Contractors and Payroll Tax: Medical Practices under the Microscope

A recent case, Thomas and Naaz, has brought medical practice service agreements under the microscope. 

The NCAT decision in Thomas and Naaz, upheld Revenue NSW’s payroll tax assessments with respect to payments made to contracted doctors. In that case, the taxpayer operated three medical centres, through which:

• contracted doctors bulk billed patients and the patients assigned their Medicare benefits to the doctors;
• the service entity then claimed these benefits on behalf of the doctors; and
  after the payments were reconciled, doctors would receive 70% of the claimed funds and the remaining 30% was retained by the service entity as a ‘service fee’ for the various other administrative support services it provided to the doctors.

NCAT found that the arrangement in Thomas and Naaz attracted payroll tax under the contractor provisions and that the agreements were “relevant contracts”.  

What is a “relevant contract”?

It is a contract, agreement, arrangement or undertaking under which a contractor provides an employer with the services of a worker.

The individual who performs the work may be the contractor or another worker engaged by the contractor.

The independent contractor is deemed to be an employee.

The person who receives the services is deemed to be an employer.

Payments by the deemed employer that relate to the performance of work by the contractor are liable for payroll tax unless an exemption applies.

Any part of the payments which are for materials, tools or equipment are not liable for payroll tax.

Exemptions apply in the following circumstances:

1. the provision of services is ancillary to the supply or use of goods; or
2. the type of work is not normally required by the employer; or
3. the contractor works for a relatively short period of the year; or
4. the contractor provides similar services to multiple employers during the year; or
5. the contractor engages 2 or more persons to perform the work.

If an employer believes a particular contract is exempt, records must be kept to show that the exemption applies.

The original NCAT decision in Thomas and Naaz held that the practitioners were providing services to the medical practice under the agreement.

The NCAT considered that this was clear from the following contractual terms:

1. that the doctors agreed to provide the services to patients from the facility five days per week pursuant to rosters and agreed to provide advance notice of leave, that could be no more than four weeks per year;
2. that the doctors agreed to promote the interests of the facility provider;
3. that the doctors agree to abide by the operating protocols of the facility provider; and
4. that the doctors gave a restrictive covenant that operated if they ceased providing services from the facility.

What does this mean for you and your practice?

Payments from a healthcare practice to their contracted practitioners may trigger payroll tax obligations with respect to those payments. The risk that those payments are subject to payroll will come down to the terms of the contracting arrangements, as well as what happens on a day-to-day basis in the clinic.

Consultation fees (including Medicare rebates) which are collected by the clinic into its operating account and remitted net of the ‘administration fee’ are at significant risk of being subject to payroll tax. 

The terms of the contracting arrangements with the clinic’s medical practitioners will need to be reviewed and many, if not all, will require some changes. Practically, clinic owners will need to relinquish some of the control that they have in their arrangements with the doctors, including:

•  the collection of fees;
• rostering arrangements;
• how the administration fees are set;
• the use of consulting fees to pay the clinic’s operating expenses;
• restraints of trade; and
• ownership of patient records.

Where to next?

Now is the time to review your service entity arrangements. If exemptions apply, adequate records to demonstrate need to be maintained. 

Each business needs to consider its own administrative service arrangements and consider the payroll tax impact arising from the current approach of the revenue authorities. Although the wording of any service agreement between the practice and the practitioner will be important, so will the business's day-to-day operations.

Sources

https://hallandwilcox.com.au/thinking/healthcare-practices-under-payroll-tax-microscope/

https://www.revenue.nsw.gov.au/help-centre/resources-library/cpn/cpn007

https://www.caselaw.nsw.gov.au/decision/17ba49dc933fd5acb37385cc

WLM can help

If you would like advice or assistance, please contact us.