each practitioner operating from the clinic following from the recent decisions in Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd [2019] VSCA 197 and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (see our previous articles on these decisions).

The Ruling has adopted the analysis in these cases to conclude that if a medical centre engages a practitioner to practise from its premises, or holds out to the public that it provides patients with access to the medical services of a practitioner, it is likely that a relevant contract exists.

While the rulings issued by Revenue NSW and the State Revenue Office Victoria apply to the payroll tax legislation in New South Wales and Victoria respectively, the payroll tax legislation in each of the States and Territories is largely the same – harmonised – and so the substance of these rulings in the context of medical centres is the same. The Rulings are also substantively the same as the earlier rulings issued by the revenue authorities in Queensland (PTAQ000.6.1) and South Australia (PTA SA003) respectively.

Key points from the Ruling

There has been much debate and many arguments raised by the medical and other healthcare professions as to why the payroll tax law should not operate to the arrangements between a practitioner and the medical centre in which they see patients. However, now that the recent cases have run their course, the Ruling is considered to restate the current position of the law. In particular, the key points from the Ruling are as follows.

• It reflects the ‘longstanding position’ of the Revenue Authorities, meaning that the concepts it outlines apply to arrangements and contracts already in existence before the Ruling was published.
• It refers to ‘medical centre businesses’ generally, which includes dental clinics, physiotherapy practices, radiology centres and similar healthcare providers who contract with medical, dental and other healthcare practitioners (or their entities) to provide patients with access to the services of the practitioners.
• If the contract provides, either expressly or by implication, that a practitioner is engaged to supply work-related services to the medical centre by serving patients for or on behalf of the medical centre, the contract is a ‘relevant contract’.
• Only a suitably qualified and, in some cases, registered practitioner can provide the relevant medical services to patients. Although the recent cases have held that, provided the clinic is deriving some economic or financial benefit from the provision of the medical services from their premises, the practitioner can be considered to be performing work ‘for’ the centre.
• Payroll tax will still apply even if the amounts paid to practitioners represent the remittance of patient fees that are collected by the centre on the practitioners’ behalf and held on trust for them, with a deduction for the centre’s service fees. In Optical Superstore, it was determined that the word ‘paid’ in the legislation was broad enough to include the return of funds held on trust.
• Where a service entity is used to pay the practitioners amounts owed (as opposed to payments coming directly from the medical centre structure), the third-party payment provisions of the Act can apply to assess the medical practice for payroll tax on those payments.
• A pure ‘tenancy contract’ will not be considered a relevant contract. Under these types of arrangements, the practitioners merely ‘rent’ the premises from the property owner and supply their own administrative and nursing staff. These arrangements escape the relevant contract ‘net’ as the practitioners cannot be said to be providing a service to the owner of the relevant premises. However, as with all contracts, it will be the substance and effect of the contract that is determinative, not the terms used. So merely labelling an arrangement as a rental agreement or using terms like landlord and tenant will not, of itself, avoid payroll tax.

Our thoughts on the Ruling

The Ruling isn’t groundbreaking. As the Ruling itself says, it reflects the ‘longstanding’ views of the Revenue Authorities as to how the relevant contractual provisions apply. It restates the positions first discussed in both Thomas and Naaz and Optical Superstore. Before the Ruling, there was some uncertainty as to how the Revenue Authorities would seek to apply these decisions. However, we had already started to see payroll tax investigations being launched into medical practice clients. In fact, we suspect that if it had not been for COVID-19, we would have seen much more activity from the Revenue Authorities as a result of these decisions.

It is interesting that no amnesty was announced alongside the Ruling, unlike the amnesties announced by the Queensland Revenue Office and Revenue SA. If such an announcement was intended, it would make sense that it would be made at the same time as the Ruling being published. This leads us to believe that no amnesty will be forthcoming. This is unfortunate given that prior to the Optical Superstore decision in 2019, medical practice and practitioner arrangements were historically thought to be free from payroll tax.

It is important to note that the Ruling does not automatically apply to all arrangements involving a medical centre business and its practitioners. Not every medical practice and practitioner arrangement will be considered a relevant contract (and subject to payroll tax). While the Ruling does give some examples of when payroll tax should not apply, these are generally based on straightforward fact patterns and don’t stray far from what has been stated by the courts in Thomas and Naaz and Optical Superstore. The principles set out in the Ruling (and the Act) need to be applied on a case-by-case basis as it may be that your circumstances can be distinguished from the status quo outlined in the Ruling.

Where arrangements are determined to be relevant contracts, it is equally important to consider on a case-by-case basis whether any exemptions are available to reduce or eliminate any resulting payroll tax liability.

What next?

First, for those who are affected by this announcement, don’t panic. In no particular order, we think that medical centre owners and practitioners should do the following.

1. Have your current agreements and arrangements reviewed to assess whether there is any basis to avoid the characterisation of the arrangement as evidencing a relevant contract and whether an exemption applies.
2. Maintain contemporaneous written records to substantiate the position you take on your payroll tax compliance, particularly with respect to the application of an exemption.
3. Update your agreements to ensure that they correctly reflect the commercial agreement between the parties and don’t inadvertently cause other risks to arise. We have reviewed a number of agreements that may give rise to the creation of an employment relationship with the practitioner. Straightforward amendments can be made to avoid that conclusion and the risk of PAYG, superannuation and the need to provide employee entitlements to practitioners (where it is not otherwise intended between the parties). This is even more important now given the High Court of Australia’s decision in ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
4. For medical practitioners based in Queensland and South Australia, serious consideration should be given to registering for the payroll tax amnesty in those States. Clinics based in Queensland need to have registered their interest before the 29 September 2023 deadline (as we outline in our earlier article), and those based in South Australia by 30 September 2023. There is no amnesty contained in the Ruling and, to date, none has been announced for New South Wales or Victoria.
5. Consideration may need to be given as to whether to make a voluntary disclosure to the relevant revenue authority. It should be expected that the revenue authorities will eventually contact all medical centres and request details of the arrangements with practitioners to confirm whether or not payroll tax is payable. The making of a voluntary disclosure will potentially reduce the quantum of penalties that could be applied if payroll tax has not been paid for a number of years and, depending on the size of the practice, may be the difference between the survival of a practice or its demise.

[1] Payroll Tax Act 2007 (Vic) and Payroll tax Act 2007 (NSW).