Recent decisions by the New South Wales and Victorian courts has put a spotlight on the medical and healthcare practices and practitioners who use service entities to provide administrative services. This focus increases the likelihood of a ‘review’ by the State Revenue Authorities, particularly around payroll tax. We anticipate that other States will follow suit and begin treating practitioners under these service agreements as employees for payroll tax purposes.
Recent decisions in New South Wales and Victoria have put a spotlight on payroll tax status of medical practices and practitioners who use service entities to provide administrative services, including collecting patient fees. The recent decisions increase the likelihood of a payroll tax review of these arrangements by the State revenue authorities. We anticipate that other States will (if not already) follow suit and begin reviewing these arrangements in more detail and possibly treating payments made to practitioners under these service agreements as wages for payroll tax purposes.
In the recent case, Thomas and Naaz Pty Ltd (Thomas & Naaz) v Chief Commissioner of State Revenue (CCSR), the NSW Civil and Administrative Tribunal (NCAT) held that the payments made to doctors by Thomas & Naaz under service facility agreements were wages for payroll tax purposes. Thomas & Naaz were found to owe Revenue NSW $795,292 in retrospective payroll taxes plus penalties and interest. This case is now being appealed.
Facts about Thomas & Naaz V CCSR
Several doctors entered into a written service facility agreement with respect to one of the three medical practices operated by Thomas & Naaz. According to the agreements, Thomas & Naaz was to provide rooms to the doctors, as well as shared administrative and medical support services (including nurses, reception and administrative staff).
Thomas & Naaz collected Medicare fees on behalf of the doctors, i.e. the patients paid the medical centres directly for the medical services provided by the doctors. The flow of funds was as follows:
- The doctors bulk billed each patient and the patients assigned their Medicare benefits to the doctors
- Thomas & Naaz made claims with Medicare with respect to the services provided by the doctors
- Medicare paid the funds into an account held by Thomas & Naaz
- Administrative staff of Thomas & Naaz recorded and reconciled these payments
- On a fortnightly basis, Thomas & Naaz paid an amount equal to 70% of the claims paid by Medicare for a particular doctor to the doctor (or their entity) and retained 30% as a service fee.
In addition to the above, under the service facility agreements the doctors entered into other obligations such as meeting roster commitments (including being physically present during rostered sessions), adhering to a leave policy, signing on at the start and end of each shift, and promoting the interests of the clinic at all times. Restrictions were also placed on doctors with an exclusion zone of five kilometres from the clinic within two years of their departure from the clinic.
Based on the above facts, NCAT concluded that the service facility agreement were ‘relevant contracts’ under the payroll tax legislation and the payments to doctors representing 70% of the claims paid by Medicare were subject to payroll tax.
NCAT found that the doctors were not only providing services to the patients of the medical centres, but also to Thomas & Naaz. This is despite the fact that Thomas & Naaz was holding the funds received from Medicare on trust for the doctors.
What does this mean for you as a practice owner?
Medical, dental and allied health practices with service facility arrangements are at risk of exposure to payroll tax in respect to payments made under these agreements. The payroll tax rate ranges between 4.75% to 5.5% across the various State and Territory jurisdictions.
In the event of a State revenue office review, the revenue office will generally review a historical period spanning five years. If payroll tax is assessed, interest and penalties may also be applied in addition to the payroll tax liability.
We strongly suggest that all current service agreements be reviewed by a payroll tax specialist to assess and quantify any payroll tax risk. In addition, medical, dental and allied health practices should assess their structures and consider the suitability and drafting of service facility agreements.
For more information on how BDO can assist with implementation and review of service agreements and potential payroll tax implications in medical, dental and allied health practices, please contact your local BDO adviser.