TAX TIP #35: | PAYROLL TAX | SERVICE AGREEMENTS

Facts

Company A operates a medical centre.

Doctor B carries on her business from the medical centre under a written service agreement with Company A.

The parties operate as follows:

• Company A provides a room to Doctor B for consultations, administration and medical support services;

• Doctor B deals directly with patients and bulk-bills each patient;

• Company A make claims on Medicare on Doctor B’s behalf;

• the Medicare claims are placed into an account held Company A;

• Company A pays an amount equal to 70% of the Medicare claims to Doctor B and retains the other 30% as a service fee.

Doctor B agrees to:

• provide the services on a 5-day week basis, including weekend rotation;

• promote the interest of the medical centre;

• abide by operating protocols;

• meet roster requirements;

• give notices of absence; and

• not channel patients away from the medical centre.
  

Question

Is Company A liable for payroll tax for the funds (70% of Medicare claims) they remitted to Doctor B?

Answer

Yes.

Tax Tip

The facts of the recent case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220 are similar to the facts set out above. In that case, the Tribunal concluded that the service agreement secures the provision of services provided by the doctors to the patients and that the doctors provided the services not only to the patients but also to the medical centre. The medical centre in that case had a high level of control over the doctors that led to the doctors being essential to the medical centre’s business.

Using the same logic in Thomas and Naaz, the terms of the service agreement support the conclusion that Doctor B is providing services not only to her patients, but also to Company A. Due to the high level of control over Doctor B by Company A, she will be deemed an essential part of the business. As a result, the payments made from Company A to Doctor B are deemed 'taxable wages' and is subject to payroll tax.

Medical and Allied health practices and their advisers should review and/or redraft their service agreements to:

1. ensure that where doctors carry on their own businesses, they exercise a high level of control over the provision of their services and management of funds;

2. ensure that the doctors collect the Medicare payments; and

3. pay the medical centre the agreed service fee.

While it may not be seen as commercially desirable for medical centre owners to not control the flow of funds, which creates monetary risk, this structure is opposite to the structure in Thomas and Naaz and may minimise the risk of payroll tax exposure because the argument is that no wages that are ‘paid or payable’ from the medical centre owner to the doctor are made in order to trigger the imposition of payroll tax on taxable wages.

From a financial point of view, it means the medical centre will save on an additional 4.75% to 4.95% payroll tax. However, the disadvantage is the losing control of the flow of funds.

As Thomas and Naaz followed in the footsteps of the Victorian Supreme Court of Appeal case Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd [2019] VSCA 197, it is highly likely to be used as a precedent for future cases.

Thomas and Naaz can potentially be applied to any business where a consultancy fee or commission is paid e.g. real estate agencies, motor dealerships and other businesses where contractors or consultants are engaged rather than employed.

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