Payroll tax update: implications for medical practices in Australia

With recent developments in payroll tax case law, and the various State Revenue Offices’ interest in assessing medical practices for payroll tax, practice owners need to consider how they prepare for and manage potential payroll tax liability.

Medical practices’ liability for payroll tax

Depending on the way that the legal relationships between practices and independent contractor doctors are set up (and also the way in which the relationships work in reality) a practice may be liable for payroll tax on payments made to independent contractors who are not legally regarded as employees for any other purpose. There should be little doubt that many medical practices would be at risk of being found liable to pay payroll tax on payments made to independent contractor doctors if they are assessed.

The liability arises where the contractual arrangements are such that the independent contractor doctors meet the extended definition of “employee” under the “harmonised”  Payroll Tax Acts in New South Wales, Victoria, Tasmania, Northern Territory, and South Australia, and the payments made to the doctors meet the extended definition of “wages” under those Acts.

Why now?

The potential liability is not new. Victorian Payroll Tax legislation has not changed in this respect since 2009, and the harmonisation protocol between the participating States and the Northern Territory was entered into in 2010. What has changed is that since 2018 the Victorian State Revenue Office (SRO) has turned its attention to independent contractor arrangements with health service providers, and in late 2019 succeeded in a case involving a large optometrical services provider in the Victorian Court of Appeal (in Commissioner of State Revenue v The Optical Superstore Pt Ltd).

Optical Superstores applied to appeal that decision to the High Court, which dismissed the application for leave to appeal.

As has been widely reported in the medical media, the New South Wales Civil and Administrative Tribunal applied the Optical Superstores precedent in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue where it was held that the practice owners owed almost $800,000 in retrospective payroll tax. The Supreme Court of NSW Court of Appeal refused to grant leave to appeal the Tribunal decision on the basis that the factual and legislative circumstances were uncontroversial.

It can now be taken as settled that medical practices in the States in which the harmonised legislation applies will be liable for payroll tax on payments made to independent contractor doctors where the doctors meet the extended definition of “employee” under the Payroll Tax Acts, and the payments made to them by the practice meet the extended definition of “wages” under those Acts. This is not the case in Western Australia, where the Pay-roll Tax Assessment Act 2002 (WA) does not contain the same extended definition provisions as the other States.

In December 2022, the Queensland Revenue Office issued a Public Ruling titled Relevant Contracts – Medical Centres. The Victorian SRO and Revenue NSW have now also published Rulings titled Relevant contracts – medical centres. The Rulings are worth reviewing. They contain a summary of the complex relevant Payroll Tax Act provisions, and an explanation of them which is reasonably accessible, as well as a number of examples.

Managing the potential liability

The Thomas and Naaz decision did identify an arrangement that was in place for three of the independent contractor doctors, under which the doctors did not meet the definition of employee under the Payroll Tax Act 2007 (NSW), and there were no payments made to them by the practice which met the definition of wages under the Act, and in the case of those three doctors payroll tax was not payable.

In South Australia and Queensland payroll tax amnesties have been put in place intended to provide a breathing space to allow practices to adjust and prepare.

The Queensland amnesty is available to payments made to contracted GPs, where those payments fall under the extended definition of “wages” in the legislation, up until 30 June 2025. Practices wishing to take advantage of the amnesty must:

• submit an expression of interest using an online form
• make a voluntary disclosure and, if not already registered for payroll tax, register for payroll tax in Queensland by 30 June 2025
• comply with their ongoing payroll tax obligations after making the voluntary disclosure from 1 July 2025

The South Australian amnesty is available to payments made to contracted GPs up until 30 June 2024. Practices wishing to take advantage of the amnesty must:

• submit an expression of interest using an online form by 
• make a voluntary disclosure and, if not already registered for payroll tax, register for payroll tax in South Australia by 30 June 2024
• comply with their ongoing payroll tax obligations after making the voluntary disclosure from 1 July 2024

The NSW government has announced a 12 month freeze on payroll tax audits for medical practices to provide for a period of consultation, but there is no public indication at this stage that NSW or Victoria will implement similar amnesty arrangements. At the time of writing, the situation in Tasmania remains unclear.

Recommendations

It is strongly recommended that practices seek specialised legal advice on their potential payroll tax exposure, their contracts with independent contractor doctors, their practice documentation, billing and payment arrangements, and the public statements that they make in advertising and marketing material.

This article was originally published in AMA Victoria's blog, Stethoscope.

Read other items in the Australian Healthcare Brief - September 2023