The recent NSW Payroll Tax case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, has raised concern amongst medical practices throughout Australia regarding any impacts it may have for state payroll tax.
This case is a tribunal case and the decision does not hold the same authority as a court decision. However, it is of concern that the High Court has refused to hear the matter.
Even though this is a NSW payroll tax case, we believe that the Office of State Revenue in QLD, as well as other states, will be looking at it.
Thomas and Naaz operated bulk billing medical centres in NSW.
- Doctors were engaged with these medical centres under written service agreements, that provided for a 30% service fee (plus GST) for room rental, shared administration and medical support.
- The medical centres collected Medicare Benefits from the patients on behalf of the doctors and (ignoring GST), remitted 70% to the doctors and retained the remaining 30% as service fees.
Revenue NSW held that these doctors were contractors engaged under “relevant contracts” and the payments to the doctors were taxable wages for payroll tax purposes.
The key issue of the case was the flow of funds between the practice and the doctors. All patient fees were banked into one account and then 70% was paid to the doctors with the balance paid to the practice. It would indeed be difficult to imagine how a practice could provide services to independent GPs operating any other way. Although not widely discussed in the judgment, the practice was reporting all patient fees as income in its Financial Statements and Income Tax Returns and the payments to the doctors were reported as Contractor Expenses.
The true nature of a Service Agreement (sometimes referred to as a Serviced Office Agreement) is to ensure patient fees are banked into a clearing account and this account is separate from the practice’s general operating bank account. Service Fees (including GST) should be paid from the clearing account to the practice’s general operating account. The practice should only report the service fees as income and should not report the doctors’ payments as expenses of the practice. The only time patient fees would be reported as income of the practice is where the practice has genuine employee doctors.
The other relevant issue in the case was the nature of the agreements between the doctors and the practice, and very specific provisions including –
- References to shifts, specified hours of work and rosters;
- Leave policies and the requirement to apply for leave;
- Doctors were required to promote the business of the medical centre;
- Restraint of trade restrictions once leaving the practice; and
- Ownership of patient records.
How the doctors are referred to on the practice’s website could potentially also trigger a review.
We recommend that the Service Agreements and work practices are regularly reviewed to ensure that nothing in the Agreements or on the practice’s website would result in an assertion by the QLD Commissioner for Payroll Tax that the doctors are deemed to be Contractors retained under relevant contracts or employees.
For More Information
Should you require any further information on your current practices and whether the Service Agreements you are using may classified as relevant contracts for payroll tax purposes, please contact us.