Medical practices and payroll tax: the current state of play

8 minute read 06.10.2023 Nicole Gordon, Aidan Kleynhans, Elissa Romanin

Medical practices that engage practitioners as contractors need to urgently review their payroll tax position due to recent revenue office rulings.

Key takeouts

Recent rulings clarifying the position of the revenue authorities in Qld, NSW and Vic make it clear that common contractual arrangements between medical centres and GP contractors are captured by payroll tax legislation.

Temporary relief has been announced for GP contractors in Qld, NSW, ACT and SA. In SA and Qld, medical practices need to act promptly to take advantage of the available amnesties.

The updated Qld ruling clarifies that clear direct payments to practitioners (from Medicare and patients) will fall outside the payroll tax net. As a priority, medical centres need to rethink their payment arrangements with contracted GPs.

What has changed?

While contractor arrangements have always potentially been within the payroll tax net, the revenue offices in Queensland (Qld), Victoria (Vic), New South Wales (NSW), and South Australia (SA) have all recently released substantially similar rulings confirming their view that arrangements commonly entered between medical centre operators and medical practitioners are caught by the 'relevant contract' provisions contained in the payroll tax legislation.

The key message arising from the rulings (and the cases) is that a contract will be a 'relevant contract' if:

the practitioner carries on a business or practice of providing medical-related services to patients;
in the course of conducting its business, the medical centre provides members of the public with access to medical-related services and engages a practitioner to supply services to the medical centre by serving patients on its behalf; and
an exemption does not apply.

The recent rulings do not follow a change in the legislation. Rather, the recent attention on medical practices stems from two cases: The Optical Superstore Pty Ltd v Commissioner of State Revenue in Victoria and Thomas and Naaz v Chief Commissioner of State Revenue in NSW.

Those cases considered the application of payroll tax to an arrangement that is common amongst medical practices, where:

a medical centre engages medical practitioners as independent contractors;
the practitioners pay service fees to the medical centre for the use of consultation rooms and administrative services (reception, organising appointments, processing payments, etc.);
the medical centre collects fees and/or Medicare rebates on behalf of each practitioner, deducts its service fee and pays the balance to the practitioner.

For the relevant contract provisions, the two key questions are:

whether the contractor is providing a service to the medical centre; and
whether there is a payment from the medical centre to the practitioner which could be considered to be 'in relation to the performance of work'.

It had been widely understood that practitioners provided medical services to their patients only, and did not provide services to the medical centre itself. However, recent case law has cast doubt on this. If a medical centre holds itself out to the public as providing patients with access to the medical services of a practitioner, in that case, the provision of medical services is a necessary part of the medical centre's business and the medical practitioner will be regarded as providing services to the patient, for or on behalf of the medical centre as well as to the medical centre.

Importantly, it does not matter that payments made to a practitioner are sourced from money received by the medical centre on behalf of practitioners, either from patient fees or Medicare payments, even if the doctor is beneficially entitled to that money. When the money is paid or becomes payable to the doctor, it constitutes wages for payroll tax purposes (unless an exemption applies).

Current state of play

The rulings that have been issued by the revenue authorities in Qld, Vic, NSW and SA confirm that medical centres that have arrangements of the type considered in Optical Superstore and Thomas and Naaz, including in relation to how the relevant funds flow between the patient, the medical centre and the medical practitioner, will be caught unless an exemption is available. The revenue rulings accept that payments made under properly structured tenancy contracts should not be subject to payroll tax. However, it would not be commercially realistic for most medical centres to restructure their affairs to meet the revenue authorities' requirements for a tenancy contract to exist.

The main exemptions that may be relevant are:

if the contractor only works at the medical centre for 90 days or less in a financial year; or
if the contractor provides services of the same kind to other principals (such as other medical centres) in the financial year.

The rulings in each jurisdiction are essentially the same, although Qld has recently updated its previous ruling in response to industry lobbying. The updated Qld ruling (PTAQ000.6.2) issued on 18 September 2023 addresses the implications of various alternative payment arrangements that are available to medical centres and practitioners, which partly arise from some comments in the Thomas and Naaz decision. The Qld ruling clarifies that:

where a Medicare benefit assigned by the patient to the practitioner and/or any additional out-of-pocket patient fees, are paid directly to the practitioner, there will be no deemed wages which are subject to payroll tax;
where a Medicare benefit assigned by the patient to the practitioner and/or any additional out-of-pocket patient fees, are paid to the medical centre, the payment from the medical centre to the practitioner (net of an administration/service fee) will be deemed wages which are subject to payroll tax; and
if patient revenue is paid to a third-party entity, the payment from the third party to the practitioner will be deemed wages subject to payroll tax.

These payment arrangements, in particular where money is received directly by a practitioner, deal with the payroll tax risk, and there will be commercial considerations that affected medical centres will need to consider to decide whether rearranging the 'flow of funds' in this way is viable.

Tasmania, ACT and the Northern Territory have not released rulings at the time of writing. Western Australia's payroll tax legislation does not contain relevant contract provisions, and therefore the same issue does not arise for GPs in that state.

What relief is available?

Broadly, a number of states and territories have announced a form of temporary relief. So far, all the announcements only apply to payments to contracted GPs. Only SA and Qld have announced payroll tax amnesties for GPs, and quick action is required to take advantage of this relief. Vic has not announced any form of relief to date.

Queensland

Qld has announced an amnesty scheme for GPs. Under the scheme, medical centres will not be required to pay payroll tax on payments made to contracted GPs from 1 July 2018 until 30 June 2025. To be eligible, medical centres need to express interest by 10 November 2023. They will be required to make a voluntary disclosure of all information the Commissioner requires to assess their payroll tax obligations. For more details, see the Queensland Revenue Office's information page.

South Australia

SA has announced a similar amnesty although it is not quite as generous, with the amnesty period starting on 1 July 2018 and ending on 30 June 2024 (a year earlier than in Queensland). Registration for the amnesty is due by 30 September 2023, and medical centres will similarly be required to make a voluntary disclosure. For more details, see Revenue South Australia's information page.

New South Wales

The NSW government has recently passed an amendment to the Taxation Administration Act 1996 which puts a 12-month 'pause' on payroll tax audits for GPs starting 4 September 2023. During the pause, Revenue NSW will not be able to conduct any audits in relation to payments to GPs. However, the pause is merely to allow time for consultation and hopefully we will see a more fulsome announcement before the pause period ends. Currently, it appears possible that medical centres could be hit with assessments, interest and penalties as soon as the pause ends.

Australian Capital Territory

The ACT government is proposing to waive existing payroll tax liabilities for medical centres that have not already been paying payroll tax on GP payments (up until 30 June 2023). The ACT is also proposing to offer a 2 year exemption (up until 30 June 2025) from payroll tax on payments to GPs for medical centres which bulk bill at least 65% of patients. See the media statement on the incentives for more bulk billing.

If a medical centre is not eligible for relief or exemption, it will be liable for the total amount of payroll tax, plus interest and penalties. State Revenue offices typically go back five years when assessing historical tax liabilities, though we have seen reviews going back longer.

Next steps

Affected medical centres are strongly advised to take action as soon as possible to:

assess the availability of exemptions under the payroll tax legislation;
consider whether they need to take steps to take advantage of amnesties or other relief which is available; and
review their payment arrangement with medical practitioners to determine whether payments from the medical centre to the practitioner can be eliminated from their arrangements moving forward (subject to the application of the (broad) avoidance provisions in the payroll tax laws).

As a final note, it is important to keep in mind that it is not only medical centres that engage GPs that need to pay close attention to recent payroll tax developments; a broad range of medical and allied health practices are also impacted and need to review their arrangements.

Please get in touch with one of the members of our team if you would like to discuss whether these changes might impact your business, and the options available.