Payroll tax obligations of medical and healthcare providers

Do you operate or manage a medical or healthcare clinic? Does the clinic engage medical practitioners and professional (such as GPs, dentists)?

If so, the payroll tax authorities around Australia will be looking at you (if not already).

What do you need to do?

Consider both your legal agreement with the medical professionals and what happens on a day-to-day basis with the clinic’s patients; how cash is collected and how it is applied to pay the clinic’s costs and the medical professional.

Consult a legal adviser to confirm your payroll tax obligations (if any) on the payments you make to the medical 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 medical, dental, and optometry clinics, and the manner in which the clinics have structured their arrangements regarding medical professionals at that clinic. In many cases, medical practitioners are engaged by a service entity (or medical centre operator) as contractors to work in these clinics. The Revenue Offices have sought to apply payroll tax to the payments made by the centre or clinic to the medical practitioners.

The recent VCAT decision in The Optical Superstore Pty Ltd & Ors v Commissioner of State [2018] VCAT 169 (Optical Superstore) is an example of that payroll tax focus.

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

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

  • 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 its customers to the optometrists.

The SRO contended that the payments to the optometrists constituted 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. This meant that, in the SRO’s view, the payments to the optometrists were deemed to be wages and subject to payroll tax.

The Tribunal found that the agreements between the optometrists and the Applicant were ‘relevant contracts’ for payroll tax purposes (meaning that payments under these agreements could attract payroll tax. However, in this particular case, the payments made by the Applicant to the optometrists were not wages because the store was simply returning the fees to the optometrists, who were rightfully entitled to that income under the trust arrangement that was in place between the store and the optometrists.

The SRO has appealed this decision, which is scheduled to be heard in September 2018.

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.

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 regarding the management of the practice. For example, in a typical case where the clinic is entitled to a ‘service fee’ of, say, 35% for operating and managing the practice, the Revenue Office may take issue with a medical centre recognising 100% of the consultation fees paid by patients as its own income in its financial records (with a separate expense item for the amounts returnable to the medical professional), even though the service agreement makes clear that the fees are to be held on trust for the medical professional.

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 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 the medical profession, 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.


Anthony Bradica

Anthony specialises in taxation planning and structuring for corporate clients, including advising on capital raisings and M&A.

Jim Koutsokostas

Jim is a experienced lawyer and Chartered Tax Advisor, providing expert advice on corporate and trust tax matters.

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