We have previously blogged about Medical Professionals and Payroll Tax and the potential for State Revenue to treat medical professionals under a service agreement as employees or contractors.
A recent payroll tax case heard at the New South Wales Civil and Administrative Tribunal (NCAT) has confirmed our concerns and increased the likelihood of State Revenue treating Medical Professionals under a service agreement as employees or contractors.
The commentary around this most recent payroll tax case is now widely available so it is extremely important to understand the facts surrounding this case.
The case of Thomas and Naaz Pty Limited v Chief Commissioner of State Revenue was released on 3 September 2021 and relates to a Medical Practice operating from three bulk billing medical centres at the time. The background surrounding this case is as follows:
- The various doctors operated from the applicants medical centres and each Doctor or related entity entered into a written agreement with the applicant
- The Doctors were provided with rooms as well as shared administrative and medical support, as well as the collection of Medicare fees on behalf of the Doctors. The patients paid the medical centres and did not pay the doctors directly for the medical services provided.
- In accordance with the written service agreement 70% of the of the patient billing went to the doctors (without any deduction for tax or superannuation) and the remaining 30% was retained by the applicant as a service fee.
- The payments from the applicant to the Doctors equal to the 70% of the Medicare Patient Fees were the main concern for Revenue NSW and the subject of the assessments they issued.
- The payroll tax assessment Revenue NSW issued to Thomas and Naaz totalled $795,292 for the period covering 1 July 2013 to 31 March 2018 with these payments the applicant made to the doctors considered to be wages for payroll tax purposes.
- Thomas and Naaz objected to the assessments issued by Revenue NSW and insisted that the doctors were supplying services directly to the patients and not the medical centre and they were not operating under a “relevant contract”.
- The commissioner rejected their objection to the assessment so Thomas and Naaz then went to NCAT for the matter to be heard.
- After hearing the facts of this case NCAT upheld the NSW Revenue assessments and found in favour of Revenue NSW.
The arrangements Thomas and Naaz had in place with the various Doctors were not dissimilar to many Medical Practises arrangements. So we must clarify what the specific arrangements were and how these may have impacted the NCAT decision.
The NCAT decision was based on 2 key issues
- Whether the agreements with the Various Doctors were “Relevant contracts” under s32 of the PT Act and;
- Whether the Payments were “for or in relation to the performance of work relating to” the Agreement.
A “relevant contract” is defined Section in s31 (1)b) of the PT Act and notes an Agreement will be a “relevant contract” if, during the particular financial year in the course of the business of the applicant of operating medical centres, the applicant has supplied to it under the Agreement the services of persons for or in relation to the performance of work.
On that basis then could the payment of the 70% Medicare billings paid to doctors be considered a payment relating to the provision of services and, therefore, payment of taxable wages for payroll tax purposes?
Unfortunately, NCAT found the Agreements with the Various doctors to be ‘relevant contracts’ and for the services provided by the Various Doctors to not only the patients but also to the Medical Centre.
The Agreements with the various doctors were considered a “relevant contract” between the medical centre and the doctor mainly because of the terms included in their service agreements.
The terms included in the written agreements between the Medical Centre and the various Doctors included some terms one may consider typical of an employer/employee relationship:
- Doctors to act to promote the clinic
- Meet roster commitments and be physically present during rostered sessions
- Minimum rate per hours in the first three months
- Leave policy with a requirement for 4 weeks leave per 12mnth period
- Restraint of trade of up to 5km for up to 2 years after the Doctor left the clinic
- The medical centre would retain ownership of the files
- Abide by the protocols of the practise and complete all necessary documentation.
- Various others
Another factor worth noting at Paragraph 75 is that for the 2015 and 2016 financial years the amounts paid by the Medical Centre to the various Doctors were reported as Contractors, Subcontractors and commission expenses in the tax returns for the Medical Centre.
Also, the income reports in the income tax returns and in the financial statements included all of the billings of the Doctors.
Section 32 (1) (b) of the PT Act requires that the services provided were provided for or in relation to the performance of work. This requires only that the services supplied under the Agreements are work-related. NCAT cited Compensation Commission v Odco at 612 and Smith’s Snackfood Company Ltd v Chief Commissioner of State Revenue at  and  as a precedent for work-related and the tribunal was satisfied that the criteria here were met. It was for this reason the agreement with the various doctors was determined to be “relevant contract”within the meaning of s32 (1) (b) of the PT Act.
WHERE TO FROM HERE FOR MEDICAL PROFESSIONALS?
- This is a complex area and we will be keeping a close eye on the ramifications of this case as they continues to evolve. Once again this is not a new concern as Payroll Tax and its application to Medical Professionals has always been open to interpretation and an area of concern.
- We have always stressed the need to review your service agreements and this case goes to show the terms of the service agreement will be carefully analysed to determine whether they are a ‘Relevant Contract within the meaning of Section 31 (1) (b) of the PT Act. We are working with solicitors who specialise in payroll tax to establish what terms in the Service Agreements are of most concern. We are also considering how should the service agreements be worded so Section 31 (1) (b) of the PT Act is less of a concern? We will be looking at how can the Arrangements be structured and the Service Agreements be worded to minimise exposure to payroll tax? What is the best position should take now to mitigate their exposure to payroll tax in the future?
- Being such a complex area and without any clear guidance from State Revenue we may be unable to establish a safehabour for our Medical Professionals at this stage. Where this is the case we can only continue to do what we can to minimise the risk relating the exposure to payroll tax. Until a Practice Paper Released by State Revenue in the area of Payroll Tax and Medical Professional there will continue to be uncertainty. We understand State Revenue is working towards providing such guidance.
- Where previously there was confirmation relating to the flow of funds Medicare to the Medical Centre and it was established in previous cases this flow from Medicare to Medical Practice who are merely to act a “clearing house” or “bank of convenience” and were not payments to the “performance of work”. With this case NCAT raised doubt around this concept and this now a cause for concern across the medical practice industry. We will be investigating this area further in order to obtain clarification on what the path to safe harbour is available.
- Patient Fees collected by the Medical Centre on behalf of the various Doctors under a service agreement should not be included in total income on the end of year financial statements and tax returns. So too payment to the various Doctors should not be shown as Consulting Fees or Contractor Payments in the yearend financial statements and tax returns.
KEEPING YOU INFORMED
We will continue to write blogs in this area of concern and liaise with legal specialists in the areas of commercial law and payroll tax. As new information becomes available we will also be presenting Webinars to keep you informed.