Revenue NSW has shone a spotlight on payroll tax implications for medico’s and other similarly structures professional practices due to a NSW Civil and Administrative Tribunal (NCAT) decision which has been confirmed on appeal.  The result of this appeal is set to be reflected in the audit practice of the relevant office’s of state revenue.

Payroll tax is levied on salary and wages, however, can is also levied on other payments made under “relevant contracts” that are considered to be wages.

Medical and other professional practices usually operate a ‘service entity’ model where the practice collects consultation income, on behalf of the doctor or professional then distributes to the doctor after deducting service fees.

In the NCAT Appeal Panel decision in Thomas and Naaz, who operated three bulk billing medical centres the structure of the arrangement was broadly as follows:

• Doctors were engaged with these medical centres under written service agreements, that provided for a 30% service fee (plus GST) for room rental, shared administration and medical support; and
• The medical centres undertook all of the paperwork to collect the Medicare Benefits from the patients on behalf of the doctors and (ignoring GST), remitted 70% to the doctors and retained the remaining 30% as service fees.

Revenue NSW held that the payments to the doctors were under a relevant contract and therefore the payments to the doctors were taxable wages for payroll tax purposes.  A key issue was the flow of funds between the practice and the doctors, however, Revenue NSW is of the view that this is not the sole determining factor.

Whilst there are limited exemptions to the inclusion of such payments as taxable wages for payroll tax purposes such that it is likely that payments from medico service entities to health care practitioners will attract payroll tax. If there is a payroll tax liability, penalties of 30% and interest may be charged upon review of authorities.  As such, this is likely to require practices to rethink the pricing structure of services.

We strongly suggest that Service Agreements and work practices are reviewed together with consideration of pricing of services. If you have any concerns or wish to seek expert advice regarding your current structure, Service Agreements and payroll tax risk please reach out to your ESV engagement partner.