Victoria’s State Revenue Office (VSRO) and NSW Revenue (RNSW) issued near identical rulings on 11 August 2023 on the application of payroll tax to payments made by medical centres to health professionals. Unsurprisingly, the two revenue authorities followed a long string of court victories to publicly confirm they will require payroll tax on such payments.
Consistent with their public statements, the two revenue authorities have not offered an amnesty from the tax nor deferred its practical commencement. However, it is surprising that the date of effect of the rulings is stated to be 1 July 2018. That means all liabilities within the statutory recovery period of five years are effectively owing. This is not consistent with many decisions by RNSW’s audit teams in the past three years which have often accepted the liability only applies from the 2019 date that the landmark decision in the Victorian Optical Superstore case was handed down.
What is the payroll tax treatment adopted in the rulings?
The general position taken in the rulings is consistent with Optical Superstore and the NSW Thomas and Naaz decisions. In summary, the rulings clarify that:
- The medical centre is treated for payroll tax as an "employer”;
- The health professional is treated for payroll tax as an employee even if they are not an employee under employment law;
- The payments made by the medical centres to the health professional are treated as wages (to the extent they are payments for work related services);
- The general payroll tax exemptions available for contractor arrangements can apply; and
- Where exemptions are not available, the medical centre’s payment will be taxable subject to payroll tax free thresholds.
What is the impact on medical centres?
Various medical associations and health industry spokespeople have expressed alarm at the court decisions and particularly now to these rulings. It is easy to see why. Most medical practices would not otherwise pay payroll tax as the total wages paid to say dentist nurses and administrative staff, for example, usually do not reach the payroll tax free threshold. If just $1million of payments made to health professionals were subject to payroll tax in each of the past five years, a medical centre in Victoria or NSW would have liabilities approaching $250,000 before interest.
Such outcomes must threaten the viability of those medical centres that operate on a breakeven basis. The prospect of closure of medical centres is surely a ground for the Victorian and NSW Governments to offer an amnesty period where some of the older liabilities and interest are waived on condition that the remaining liabilities are paid by a set date. It should be noted that both the Queensland and South Australian Governments have agreed to forms of amnesty and deferral of the liabilities. For example, Queensland medical centres, which lodge an expression of interest with Queensland Revenue by 29 September 2023, will not be required to pay payroll tax on payments to contracted GPs until July 2025. That amnesty does not apply to other health professionals.
Restructured payment arrangements
Following the earlier court decisions, many medical practices restructured their arrangements to, in effect, reverse the payment flows, as follows:
- The health professional’s personal practice entity receives payments directly from patients and Medicare in respect of services provided at the medical centre,
- The practice entity pays a facilities and administration fee to the medical centre, and
- The practice entity in turn pays wages to the health professional.
The rulings give an example where even these arrangements are caught within the payroll tax net. While the health professional is clearly an employee of their personal practice entity, VSRO and RNSW deem them to be an employee of the medical centre. The ruling treats as medical centre wages the wages payment made by the practice entity to the health professional themself. Not only is this a payment that the medical centre does not make but, in most cases, it will be one which the medical centre does not have details on, nor can it necessarily obtain such details.
In the final Thomas and Naaz decision, these payments were distinguished from those subject to payroll tax. None of the litigation so far has treated these payments as wages paid by the medical centre. It is Mazars’ view that litigation will be inevitable once a Revenue Authority attempts to enforce liability on these payments and the medical centres have a potential precedent to rely upon.
What arrangements are not caught?
In addition to contractor exemptions, the rulings recognise that not all health professional arrangements will be caught by the provisions. There are some arrangements where a centre does not provide members of the public with access to medical related services. Rather, the centre is merely a provider of rooms to the health professional. The centre itself does not receive services from the health professionals nor does it offer services to the public. Medical centres need to be very careful before relying on this distinction. While many may think this is the reality, their website and health professional contracts may present a very different picture. For example, the medical centre may in fact attract the custom and have control over the health professional’s patient services.
What should medical centres do?
With the issuance of the rulings, all medical centres in Victoria and NSW need to examine their payroll tax position and make decisions. That can include restructuring or pursuing exemptions or amending or enforcing health professional contracts to ensure they contribute to the liability. In some cases, medical centres will need to obtain external funding to meet liabilities.
To find out how this decision may impact your medical practice or to discuss next steps you should consider, contact your usual Mazars advisor or alternately one of our experts via the form below or on:
Author: Stephen Baxter
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