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In August 2023, the NSW State Revenue Office ruled that GPs working under fee-for-service arrangements would be employees for the purposes of payroll tax (i.e. relevant contracts), and the Victorian office issued a near-identical ruling at the same time. The NSW ruling was effective 1 July 2018, and followed two recent court cases (Thomas and Naaz and Optical Superstore) that questioned the independence of fee-for-service arrangements widely used by medical centres across Australia. 

A typical fee-for-service arrangement for a medical centre, would involve the Doctors providing services directly to patients through their medicare provider numbers. The Doctors then pay a facility fee to the medical centre to coordinate billings, provide facilities and nursing and administrative services, generally a % of patient fees 60-70%. Until Thomas and Naaz, this arrangement was not considered a relevant contract for payroll tax purposes.

A relevant contract for payroll tax purposes

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 that 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 showing the exemption applies.

What does the ATO think? 

The ATO will deem a contractor an employee for PAYGW and superannuation purposes if the contractor is “serving” your business and performs their work as a representative of your business. Criteria/Multifactorial test to apply are:-

Control - A contractor will choose how and where work is done subject to reasonable direction by you, the business.

Integration - A contractor performs work to further their own business. They may choose to present themselves as part of your business.

Mode of Remuneration - A contractor is paid to achieve a specific result and is paid when they have completed that result, often for a fixed fee.

Delegation - A contractor is free to delegate to others.

Tools and Equipment - A contractor provides their own tools and equipment.

Risk - A contractor bears commercial risk for any costs arising out of injury or defect in their work.

There, however, has been a recent High Court Fair Work case, which rejected the Multifactorial test and, in this case (Construction, Forestry, Maritime & Energy Union v Personnel Contracting Pty Ltd), what was more important was whether the person was contracted to work in the business of the enterprise rather than considering the individual’s business. The control the business had over the contractor was also paramount. The High Court also commented that the use of labels in a contract should not be determinative of the nature of the relationship. 

The ATO is also in the process of reforming its guidance in relation to employee versus contractor relationships, and draft guidance is focusing on low-risk versus high-risk arrangements. A low-risk arrangement will be where the contract reflects actual performance. The new ATO guidance is not intended to be utilised for Fair Work purposes.

Where to now for medical and dental practices?

It is now time to contact your accountant to review your current arrangements with doctors and dentists.  

The NSW government will pause medical centre payroll tax audits for 12 months to consult with GP groups in the wake of a state revenue ruling that payroll tax should apply.

But 12 months will pass quickly, urgent review is required and WLM can assist.

WLM can help

It's time to contact your Accountant at WLM and review your contract and payroll tax arrangements.