Is your medical practice compliant?

The following payroll tax cases in Victoria and New South Wales are sparking considerable interest in medical and other health practices and the impact and serious payroll tax ramifications the decisions could have on clinics:

  • The Optical Superstore Pty Ltd as Trustee for OS Management S Trust & Ors v Commissioner of State Revenue [2020] HCASL 16
  • Thomas and Naaz Pty Ltd v Chief Commission of State Revenue [2021] NSWCATAD 259


  • Court decisions may determine whether a medical practice is payroll tax compliant
  • These decisions may put clinics at risk
  • BBB Partners Group Tax Audit Insurance is imperative
  • Consideration must be given to the terms of engagement
  • Contact your BBB adviser to ensure you are doing the right thing


Most medical practices are set up with the practice collecting patient fees on behalf of the practitioner, charging the practitioner a percentage service fee, offsetting that fee against the collected income, and remitting the net sum to the practitioner.

As a general rule, the practitioner is running a completely independent business and uses the clinic’s rooms and staff to run their business.

Of significance in both these cases, the patient fees collected by the clinic and then paid to the Practitioners were deemed to be ‘contractor payments’, and as such the clinic was liable for payroll tax on these payments. In the case of Thomas and Naaz, the clinic was liable for over $700,000 in payroll tax covering an approximate period of five years.

These recent decisions potentially put clinics at risk, and are a warning for medical and health practices to review the way contracts and payments are structured to practitioners who operate from their practices.

State Revenue Focus

We expect the State Revenue Authorities will be focusing their audit activities on medical and health practices to ascertain whether engagements with practitioners are payroll tax compliant. The decisions highlight that the terms of the service agreement you have in place with the practitioner will be carefully analysed to determine whether these practitioners are deemed a ‘relevant contractor’ for payroll tax purposes.

Though fact-dependent on individual cases, careful consideration should be given to:

  • the representation of Practitioners in the clinic;
  • the terms of engagement and service fee agreements – with the inclusion or exclusion of items such as guarantee payments, delegation, leave, restraint of trade; and
  • the flow of funds from patient to practitioner

Review your current arrangements

We believe there are steps that can be taken for clinics to limit and reduce their risk.  Before finalising our advice, we are waiting on the NSW State Revenue Office Ruling expected to be issued in the coming weeks.

Thomas and Naaz was a NSW case and Optical Superstore was Victorian, and there are many similarities in the NSW/VIC payroll tax legislation. So we expect the Victorian courts and State Revenue Office (SRO) to take similar action.

In the Thomas and Naaz case, there were a number of clear issues that BBB Partners ensure do not occur in clinics we manage.  That being said, we still believe all clinics should use the opportunity to conduct a review of their current arrangements.

In addition, consideration should be given to how the individual practitioners report their income and service fee paid in their personal income tax returns. There is information that some practitioners are only reporting the net amount as contractor income. This does not reflect the true structure of the arrangement and demonstrates a lack of understanding by the practitioners and/or their advisors. If the clinic and individual practitioners are inconsistent with their reporting, it presents an opportunity for an SRO review and details to question in an audit.

What about Contractors?

Where practitioners are engaged as contractors, based on recent decisions, there is a risk that these practitionersare deemed to be ‘relevant contractors’ for payroll tax purposes. For amounts to be classified as taxable wages under the ‘relevant contract’ provisions, the payment must be ‘for or in relation to the performance of work’ under the contract.

Whether there is a ‘relevant contract’ in place depends upon the facts of the arrangement, and in particular, the nature of the benefit received by the principal in the context of their business.

Reduce your risk

There have been a number of other practice audits and reviews that haven’t made it to court, but we understand that the NSW payroll tax team is targeting easier cases with a 75% success rate.

Even for clinics that are compliant, there could be considerable costs involved with undertaking a payroll tax audit. Of concern is that some medical indemnity or practice insurances have updated their policies to remove the cover for Payroll Tax Audits, so this may also be worth reviewing. BBB Partners Group Tax Audit Insurance does still include cover for this.

In summary, we recommend that careful consideration be given to the terms of engagement for medical and health professionals to help ensure the agreements do not trigger unintended payroll tax risks.
Contractor vs Employee
While related to the above cases and issues, there have been two additional court cases that focused on the ‘contractor’ vs ‘employee’ definitions.
In keeping matters separate from above, this is directly focused on a contractor who is paid under an Australian Business Number (ABN).
For example, a dentist receives 40% of their billings and invoices the clinic for the 40% plus GST (as opposed to the gross fee and service fee model).
Normally an employee has tax withheld from payments, receives superannuation guarantee and leave entitlements, while an independent contractor uses an ABN, and has no superannuation or leave entitlements.
A common misconception is that if a person uses an ABN they are an independent contractor, however, this isn’t always the case. The actual relationship and agreement should be reviewed, as it is possible many contractors are actually employees and entitled to benefits from their employer.
These two cases have highlighted the importance of having clear service agreements in place that outline the arrangements and requirements of the parties involved.

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