Two recent court decisions have highlighted potential payroll tax risks for medical practices that operate under a shared services model.
In New South Wales and Victoria, doctors and optometrists practising as independent sole traders have been deemed employees, allowing the relevant state bodies to issue backdated payroll tax assessments for up to five years and impose fines for unpaid tax.
Medical centres where doctors practice as individual sole traders could face similar penalties if Queensland follows the interstate precedent.
When sole contractors are considered employees
Recently a tribunal upheld the NSW Chief Commissioner of State Revenue’s assessment that Thomas and Naaz Pty Ltd, a business that operated three medical centres under a shared services model, was required to pay nearly $800,000 in payroll tax, interest and penalties.
The Commissioner argued that despite the doctors working as contractors and individual sole traders co-located on the same premises, the doctors’ agreements with the medical centre and how money flowed to their accounts meant the business had to pay payroll tax.
The tribunal noted the terms of the medical centre’s agreement with contractors, the flow of funds and the interdependence of businesses were the most significant factors in its decision. It is that last point that is of greatest concern to other medical centre owners.
The tribunal determined that Thomas and Naaz operated a medical centre: the main business activity was a general medical practice, and the medical centre owner could not carry on its business without the services of the doctors. As such, the doctors were providing services to the patients, as well as the medical centre.
In reaching this decision, the tribunal considered the fact the practice:
• Imposed hours of work and set rosters;
• Placed obligations on doctors to comply with protocols and promote the medical centre;
• Handled the retention of ownership of records;
• Provided for a restrain covenant
• Implemented a leave policy
• Provided for payment of hourly rates in certain circumstances.
When disbursements are considered wages
Another consideration was whether the disbursement payments received by the medical centres’ doctors should be considered wages.
The NSW tribunal adopted the reasoning of Victoria’s Optical Superstore case. In both instances, it was determined the Act does not require consideration of whether the flow of money is beneficial to the recipient. Instead, it is a connection between the amount provided and the performance of work that determines whether or not a payment is to be taken as a wage.
In the Thomas and Naaz case, the practice collected billings on behalf of the individual doctors. The medical centre owner would then pass on 70 per cent of the billings to the doctors, keeping the remaining 30 per cent as a service fee. The medical centre was also reporting its contractors’ income in its financial statements and tax returns. This is not a good idea if you are trying to establish your shared services model as separate and independent businesses.
Where to from here?
Given the similarities in the legislation between states, we anticipate that Queensland may follow NSW and Victoria’s precedent. However, payroll tax laws are open to interpretation, and there are no definitive answers just yet. This is a politically charged issue in which many governing bodies, including the AMA, are in consultation with the respective State Revenue Offices. In the meantime, you should:
1. Avoid panic, but be aware. The only way we will see certainty is with legislative change. Once we have certainty we can then advise accordingly.
2. Review your service agreements, bank arrangements and the flow of funds to ensure separation between contractors and the practice. You may discover you need to implement new service agreements, banking or record-keeping arrangements. We can help you restructure or implement new procedures to minimise risk and your exposure to payroll tax.
For more information or to discuss your specific circumstances, please do not hesitate to contact a medical taxation specialist at Walshs by booking a meeting here.
By Hugh Walsh and Kaitlin Brock