Exploring the current payroll tax risks for Western Australian medical practices

21 February 2023

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Current State of Play

There continues to be a significant level of scrutiny by State and Federal regulators, directed towards the rights and tax obligations of contractors and those who engage. Stemming from a changing industrial relations landscape, the evolution of the ‘contractor’ has been a key focus area of the Australian Taxation Office (ATO) and State Revenue Authorities (Revenue), with their spotlights planted firmly on medical practitioners and more recently, the operation of medical centres and allied health facilities.

Understandably, it is common practice for medical centres to have arrangements whereby the practitioners who work in them operate under facility or service agreements. In principle, this is structured to maximise practitioner capacity, whilst streamlining the administrative tasks to the practice operator for efficiency. Essentially, these arrangements have been understood to involve medical professionals conducting their businesses independently and paying a fee to medical centres for the provision of consultation rooms and administration services. Under these arrangements, generally the patient fees or Medicare benefits would be collected by the medical centre, before being passed onto the practitioner, less their applicable service fee. Historically, in our experience it was generally accepted these practitioners were classified as “contractors”, and as such no payroll tax was paid on the fees that were returned to the practitioner via the medical centre.

Shifting views

The recent ruling in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD (Thomas and Naaz) has brought to light the risk of payroll tax for medical centres which operate under similar arrangements.

Ultimately, in Thomas and Naaz, the Court held that the payments made by the medical centre to the practitioners were considered taxable wages and were therefore liable to payroll tax. The basis of the decision was that the practitioners were viewed as providing a service to the medical centre, even though at the same time, they supplied services to the patients. In this case, this finding was due in part to the control the medical centre had over the practitioner's working arrangements and the services being a necessary part of the centre’s business.

This conclusion meant that a relevant contract existed under Section 32 of the Payroll Tax Act 2007 (NSW) and it should be noted similar provisions exist under harmonised legislation in other jurisdictions. When coupled with the decision that the payments were paid in relation to the performance of work, it confirmed that these payments should be considered as taxable wages under Section 35. Whilst not a focus of the case, there are a series of exemptions which may relieve arrangements from being subject to payroll tax under these provisions, however these exemptions require a case by case assessment of the circumstances of each practitioner, each financial year and broadly, a practitioner that works exclusively for one practice is unlikely to attract an exemption.

Recent Updates

In late December 2022, and following the decision in Thomas and Naaz, the Queensland Revenue Office issued Public Ruling PTAQ000.6.1 which has given further guidance regarding the payroll tax liability requirements of medical centres.

This ruling, in applying the principles held in Thomas and Naaz Pty Ltd, concluded that, unless exemptions apply, a contract between a medical centre and a practitioner is a relevant contract if the practitioner provides medical related services to patients, and the medical centre provides members of the public with access to medical related services and engages a practitioner to provide these services.

In these circumstances, payments made by the medical centre to the practitioner will be considered taxable wages and are subject to payroll tax. AMA Queensland has lobbied the Queensland Government, which we understand is considering a proposal whereby this new interpretation would be subject to an Amnesty to allow medical centres not already paying payroll tax until 2025 to commence meeting this obligation.

What does this mean if you operate a medical practice in Western Australia?

The good news - Western Australia, unlike other jurisdictions, does not have the ‘relevant contract’ provisions in its Pay-roll Tax Act.

You might choose now to stop reading and consider yourself safe as you only operate in WA. However, whilst at its core this is a predominantly East Coast issue, there is still a risk of payroll tax applying where a common law employer-employee relationship is found, or where a Western Australian business also has a presence in other States.

A common law employer-employee relationship may be determined based on the facts of a particular arrangement. In making this determination, we’ve found in recent years the Courts have placed greater weight on the terms of a contract in determining employment matters. This was on the back of several Court decisions including two High Court decisions, CFMMEU & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek), which dealt with the perennial employee v contractor argument.

In ruling on the Jamsek and Personnel Contracting cases, the High Court effectively found that the case which set the employee v contractor precedent for the last 20 years, has been generally misunderstood and that, when deciding whether a worker is an employee or contractor, one needs to consider the contract primarily, rather than looking at “facts and circumstances” from conduct across the entire engagement.

In light of these judgements and after much anticipation, the ATO has released its updated draft ruling (TR2022/D3) and draft practical compliance guideline (PCG 2022/D5) in December 2022. The ATO is clear that a contract will be a sham if it is not a legitimate record of the intended legal relationship between two parties and it is evident that both parties intended their relationship to differ from their written contract. Rather than the label, it is factors such as:

Control
Integration
The ability to delegate work
Results
Tools and Equipment
Risk

Therefore, it is critical that any contractor agreement comprehensively establishes the rights and obligations of the parties to the contract, and that those rights and obligations (which must be set out accurately) support the characterisation of the contractor as a genuine independent contractor, in order to mitigate the risk of inadvertently resulting in a classification of a common law employer arrangement which may otherwise lead to a payroll tax liability, including in Western Australia.

Businesses outside of Western Australia

If you do operate a business in States outside of Western Australia, you may like to discuss further with your employment tax concerns, we would welcome a conversation with you.