Payroll tax and medical service entities – the ‘final’ chapter

We have released a number of articles over the past couple of years (in February 2022, July 2022 and January 2023) on this issue following the concerning decision of the New South Wales Civil & Administrative Tribunal (NCAT) in the ‘Thomas & Naaz case’.  

While the various State and Territory governments continue to claim that their interpretation of the payroll tax law hasn’t changed since 2008 (when the current provisions were introduced), it is not unreasonable to say that this came as a significant surprise to the medical, legal and accounting professions.

It now appears that without legislative change, the final chapter was written last week when Revenue NSW and the State Revenue Office of Victoria simultaneously released almost identical public rulings on this issue. These rulings appear to be the culmination of the Thomas & Naaz series of cases, which ended with an unsuccessful appeal before the NSW Supreme Court of Appeal in April this year.

Where does the matter stand?

Outside of Western Australia, the last hope is legislative change and given public statements to date and the harmonisation of payroll tax laws (which largely means all States and Territories would have to agree to the change), this is highly unlikely.

The Court of Appeal decision has effectively put an end to the judicial process.

The revenue offices of Queensland, NSW and Victoria have all now issued public rulings which take a strict interpretation of the court decisions and leave minimal room to move for medical centres. The word ‘minimal’ is critical and is discussed in more detail below. The rulings are basically identical and very broadly conclude:

• Outside of simple tenancy arrangements, the vast majority of service agreements between medical centres and doctors are ‘relevant contracts’ for payroll tax purposes. A ‘simple tenancy arrangement’ is likely limited to the scenario where the landlord is merely that – a provider of a space for doctors to service their own patients and receive nothing in the way of administrative or other services from the landlord.
• Patients are customers of both the medical centre and the doctor – not just of one or the other
• The fact that only doctors individually can hold a Medical Provider Number and legally provide medical services to patients doesn’t change that position
• Even though patient fees are legally (or at least beneficially) owed or paid to the doctor, the mere act of remittance by the medical centre, such as out of a clearing account or pooled account in the name of a medical centre, is sufficient for there to be a payment by the medical centre to the doctor
• The combination of the above points results in the payments or remittances by the medical centre to the doctor being ‘taxable wages’ and subject to payroll tax owing by the medical centre (where the taxable wages threshold is exceeded)

The revenue offices of Queensland and South Australia have offered amnesties but these are very limited in that they:

• Only apply to payments to contracted GPs, not employed GPs or any other medical or allied health professional
• In South Australia only for payments up to 30 June 2024 and in Queensland only for payments up to 30 June 2025
• Require the medical centre to apply for amnesty before 29 September 2023, however this might be construed as a multiple edged sword.

There is no amnesty in any of the other States and Territories and the number of reports of retrospective payroll tax liabilities (the revenue offices can assess payroll tax liabilities for periods up to five years ago) amounting to many hundreds of thousands of dollars are growing.

Next steps

Before you throw in the towel, in our view, and we recommend that you always seek advice specific to your own circumstances, there are two areas for medical centres to focus on next.

The first is alluded to in the public rulings. Payments may exempt from payroll tax if any one of up to nine exemptions laid out in the legislation are satisfied. Our experience is that two of these exemptions are potentially available to medical centres:

1. 90-day exemption – service agreements and payments made under them are exempt if a doctor provides their services at a medical centre for no more than 90 days in a financial year. This may be relevant where doctors work part time and work at different places throughout a year (provided those ‘places’ are not related).
2. General public exemption – which applies “if the Commissioner is satisfied the practitioner who provided the services under the contract ordinarily performs services of that kind to the public generally in that financial year”. The three published rulings state that:
   - The medical centre is required to apply to the Commissioner for a determination
   - The practitioner must provide services of the same kind to other principals, such as other medical centres or hospitals

Our experience is that many doctors will be in a position to satisfy one or both of these exemptions.

The second area for medical centres to consider is one that all the published rulings are silent on, but which was referenced in all of the Thomas & Naaz decisions. The medical centre in Thomas & Naaz gave doctors the option of Medicare benefits being collected by the service entity (and remitting after service fee to the doctors, as with direct patient fees) or the doctors collecting those benefits directly themselves. Three doctors chose to collect the benefits themselves. The NCAT Appeals Panel noted:

Payroll tax has been levied by the respondent only in respect of the payments made by the appellant to doctors from the Medicare benefits it collected in its bank account on the doctors’ behalf (i.e. the amounts equal to 70% of the claims paid by Medicare). No payroll tax has been levied in respect of the payments made directly by Medicare to the three doctors.

In the Court of Appeal decision, it was noted that “the approach taken by the other three meant there was no payment, and so the deeming provisions were not engaged”.

The point is that there can only be a payroll tax liability if there is a payment by the medical centre to the doctor. If the doctor directly collects their own patient fees there is no payment and, as such, even though there is a relevant contract, there is no payroll tax liability. 

We acknowledge that there are some very real practical, commercial (eg. cash flow) and technology related issues with a process by which doctors collect their own fees and use these to pay their service fees. In light of the Rulings making reference to capturing third party payments to a practitioner, there may even be a possible payroll tax anti-avoidance issue. –These matters are well beyond the scope of this article, but we are aware that a number of banks are working on technology solutions.

What does it all mean?

The true fallout of Thomas & Naaz and the approaches of all State and Territory revenue authorities and governments (with the exception of Western Australia) is yet to be seen or felt. However, what we know is this:

• GP medical centres work on very thin margins such that the only way to meet prospective payroll tax liabilities is through increased patient fees and/or service fees
• Increased patient fees and service fees doesn’t deal with the real existential risk that the five year retrospective liabilities create. Perhaps with the exception of very large corporatized medical centres, it is more than highly likely that no medical centre would have retained anywhere near sufficient profits (if they ever made them) to meet such liabilities.
• Substantial retrospective liabilities is likely to lead to a chain reaction of medical centre closures, greater pressures on hospital emergency departments, loss of doctors from remote and regional areas. The broader health system is already under stress and would likely not be able to cope under these circumstances.
• There has been a substantial decline in the number of medical students graduating into general practice while, at the same time, many ‘older’ GPs are seeing this matter as a major reason for bringing forward their retirement – this is a during a period when there has never been a greater need for GPs and this is likely to exacerbate the problem

The message that this is sending is confused, as evidenced by the following examples:

• In Queensland, there has been a major public campaign to encourage the general public to visit GPs for ‘minor’ ailments and issues, rather than their closest public hospital emergency department – payroll tax pressure will have the opposite effect
• At a time when the Federal Government has provided an extremely modest increase in the Medicare rebate, payroll tax will make bulk billing unsustainable
• ATO rules risk medical service entities breaching income tax rules if they increase service fees to doctors

To conclude

The initial positivity that either or both the judicial process or State and Territory Governments would favourably resolve or eliminate this issue has now ceased.

However, we see that the two areas of focus outlined above provide realistic solutions, though not without cost and some time. We recommend that all medical centres (whether for GPs, medical and surgical specialists and allied health practitioners) outside of Western Australia consider these as a matter of urgency – even in Queensland and South Australia where despite having amnesties in place, these are limited in their application and the amnesty periods will end quickly.

As always, we encourage you to seek independent advice for your own specific circumstances. Of course, please reach out to the authors and their team who have significant experience in this area.

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