Thinking | 16 September 2020

Medical and healthcare providers in the spotlight over payroll tax obligations

By Anthony Bradica, Alison Choy Flannigan, Rachel O’Donnell and Jim Koutsokostas

Medical and healthcare clinics that use service entities to engage clinicians must check their service entity arrangements to comply with payroll tax laws.

If your clinic engages clinicians such as medical practitioners and allied healthcare professionals – such as dentists, optometrists and physiotherapists – the payroll tax authorities around Australia will be looking at you (if not already).

Why now?

In March 2020, the High Court denied leave to appeal from the Victorian Court of Appeal decision in The Optical Superstore Pty Ltd & Ors v Commissioner of State [2019] VSCA 197. The outcome of the Optical Superstore case was to support the decision of the Victorian State Revenue Office (SRO) to impose payroll tax on the payments made by an optical retailer for services provided by optometrists engaged by the retailer as contractors.

While the arrangements could be considered unique to the case, the SRO and other revenue authorities around the country now consider that the case supports the position that payments of fees earned by healthcare practitioners from members of the public, paid for by the patients (and their health funds or Medicare) to the clinic and then paid by the clinic to the clinician in which they operate, attracts payroll tax.

With the onset of COVID-19, it appears that the SRO has held new review activity in abeyance, but recent signs indicate that the SRO (and other revenue offices around the country) are again active and focusing on healthcare clinics and their payroll tax obligations.

What do you need to do?

Consider both your legal agreement with the health professionals that work in your clinic and what happens on a day-to-day basis with the clinic’s patients. Take into account how cash is collected and how it is applied to pay the clinic’s costs and the healthcare professional.

Consult a legal adviser to confirm your payroll tax obligations (if any) on the payments you make to the healthcare professional.

The detail

The State Revenue Offices around Australia currently have medical and healthcare providers in the spotlight regarding their payroll tax obligations.

The revenue authorities are currently focusing on healthcare clinics and the manner in which the clinics have structured their arrangements regarding healthcare professionals at that clinic.

In many cases, healthcare practitioners are either:

(a) engaged by a service entity (or medical centre operator) as contractors to work in these clinics; or

(b) operating in their right of private practice and enter into a contract with the service entity for the service entity to provide administrative services (including billing services) for the medical practitioner.

The revenue offices have sought to apply payroll tax to the payments made by the centre or clinic to the healthcare practitioners.

The recent Optical Superstore case is an example of that focus.

In that case, Optical Superstore was the owner and operator of an optical clinic. The Victorian SRO raised amended assessments for payroll tax in respect of payments made by Optical Superstore to optometrists who provided services to the general public at Optical Superstore’s facilities.

The features of the arrangements in the Optical Superstore case will be familiar to medical and healthcare providers, in that Optical Superstore:

  • owned and managed an optical store;
  • collected income from optical sales and the provision of eye tests to customers; and
  • paid a portion of the income from customers to the optometrists.

The case was heard and appealed, ultimately to the High Court. The outcome of the case was that the payments to the optometrists by Optical Superstore were held to represent payment for work performed by the optometrists under the ‘contractor provisions’ of the payroll tax law, as the arrangements involved ‘relevant contracts’ in relation to the performance of work by the optometrists to the owner of the clinic.

It was likely an unhelpful fact that the work by the optometrists in each store facilitated the sales of optical products by Optical Superstore and so there was a nexus able to be found to support the argument that the optometrists were ‘working’ for Optical Superstore.

This meant that the payments to the optometrists were deemed to be wages and subject to payroll tax.

Key risks and issues

The SRO has been emboldened by the Optical Superstore case and is currently reviewing a number of arrangements involving medical and healthcare providers. A similar focus is also being applied by the revenue offices in New South Wales and Queensland.

In our view, the facts in Optical Superstore can be confined to the unique arrangements in that case. Unfortunately, there is no ‘safe harbour’ and each business needs to consider their own position.

Ultimately, the outcome will depend on a weighing up of the following matters:

  • The wording of any service agreement between the medical centre or clinic and the medical professional. For example, is the arrangement a trust arrangement under which the owner of the clinic is merely collecting income on behalf of the medical professional or is the practitioner actually working for the clinic?
  • What happens on a day-to-day basis with the management of the practice?
    For example, the accounting for the patient fees and the service fees will be important, as will the banking arrangements for the fees.

To the extent that the arrangements do constitute relevant contracts in relation to the provision of work, it is possible that an exemption may apply. However, these exemptions can be very fact specific and will often require further fact finding.

It is not hard to imagine the revenue offices soon targeting other industries and professions where service entity arrangements, similar to healthcare, are in place, e.g. barristers, accountants and engineering businesses. Ultimately, the strength of the case will depend on the written agreements in place and how the practice is managed on a day-to-day basis.

If you have any queries in relation to the above or how it may impact you, please do not hesitate to contact us.

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