Medical Clinic Payroll Tax Update

The appeal in the Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220 (Thomas and Naaz) payroll tax case has been dismissed, which is disappointing news for all Medical and Allied Health Clinics.

This means, for this case, the application of payroll tax on payments made to independent doctors remains. We are still waiting for further guidelines from the State Revenue Office and to learn whether the case can be appealed to a higher court.

To recap the facts of the case of Thomas and Naaz:

• They operated three Medical Clinics
• Collected patient fees on behalf of the Practitioners
• Charged the Practitioner a percentage service fee offsetting that fee against the collected income, remitting the net sum to the Practitioner
• There was a written agreement between the Medical Clinic and the Practitioner

The clinic was liable for over $700,000 in payroll tax covering an approximate period of five years.

In summary, it was found (due to the agreement) that the practitioner not only provided a service to the patient but also to the clinic. This meant that a payment from the clinic to the practitioner wasn’t only a transfer of their net share of patient fees, but payment under a relevant contract and as such caught under payroll tax.

Thomas and Naaz was a NSW case, and there are many similarities in the NSW and VIC payroll tax legislation. We expect Victorian and other courts and the State Revenue Offices (SRO) to take similar action.

While each case and clinic is different, we believe there were some unique factors that contributed to the results in this case.

However, the same core issues still remain in terms of the agreement and the flow of funds. Depending on the terms in the agreement and the flow of funds, many other clinics are potentially liable for payroll tax on practitioner payments.

Review your current arrangements

It has been made clear from the case that the terms of the service fee agreements between the doctors and the clinic were a core issue. There are steps that can be taken for clinics to limit and reduce their risk. Changing the agreements would pass some of the power in the agreement to the practitioners, and some clinics may prefer not to do this.

There may be a balance between the control and independence that a clinic needs to take and whether this could increase or decrease the risk of payroll tax applying. Until we receive additional guidance, we are limited on what each choice may mean for the clinic.

In the interim, the following table identifies some core issues and the risk or likelihood that such a clause would contribute to the practitioner being deemed as providing a service to the clinic.

In relation to the flow of funds, it is idealistic to suggest that a clinic changes its total banking and collection process overnight. However, even with a perfect agreement and wording, if the flow of funds is not changed, then payroll tax could still apply.

To provide most assurance, a practitioner receiving 100% of the income directly from Medicare and patients into their business bank account, ensures that there is no payment made from the clinic to the practitioner for payroll tax to be levied.

This has also been highlighted by the RACGP’s recent news release around PRODA (Provider Digital Access) and ABNs. Following on from that, invoices issued to patients should include the practitioner’s own ABN, not the clinic’s ABN.

Paying Payroll Tax

While it is the least palatable suggestion, a clinic could accept to pay payroll tax. In metro Victoria, the payroll tax is levied at 4.85% on wages and payments that exceed $700,000. In Victorian regional areas, the payroll tax rate is 1.2125%. The clinic would accept payroll tax as a business cost and consider options of increasing the practitioner’s service fee or an increased cost to patients.

This presents a clear opportunity for the Federal or State Governments to step in, apply logic and ensure people are protected from rising costs.

By accepting to pay payroll tax a clinic is then free to apply terms in the agreements that favour the clinic.

What about Superannuation and Leave Entitlements

The case of Thomas and Naaz was solely focused on the payroll tax implications. The legislation that governs leave entitlements and superannuation is separate and based on other factors. However, for argument’s sake, if a payment under a relevant contract is found to be for labour, and the terms of the agreement were such that the practitioner was barred from delegation, then superannuation could apply.

Reduce your risk

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 be worth reviewing.

BBB Partners Group Tax Audit Insurance covers Payroll Tax Audits.

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.

Should you have concerns regarding your own particular arrangements, please contact your BBB Partners’ Advisor to review and discuss your specific circumstances.

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