Important – Are you exposed to potential Payroll Tax changes?

Please find below an update to our previous correspondence regarding the utilisation of Service Entities to engage practitioners and to provide administrative services within the medical and health care sector.

These services include provision of facilities and billing services for the practitioners. In turn, the practitioner typically retains between 60% – 70% of their fees generated and pays a Service Fee for facilities and billing services to the Service Entity.

Recent decisions in Victoria and New South Wales continue to have serious payroll tax ramifications for medical and other health practices that hold money on behalf of specialists engaged as independent contractors within Australia.

These decisions along with recent confirmation from the Commissioner of State Revenue in Queensland that medical centres in Queensland are likely to face significant payroll tax challenges, are a timely warning for general and specialist health practices to review the way payments are structured to anyone who operates from their practices.

The New South Wales Civil and Administrative Tribunal (NCAT) case is Thomas & Naaz Pty Ltd vs Chief Commissioner of State Revenue (2021 Thomas & Naaz).

The key elements of this case are as follows:

  • The taxpayer operated three medical centres;
  • The contracted doctors Bulk Billed patients, and the patients assigned their Medicare benefits to the doctors;
  • The Service Entity then claimed these benefits on behalf of the doctors; and after payments were reconciled the doctors would be paid 70% of the claimed funds whilst 30% was retained by the Service Entity as their ‘Service Fee’ for the various facilities and collection services provided to the doctors.

NCAT’s decision held that the arrangement in Thomas & Naaz was subject to Payroll Tax under the contractor provisions. The Tribunal held that the medical services were a necessary part of the taxpayer’s medical centre business. The tribunal held that the payments to the doctors related to the performance of work and therefore, were subjected to Payroll Tax.

There are many arguments backwards and forwards in relation to technical aspects associated with both the services and performance of work. Rather than debate the merits it is important to consider that such payments from a Healthcare practice to a contracted Practitioner may trigger Payroll Tax obligations.

A key element will be the terms of any agreement or arrangements between the parties as well as potentially the flow of funds surrounding Medicare & similar claims.

A medical or allied healthcare practice that banks consultation fees and Medicare claims into its Practice Account and thereafter remits the net amount after service fees to the Practitioner may be exposed. This practice may place the clinic or health entity at significant risk in relation to potential Payroll Tax exposure.

Based on the Thomas & Naaz case, service arrangements that were previously considered appropriate are now potentially carrying a risk factor.

Recent public ruling in Queensland impacting payroll tax compliance.

The Commissioner of State Revenue through the publication of Public Ruling PTAQ000.6.1 (Ruling) confirms the Commissioner’s position regarding the application of the relevant contract regime to medical centres.

In short, the Ruling, which took effect from its release date 22 December 2022, confirms there will be significant payroll tax pain for medical centre businesses in Queensland.

While it is expected that the Queensland Revenue Office will limit its audit activities to the 2022 financial year and beyond, an important update on payroll tax amnesty was announced soon after for contracted general practitioners.

Queensland payroll tax amnesty

Medical practices are liable to pay payroll tax on contracted general practitioners (GPs), and payments made to contractors may be taxable if their arrangement is considered a relevant contract for payroll tax purposes.

Given a potential lack of awareness of the payroll tax treatment of contractors among GPs, the Queensland Government will provide an amnesty on payments made to contracted GPs until 30 June 2025.

Medical practices that apply for the amnesty will not be required to pay payroll tax on payments made to contracted GPs up to 30 June 2025 and for the previous five years (2018-2025).

The amnesty is limited to contractor payments made to GPs and, for the purposes of the amnesty, a GP is registered as a general practitioner with the Medical Board of Australia.

The amnesty is not available to:

  • other medical doctors or allied health professionals;
  • medical practices that are already complying with payroll tax obligations;
  • new medical practices; or
  • non-medical businesses that are currently paying payroll tax on contractor payments.

If you are currently paying payroll tax on payments to contracted GPs, there is no change. If you are a new medical practice, you will need to comply. If you are an established practice and have not been paying payroll tax on your payments to contracted GPs, you may be eligible to apply for the amnesty.

Next steps for medical practices

Agreements underpinning arrangements between service entities and practitioners will need to be carefully reviewed and possibly updated to reduce the risk of exposure to payroll tax liabilities.

There are many factors that are relevant to determining whether a particular arrangement between a service entity and a practitioner, and payments made under that arrangement, might be subject to payroll tax.

Set out below is a summary of some key considerations:

  • Control of work hours and rate charged – practitioners should consider whether they have discretion about when they work, including the days and hours they do so and the rate they charge for the services.
  • Invoicing – invoices to customers and patients issued in the name of the practitioner could reduce the risk of payroll tax liability.
  • Fee collection – practitioners should consider which entity is collecting patient fees and the direction of services and facilities fees to the service entity.

It is also important to note that the current annual Payroll Tax threshold is $700,000 for Victoria and $1,200,000 for New South Wales.

We highly recommend that now is the time to review your Service Entity arrangements in detail. Please contact our office so that we can discuss your particular circumstances and consider the best way forward.

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