Important – Are you exposed to potential Payroll Tax changes?

Within the medical and health care sector, many of our clients utilise Service Entities to engage practitioners and to provide administrative services.

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.

Recently there was a decision in the New South Wales Civil and Administrative Tribunal (NCAT) associated with Payroll Tax. The decision handed down was in favour of New South Wales State Revenue Office and is of deep concern.

The 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.

Key areas to review include any agreement between the practitioner and the Service Entity as well as the banking arrangements. In our opinion a number of elements need to be considered which include:

  • Banking arrangements and collection of fees
  • Rostering arrangements
  • Restraint of trade
  • Ownership of patient records
  • Other considerations

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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