The decision in Thomas and Naaz has significant financial implications for many medical practices and allied health practices.
Some Background
A common practice structure is that the practitioner provides medical services to their patients and receives administration services from a separate service entity which collects patient fees on the practitioner’s behalf and pays them to the practitioner.
The issue in Thomas and Naaz was whether the patient fees paid to the practitioner were subject to payroll tax according to NSW payroll tax legislation.
The Practice Structure
T&N operated medical centres and had written services agreements with doctors who conducted their own business from the medical centres. Under the agreements the doctors paid a fee for administration and medical support services and the use of rooms for medical consultations.
The doctors provided their services directly to their patients who assigned their Medicare benefits to the doctors. Most of the doctors engaged T&N to make claims on Medicare and collect fees which were received to an account. T&N regularly reconciled the account and paid an amount of 70% of a doctor’s Medicare fees, keeping the other 30% for a service fee.
How was T&N Approaching Payroll Tax?
T&N self-assessed that the doctors were working in their own separate practices and were providing services to their patients only, rather than Thomas and Naaz. Therefore T&N did not treat the payments to doctors as “taxable wages” which would be subject to payroll tax.
The NSW state revenue authority took a different view, contending that the doctors were providing services to T&N and that payroll tax was payable.
The Service Agreements
The service agreements with doctors included requirements to:
- provide services on a five day per week basis, have weekend rotations, meet roster commitments and give notice of absence;
- ‘at all times act to promote the interest of The Clinic’;
- promote the interest of the practice and not channel patients away from the practice; and
- abide by operating protocols which included completing necessary documentation according to the protocols.
The Tribunal’s Decision
The Tribunal concluded that the payments to practitioners were subject to payroll tax because the terms of the services 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.” (Emphasis added).
The Payroll Tax Risk
The risk for practices is whether the terms of their services agreements with practitioners and also their actual practice systems lead a revenue authority to the conclusion that the practitioner is providing services to the practice entity as well as to the patient.
In T&N’s case, the high level of control by T&N over practitioners led the tribunal to conclude that the doctors were providing services to T&N, not just to their patients.
Simply put, the risk of payroll tax is reduced if control by the service entity over the doctor (who is carrying on their own business) is reduced.
What Should Practices Do?
Audit activity by revenue authorities is unlikely to reduce.
We recommend that practices operating by a similar structure to T&N should:
- check their service agreements;
- check how their practice is actually operating; and
- make changes where necessary.