Assuming you haven’t scrolled straight past this article uttering the immortal words “well of course we are, Payroll Tax doesn’t apply to our set-up”…lets have a chat about Payroll Tax.

In 2022 the ongoing case of Thomas and Naaz was brought before the NSW Civil and Administrative Tribunal (‘NCAT’).  With the appeal ultimately denied largely on technical grounds a new era of uncertainty and concern has appeared in the healthcare sphere.  The taxpayer has now lodged a further appeal with the NSW Court of Appeal so the dust hasn’t completely settled yet, but in the interim, what can be done to help minimise a Payroll Tax audit, or at least any liability should you be subject to one.

So we’re all on the same page by way of background, Thomas and Naaz concerned the operation of 3 general medical practices and the collection of patient fees and subsequent payment to doctors.  The issue here being whether the payments to doctors attracted Payroll Tax.

Like many other healthcare practices, doctors were engaged via a service agreement which very broadly involved the medical practice collecting fees on behalf of the doctor and remitting it to them less a 30% (plus GST) administration fee.

The Revenue NSW took the view that the service agreement between the medical centre and the doctors was a “relevant contract” for Payroll Tax purposes and levied the tax retrospectively over 5 financial years.  The ultimate bill being just shy of $800,000.

To be considered a “relevant contract” a determination has to be made as to whether the payments being made to contractors is akin to the payment of a salary.  Revenue NSW upon reviewing the contracts found the key elements listed below to be indicative of an employer-employee relationship rather than one of employer and contractor:

One of the key things to be cognisant of here is Revenue NSW’s approach is not considered to be new, rather a verification of how they have historically viewed these types of arrangements.  It is because of this view that they are able to look at your arrangements retrospectively and apply Payroll Tax accordingly.

But what does this mean if you’re not in NSW?  Well, I think it’s fairly safe to say it would be naïve of us to think other revenue bodies around the country aren’t watching this case closely to see whether there is an opportunity for them to do the same thing.  Payroll Tax is a state-based tax and as such differs from state-to-state however, they are broadly harmonised making it much easier for other states to follow suit.

Being based in WA, how would it apply to health care centres here?  WA Payroll Tax legislation doesn’t have the same “contractor deeming” provisions as in the NSW Payroll Tax legislation however, the approach to the employer/employee relationship and the substantive factors which make up that relationship are very similar to those in NSW.  Close enough to at least trigger a review of your arrangements.

Does this only affect medical centres?  The short answer is no.  It affects any business using the same type of service agreement relationship.  This means physiotherapy practices, psychology practices etc may also be caught in the net.

So what can you do?

First and foremost, don’t panic and talk to your advisors about any potential exposure.

Secondly, review your service agreement contracts.  The service agreements between the medical centre and doctors in Thomas and Naaz was quite extensive in its requirements of doctors ranging from the way payments were made, to promoting the medical centre and the way leave was applied for.  Ultimately the less control over the movement, behaviour and payment arrangements you have with your doctors, the more likely it is they will be viewed as contractors.

Thirdly, review how your accounts are presented.  What was clear in the Thomas and Naaz case was the way in which payments to doctors was accounted for and the way this was used as an interpretation of how the relationship was viewed.  For example, in the 2015 and 2016 financial years, the total amount of Medicare rebate received was accounted for as gross income with the 70% paid to doctors being reflected as payments to contractors.

Finally, check whether your advisor carries the necessary cover on their audit insurance.  Audits can be very expensive and Payroll tax is no different.