In a wakeup call to medical practices, a payroll tax case heard in an NSW court has confirmed a growing concern that medical professionals will begin to be seen as employees under service arrangements for payroll tax purposes.

28 April 2022

The case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue has sparked a review of medical practices structural arrangements in order to reduce the potential for payroll tax assessments.

Ken Gunderson-Briggs, partner and founder of Gunderson Briggs Chartered Accountants stated that the problem may not just be associated with medical practices.

“This is likely to also affect similar arrangements where there is a 3rd party centralised administration function and individuals providing their professional advice and skills through their labor with patients, clients and customers. There are similarities between the medical practice in this case and a barrister’s floor, financial planning house and certain law firms”

The broad facts of this case are as follows:

• The various doctors operated from one of the medical centres, and each doctor or related entity entered into a written agreement with the practice entity;

• ​The doctors were provided with rooms, shared administrative and medical support. The collection of Medicare fees on behalf of the doctors was undertaken by the practice entity. The patients paid the medical centres and did not pay the doctors directly for the medical services provided; and

• In accordance with the written service agreement, 70% of the patient billing went to the doctors (without any deduction for tax or superannuation) and the remaining 30% was retained by the practice entity as a service fee.

These arrangements with various doctors are very similar to what other medical practices as well as other professions such as barristers have in place. The payroll tax liability is based around two issues:

• The agreements with the various doctors were considered to be “relevant contracts” under section 32 of the NSW Payroll Tax Act; and

• ​The payments to doctors by the practice entity were “for or in relation to the performance of work relating to” the Agreement.

The terms included in their service agreements and the actual conduct of the doctors in relation to arrangements were considered a relevant contract between the medical centre and the doctors. In addition, terms within the written agreement between the doctors and medical centre were typical of a employer/employee relationship. Some of the terms included:

• The doctors promoted the clinic;

• ​The doctors met roster commitments and were physically present during rostered sessions.;

• ​There was:

  • a minimum rate per hour in the first three months.

  • ​a leave policy with a requirement for four weeks leave per twelve month period.

  • a restraint of trade of up to five kilometers for up to two years after a doctor left the clinic.

• The medical centre would retain ownership of the patient records; and

• ​The doctors would abide by the protocols of the practice and complete all necessary documentation.

What you need to consider

• Up to date service agreement. These need to be in place and adequately describe the actual agreement;

• Details are critical. It is important that written agreements are reviewed to ensure the arrangements, while reflecting what actually happens, are not akin to an employer/employee relationship;

• Fee collection. This should be undertaken directly by the doctor, rather than the by the practice;

• Accounting function. The financial statements must adequately reflect the practice arrangements; and

• Ownership. Are the ownership of the clients and client records critical to the practice? Retention of these records may indicate that the patients belong to the practice and not the doctors.

Should you have any question or queries regarding this area of payroll tax and how it may affect your business, please do not hesitate to contact Gunderson Briggs below.