Medical practices can plan for payroll tax

South Australian doctors and practices should be ready to face the local implications of new interpretations of interstate tax legislation, write tax law specialists Kale Rigano and Alex Belperio of AMA(SA) legal partner Norman Waterhouse.

The issue of evolving judicial interpretation of payroll tax legislation has been extensively discussed across Australia in recent months (and years) due to landmark cases such as Chief Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Optical Superstore) and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220 (Thomas and Naaz).

A close working relationship between AMA(SA) and Norman Waterhouse Lawyers led us to examine this issue and how private practitioners might safely navigate any new payroll tax landscape.

Here, we provide a summary of some key factors and recent developments. We will continue working with AMA(SA) to help the association and its members manage the ramifications of any legislative or interpretative change in the months ahead.

Payroll tax – in a nutshell

Unlike federal taxes such as income tax and CGT, payroll tax is a creature of state-based legislation and is overseen by state revenue authorities. It is essentially a tax imposed on each dollar paid in wages that exceeds a threshold set in each state and territory.

While the interpretation of state-based legislation typically differs from state to state (or territory), payroll tax legislation is ‘harmonised’ in Australia, making its interpretation in one state more directly applicable in other states. Essentially, this means that payroll tax legislation in all Australian states and territories (except WA) is largely the same, and likely to be interpreted and applied in the same manner; however, the thresholds for payroll tax applying and the rates imposed are vastly different across jurisdictions. In South Australia, payroll tax starts to be charged on wages (including superannuation, fringe benefits, etc.) above $1.5 million (at variable rates), with the top rate of 4.95% payable on all wages above $1.7million.

Harmonisation is the main reason why South Australian medical professionals should be concerned about the NSW decision in Thomas and Naaz. While this case was decided in NSW, given the similarities of the legislation, it is likely that the authority will be applied in South Australia if tested here.

Effect of recent cases

Optical Superstore and Thomas and Naaz primarily centred on the interpretation of the ‘relevant contract’ provisions. Broadly speaking, the intent of these provisions is to enable state revenue authorities to capture in the payroll tax net payments made to independent contractors. These provisions are drafted very broadly.

Where a ‘relevant contract’ is deemed to exist, the person who supplies services under that contract is deemed to be an employee for payroll tax purposes, and the person (or entity) receiving those services is deemed to be the employer. Payments made by the ‘employer’ to the ‘employee’ under such an arrangement are then taken to be wages and will be included when determining the employer’s total wages and payroll tax liability for a given period.

For example, for medical practice entities, this can operate so that the medical practice is deemed to be the employer of each doctor it has engaged, with the result that payments made to those doctors are included in the practice’s wages for payroll tax purposes.

Until recently, payroll tax legislation has not been interpreted to include doctors and deemed ‘employer’ practices in this way. But if the State Government decides adopt the interpretation set down interstate, and given the South Australian threshold of $1.5 million in wages, we expect that a practice with three to four fulltime GPs will now likely find themselves exposed to payroll tax, so that the payments to GPs will be added to the wages paid to administration staff, nurses, etc. – at a cost of 4.95% for each dollar over $1.7 million (and lesser rates for each dollar between $1.5 million and $1.7 million).

Notwithstanding the example above, it should be noted that the application of the ‘relevant contract’ provisions is not limited to GPs – it also applies to other medical specialists, dentists and allied health professionals. If applicable, the provisions can pick up payments made from Medicare, insurance providers, gap payments and PIP payments.

Operating as a service entity (that is, providing administrative services only to allow doctors to conduct their own medical practice) provides some protection, but it does not by itself stop the application of the ‘relevant contract’ provisions – and particular attention will be paid to how the service entity actually provides its services.

The result of these cases means that many practices and service entities may now be unwittingly in breach of their payroll tax obligations (and may also have substantial historical liabilities as a result).

Further developments

Following these cases, the AMA has advocated to relevant state governments for the protection of medical practices against excessive payroll tax liabilities and has made significant progress in some jurisdictions.

However, in a ruling published on 22 December 2022, the Queensland Revenue Office (QRO) has signalled its intent to drag in medical billings from angles outside the ‘relevant contract’ regime, by relying on other provisions contained in the payroll tax legislation relating to third-party payments and employee-agency contracts (which, like relevant contracts, may be deemed to exist if certain broad conditions are satisfied). While we do not agree with the QRO’s position, given the harmonisation of our payroll tax legislation, in our view the QRO has signalled where the next battle may be fought.

What can be done?

Aside from creating fear and uncertainty, these recent developments have transformed the general position of payroll tax in a medical practice context, potentially exposing many practices around the country to retrospective and future payroll tax liabilities.

Understandably, these potential liabilities have left many within the profession extremely concerned. In our view this problem must ultimately be fixed by legislative intervention – such as providing an exemption on public policy grounds for payments made to medical professionals, as sought by the AMA across the country.

It is important to note that the new interpretations will not affect all medical practices (as this depends on the particular facts and circumstances of each individual practice/arrangement). Some practices or service arrangements may already be structured so that the new interpretations have no application.

Further, if your practice is exposed (in our experience, this will be most practices), proactive steps can be taken to stop the operation of the ‘relevant contract’ provisions and alleviate the payroll tax concerns flowing from those provisions. This involves careful tax planning and commercial structuring (including a detailed review of the contractor agreement or service arrangements) to ensure that the reasoning applied in Optical Superstore and Thomas and Naaz, can be countered. What is less certain is whether RevenueSA believes the QRO ruling has any merit – but even so, we believe that with appropriate structuring the additional avenues of attack can be defended.

These arrangements will by necessity result in some operational and administrative shifts within the practice. However, once implemented, the practice’s administration should proceed largely as before – with GPs treating patients, and the administration making appointments and reconciling billings. Safeguarding yourself in this rapidly changing environment does not have to jeopardise the fundamental functionality of your business.

We are pleased to announce that, as a preferred provider of AMA(SA), we have prepared a package to help practices determine their exposure under these new interpretations and, if exposed, provide advice as to the available options. We have also prepared a revised services agreement to avoid some of the pitfalls highlighted in the cases and guide future practice administration. Due to our relationship with AMA(SA) we can offer a discounted fee to AMA(SA) members.

To discuss your potential payroll tax liabilities, and whether the recent cases affect your practice or service arrangements, please contact Kale Rigano KRigano@normans.com.au or Alex Belperio ABelperio@normans.com.au at Norman Waterhouse Lawyers on (08) 8210 1207. Our experience advising clients in relation to state and federal tax jurisdictions extends over a large variety of industries and diverse tax profiles.

The content of this article is not intended to be legal advice and does not consider your individual needs and circumstances. Legal or other professional advice should be sought before acting or relying on this article or any part of it.