Payroll tax exposures for medical practices

In the case, Thomas and Naaz P/L v CCSR [2021] NSWCATAD 259, the NCAT held that the payments by the medical practice administrative service entity to the medical practitioners themselves were wages for payroll tax purposes. That was the case even though the payments were from Medicare claims made by the medical practitioners. 

The case was being treated as a test case by many medical practitioners in NSW. It has Australia wide application. A Victorian case (Optical Superstore) had found a similar result but involved facts unlike those implemented by most medical practitioners. The Thomas and Naaz case is the first one with features similar to most administrative service arrangements, those being the following:

• The administrative service entity provided rooms at its medical centres to the Doctors, as well as shared administrative and medical support services.
• The Doctors saw patients at the medical centres.
• The Doctors “bulk billed” each patient and the patients assigned their Medicare benefits to the Doctors.
• The administrative service entity, on behalf of the Doctors, made claims on Medicare and the funds received from Medicare were placed into its account.  
• Administrative staff employed by the administrative service entity recorded and reconciled these payments; and
• The administrative service entity paid to each doctor amounts equal to 70 per cent of the claims paid by Medicare for that particular Doctor (without any deductions for tax or superannuation or otherwise). The remaining 30 per cent was retained by the administrative service entity as a service fee.

After a detailed analysis of the agreement between the administrative service entity and the doctors, the NCAT determined:

“These clauses indicate that the Agreement secured the provision of the Services provided by the Doctors to the patients of applicant’s medical centres. In circumstances where such services were a necessary part of the applicant’s medical centre business, the Doctors provided them not only to the patients but also to the applicant.”

The NCAT concluded that the payments made by the administrative service entity “for or in relation to the performance of work relating to” the Agreements, were deemed to be wages and were subject to payroll tax under the contractor provisions. The NCAT found that it was not relevant that the administrative service entity received the Medicare benefits on trust for the practitioners. That aspect of the decision remains puzzling to many medical practices as clearly the doctor’s services are provided mainly to the patients. Any provision of the doctor’s services to the administrative service entity is secondary to both his/her services to patients and the entity’s provision of services to the doctor. . However, as this is effectively the fourth court decision that has made that finding it now seems to be firm law.

The value of the payment subject to payroll tax was confirmed as the net payment made to the doctor being, in this case, the gross benefits received by the administrative service entity less its 30% fee for its services.

We comment briefly on three potential exclusions from the contractor provisions if they had applied to the facts of the case, as follows:

• Whether the services were performed by a Doctor who ordinarily performed services of that kind to the public generally in that financial year – this was argued in the case but not supported by any evidence other than statements by some of the Doctors. For this argument to succeed, evidence of the medical services provided by the Doctor, other than through the medical centre in question, would need to be provided including income generated and hours worked.
• Whether any Doctor’s services to the administrative service entity could be shown to be performed by two or more persons – an argument for this exemption, based on any particular arrangements in place for doctor absences, was not presented in the case, and
• If the Doctors instead received their patient’s Medicare Benefits directly into their own bank accounts and 30% of that amount was transferred to the administrative service entity - this reversal of the payment flow would mean that the administrative service entity is not making payments to the Doctor for the performance of work. Following Optical Superstore, many medical practices re-structured their arrangements in this and other ways to escape future payroll tax liabilities. We do caution that few of the revised arrangements have been closely examined by the state revenue authorities yet.  Revenue NSW believes that it can capture payroll tax on these payment flow reversals as well. Mazars believes that a test case on this payment structure will be forthcoming.

Mazars expects the Thomas and Naaz decision will accelerate the nationwide state revenue authority audit programs aimed at medical centres. We believe it will even embolden Revenue NSW and Victorian SRO, and Queensland OSR to target medical centres operating under restructured payment and administrative arrangements implemented following Optical Superstore.

What is certain is that all medical centres need to address this growing and continuing issue. Please contact the author, your usual Mazars advisor or contact us via the form below for assistance addressing this matter. 

Author: Stephen Baxter

Published: 13/09/2021

All rights reserved. This publication in whole or in part may not be reproduced, distributed or used in any manner whatsoever without the express prior and written consent of Mazars, except for the use of brief quotations in the press, in social media or in another communication tool, as long as Mazars and the source of the publication are duly mentioned. In all cases, Mazars’ intellectual property rights are protected and the Mazars Group shall not be liable for any use of this publication by third parties, either with or without Mazars’ prior authorisation. Also please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice. Content is accurate as at the date published.