Payroll tax risks to medical practices and allied health providers

If you own a medical or allied health practice that engages subcontractors, and you do not pay any payroll tax, you should be aware of two recent court cases.

Essentially, both court cases (one in NSW and another in Victoria) found that the nature of the relationship between the practice and its “subcontractors” was more akin to an employer/employee relationship – making all payments over a certain threshold subject to payroll tax.

Payroll tax is a tax applied to businesses that exceed a certain amount in total wage payments per year. The threshold differs depending on the state that you operate in.

In the ACT, the threshold is $2 million which is the highest of any state or territory. However, the tax rate is also the highest at 6.85%. This means businesses that operate in the ACT do not have to pay payroll tax until their total taxable wages reach $2 million or more.

The recent court cases will only impact medical centres thatIf you own a medical or allied health practice that engages subcontractors, and you do not pay any payroll tax, you should be aware of two recent court cases. engage many doctors, or allied health businesses that may have multiple sites with multiple consultants.

In light of these recent cases, we are urging practice owners to review their arrangements with service providers.

What’s the difference between a subcontractor and an employee?

The court decisions focused on the definition of a “wage” and “subcontractor payment”.

They looked closely at service fee arrangements, where the doctor or consultant was renumerated based on a percentage of patient fees derived from working for the medical centre.

The most recent case (Thomas and Naaz Pty Ltd V Chief Commissioner of State Revenue NSW) provided a guideline of what type of arrangements come under the definition of “wages” under payroll tax legislation.

The facts of this case were:

  • Practice owners operated 3 medical centres.You need to learn the difference between a subcontractor and an employee when it comes to payroll tax.
  • They provided rooms for the doctors to see patients.
  • Doctors used their own Medicare details for invoicing patients.
  • The practice received the funds from Medicare.
  • All administrative employees who collected the fees and made bookings for patients were employed by the practice.
  • Each fortnight, the doctors received 70% of the claims paid by Medicare for patients they saw.
  • The service agreement detailed the required hours of work, leave policy, and other employee-like provisions.
  • The medical centre set the fees charged to patients.
  • Patients were “owned” by the practice and not the individual doctor.
  • There were restraints on the doctor leaving and setting up a practice nearby.

Most of the doctors worked exclusively for one of the medical centres owned by the applicants (practice owners) so they could not prove that the doctors were in business.

This meant they were actually employees of the centres, as they were not consulting to the public in general.

What types of arrangements are exempt?

The court reviewed the service agreements in place and determined most of the control was held by the medical centre including:Payroll tax - what types of arrangements are exempt?

  • Which patients saw each doctor
  • The hours the doctors worked; and
  • That the doctors had no right to substitute themselves with another person if they were sick or on leave.

This is the very definition of an employer/employee relationship and not two independent businesses.

If a health provider had collected their own fees, rented a consulting room, and used the administration function of the practice for patient bookings, there may be a case that these payments were exempt from payroll tax.

The doctors could also consider having their own administrator or bookkeeper who is not the same as the medical centre, and have an option to substitute another qualified practitioner when they could not work.

In addition, patient records would need to be owned by the doctor and not the centre.  However, this is unlikely to be seen as a desirable solution for medical or health practices as it could mean the business loses its goodwill value.

What should you do now?

Subcontractor arrangements like this do not just exist in the health industry. Professional practice businesses must be aware of recent court rulings and consider the implications if they engage in these types of arrangements which may be subject to backdated, current and future payroll tax.It’s important to get advice on whether it’s likely that your specific agreements could be subject to payroll tax.

If you’re a practice owner with similar arrangements, you need to consider your agreements and potential liability.

As agreements can have different conditions, it’s important to get advice on whether your specific agreements could likely be subject to payroll tax.

RSM is a national accounting practice with accounting professionals who specialise in the health industry. We can help you review your subcontractor agreements and potential liability, so you can decide how best to proceed with arrangements moving forward.

For further information

To speak with an RSM advisor regarding your agreements, please contact your local RSM office.