Since the decision of the Court of Appeal of the Supreme Court of Victoria in September 2019 in Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Optical Superstore), there has been considerable uncertainty and concern about the payroll tax position for medical and health practices. A recent decision in New South Wales and the approach of the Revenue offices since September 2019 appear to have provided greater certainty but some may not see that certainty as a good thing.
It is a common practice for medical, dental and allied health practices to operate under a ‘tenancy and agency’ model, under which a healthcare provider (e.g. a doctor or dentist) engages a practice to provide facilities and administration services to the healthcare provider for a service fee. These arrangements are structured on the basis that the healthcare provider is conducting their own business and performing work for the patients, with the support of the facility provider. As part of these arrangements, it was commonplace for the facility provider to collect the patient fees from patients on behalf of the healthcare provider and, after deducting a service fee, pay the balance of the patient fees to the healthcare provider.
Until the decision in Optical Superstore, it was thought that the payments by the practice to the healthcare provider under these arrangements are not subject to payroll tax — this is because the money being paid to the healthcare provider already belongs to the healthcare provider, and is only being held by the practice on trust for the healthcare provider.
When the decision in Optical Superstore was handed down, the implications of the decision were unclear. The particular features of the arrangements in Optical Superstore led some to believe that the decision would not have general application. However, the audit approach of the Revenue offices since Optical Superstore and the recent decision of the New South Wales Civil and Administrative Tribunal (NCAT) in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (Naaz) suggest that nearly all healthcare practice arrangements are now potentially subject to payroll tax.
In addition, it is understood that Revenue NSW, and potentially other Revenue offices, are developing a guidance document on the application of payroll tax to healthcare practices. The document will reflect Revenue NSW’s current practice at audit that arrangements between facility providers and healthcare providers are nearly always relevant contracts for payroll tax, subject to an exemption being available.
Relevant contract provisions and healthcare practice arrangements
There are four statutory provisions in the payroll tax laws that are particularly important, when considering whether healthcare practice arrangements are subject to payroll tax as ‘relevant contracts’ as follows:
- Section 32(1) of the Payroll Tax Act 2007 (NSW) (PTA)[1], with the key issue in this context being whether the healthcare provider is regarded as providing services to the facility provider in addition to any services being provided to the patient. In both Optical Superstore[2] and Naaz, it was found that the healthcare practitioners were providing services to the facility providers;
- Section 32(2) of the PTA, which sets out the exemptions available to an arrangement being a relevant contract. Commonly, in healthcare practice arrangements, the only potential exemption is that the healthcare provider is providing services of the kind to the public generally (i.e. section 32(2)(b)(iv) of the PTA);
- Section 35 of the PTA, which concerns when a payment made by a deemed employer to a deemed employee will be taxable wages. In Optical Superstore, it was held that all payments to the deemed employee will be caught as long as there is a sufficient connection to the work performed by the deemed employee and, further, that money held on trust by the deemed employer was not excluded; and
- Section 46(2) of the PTA, a specific anti-avoidance provision capturing arrangements where someone other than the deemed employer made the payment to the deemed employee and which the Revenue offices have cited as the basis for their position that changing the money flow, so that the healthcare practitioners collect the fees, does not alter the payroll tax outcome.
Naaz decision
In Naaz, the NCAT held that the healthcare practitioners, being doctors, were providing services to the medical practice under the arrangement. The NCAT considered that this was clear from the following contractual terms of the arrangement:
- that the doctors agreed to provide the services to patients from the facility five days per week pursuant to rosters and agreed to provide advance notice of leave, that could be no more than four weeks per year;
- that the doctors agreed to promote the interests of the facility provider;
- that the doctors agree to abide by the operating protocols of the facility provider; and
- that the doctors gave a restrictive covenant that operated if they ceased providing services from the facility.
While the NCAT relied upon the above contractual terms, it should not be assumed that, had such terms been absent from the contracts, the NCAT would not have held that the arrangements were ‘relevant contracts’ under section 32(1) of the PTA.
In Naaz, the period for which assessments were issued was 2013 to 2018 and, despite the fact that the Optical Superstore decision was handed down only in September 2019, penalty tax was imposed at the maximum rate.
Approach of the Revenue offices
Recent experience during audits indicates that the approach of the Revenue offices is that most arrangements between healthcare practitioners and facility providers will be relevant contracts under section 32(1) of the PTA. Accordingly, to prevent the arrangements being subject to payroll tax, it will be necessary to establish that an exemption in 32(2) of the PTA applies.
Revenue NSW is currently formulating a practice note or ruling on the application of the relevant contract provisions to healthcare practice arrangements. It is understood that the guidance document will confirm the practice that has been adopted by Revenue NSW at audit.
It is also understood, based on discussions with Revenue officers during recent audits, that the guidance document will confirm Revenue NSW’s view that section 46(2) of the PTA will operate where the healthcare practitioner collects the fees from patients to still deem the payments retained by the healthcare practitioner to be taxable wages of the facility provider.
Final observations
The following should be noted:
- healthcare practices that use a tenancy and agency model now likely need to include payments made to the practitioners in their taxable wages for payroll tax, unless an exemption to the relevant contract provisions is available;
- it can be expected that the Revenue offices will dedicate compliance activities to healthcare practice arrangements over the next six to 18 months;
- from experience at audit, the Revenue offices appear unmoved by policy arguments about the extension of payroll tax to arrangements that were previously not contemplated as being caught; and
- it appears that it is Revenue NSW’s view that it is not possible to restructure to avoid the operation of the relevant contractor provision, but it will be worthwhile examining the position in the guidance document.
[1] The statutory provisions referred to in this note exist in all States other than Queensland and Western Australia. In Queensland, the same provisions exist, albeit the section references are different. Western Australia does not have relevant contract provisions in its payroll tax law.
[2] This was only dealt with at first instance in the Victorian Civil and Administrative Tribunal in The Optical Superstore Pty Ltd & Ors v Commissioner of State (Review and Regulation) (Corrected) [2018] VCAT 169 as the taxpayer chose not to appeal this finding.
[TaxVine 47, 10/12/21] One of the Tax Institute’s Sydney members: Matthew McKee, FTI, Partner at Brown Wright Stein Lawyers, considers the payroll tax position for medical and health practices following recent case law.
[Tax Month – December 2021 – Previous 2021] 12.12.21