Deep dive: Employment tax complexities for healthcare practitioner arrangements
Arrangements with healthcare practitioners can present complex problems when considered in the context of Payroll Tax and the Superannuation Guarantee. -10 September 2021
Share this article
Arrangements between healthcare centres and medical practitioners have presented a continuum of complexity for regulators for many years. This article discusses the problem presented for such arrangements, when considered in the context of Payroll Tax and the Superannuation Guarantee (SG).
Whilst the question of common law employment has tended to be clearer, challenges have existed with the application of extended tests within the Payroll Tax and SG legislation which target specific types of independent contracting arrangements. These challenges are particularly present in arrangements between healthcare centres and practitioners, which demonstrate the following characteristics:
- Practitioners contract with the healthcare centre for the usage of premises and administrative support, for which they pay a fee; and
- Healthcare centres, as part of their service, collect patient billings and remit those monies to the practitioners less their service fee.
We broadly refer to these arrangements in this paper as facility and service arrangements (FSAs).
The extended tests relating to Payroll Tax and SG broadly require the provision of services by a worker (or contractor) to a principal. Consequently, the application of these extended tests to FSAs has been challenged by businesses, on the basis of views to the following effect:
- Medical practitioners supply services to their own patients from the relevant premises;
- No such services are supplied by medical practitioners to the healthcare centres;
- Any payments made are broadly the remittance of the medical practitioners’ own monies, and are not in connection with, or in return for, the provision of services to the healthcare centre; and
- Specific to SG, a further view has been that even if there were any such services supplied to the medical practices, payments would be on a ‘results’ basis and would not fall within the remit of the extended SG employee test.
Recent developments have placed increased pressure on these views, thereby increasing the risk of Payroll Tax and SG applying in certain circumstances. We highlight below our perspective on the key causes for this.
1. The Optical Superstore series of judgements1 and the recent Thomas vs Naaz decision2
There are numerous articles summarising the outcomes in the Optical Superstore series of judgements, which started in the Victorian Administrative Appeals Tribunal, and flowed to the Victorian Supreme Court and then on to the Victorian Court of Appeal.
These judgements must be read collectively, in order to appreciate their significance, and we surmise that the key takeaways are as follows.
The ‘relevant contract’ provisions are extremely broad, and the State Revenue authorities are likely to apply them (subject to a common law or employment agency relationship) to arrangements between organisations and non-employed service providers.
It is true that the non-employed service provider must supply services which are ‘for or in relation to the performance of work’ to the organisation (‘the principal’) in order for there to be a relevant contract. However, the Courts have long held that this is not a narrow test, and it has been found time after time that a service provider may be held to have supplied ‘some’ level of service to a principal for the purpose of their business, notwithstanding they may have primarily been engaged to supply services to a third party.
Whether there is a relevant contract therefore turns upon the facts of the arrangement, and in particular, the nature of the benefit received by the principal in the context of their business. A contract may not expressly identify a service as being supplied by a service provider to a principal; but that doesn’t mean the benefit they receive under the contract will not be construed as a supply of services for the purpose of the relevant contract provisions.
In order for a payment to be a ‘wage’ under the relevant contract provisions, the payment must be ‘for or in relation to the performance of work’ under the relevant contract.
The contentions that certain healthcare arrangements involve a medical practice collecting and remitting a medical practitioners’ own money are not a payment, and/or are not ‘for or in relation to the performance of work’, have been addressed within these series of judgements.
Whether or not there is a ‘payment’ for the purpose of the relevant contract provisions has clearly been decided - and there is indeed a payment.
Whether or not that payment is ‘for or in relation to the performance of work’ is a question which was only partly addressed, although this was done in a manner which left doubt in the minds of some. The judgement handed down by the Supreme Court made it clear that this test is broad and one could deduce that the reasoning leaves little scope for arguments that payments made under FSA’s are not ‘for or in relation to the performance of work’ . If you have followed case law in other industries, it would seem that, once a relevant contract is identified, payments under that contract are more likely than not to be work related and therefore, a ‘wage’ for the purpose of the relevant contract provisions.
It is noteworthy that doubt existed for some as to whether this interpretation was premature, in light of the way the Optical Superstore series of judgements unfolded and, also, in light of the decision handed down in Homefront Nursing3, which determined certain payments collected on behalf of GPs were not sufficiently connected to the provision of services. Reliance on the Homefront Nursing decision should be considered with caution for two reasons, as set out below.
First, Homefront Nursing is at odds with the reasoning given by the Victorian Supreme Court and in the Optical Superstore series of judgements, noting that the decision of the Victorian Court of Appeal was handed down shortly after Homefront Nursing.
Secondly,the more recent decision handed down in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (Thomas and Naaz) declined to follow Homefront Nursing, by taking a more structured approach to considering the relevant contract provisions in relation to an arrangement between a medical centre and a practitioner (in this case, a General Practitioner or GP).
In this matter, the Tribunal considered both the question of whether a service had been supplied by a GP to the medical centre, and whether the remission of monies from the medical centre to the GP, was a payment ‘for or in relation to the performance of work’. The answer to both questions was in the affirmative.
In relation to the question of service, the focus of the Tribunal was on the nature of the business (i.e. the medical centre's business) and its need to secure arrangements with medical practitioners for the purpose of that business. Put another way, the applicant’s business was established as being a medical centre which offered healthcare services to patients. In order to operate that medical centre, it required medical practitioners to treat patients of the medical centre. Through this observation, it was held that the GPs indeed supplied services to the medical centre, notwithstanding they at the same time supplied services to patients.
It is noteworthy that certain clauses within the agreements between the medical centre and the GPs were highlighted as supporting this view. The focus on these factors, which broadly dealt with rostering, promoting the interests of the medical centre and abiding by protocols and restrictive covenants, suggests that the approach for considering a matter of this nature necessarily requires a careful evaluation of the contractual terms and how they measure against the commercial objects of the business.
On the question of whether a ‘payment’ was made for or in relation to the performance of work, the Tribunal observed that the effect of the Optical Superstore series of judgements was to require a finding in the affirmative. This resulted in bulk-billed amounts collected on the GPs behalf being characterised as a ‘wage’.
2. The Moffet vs Dental Corporation series of judgements
This Federal Court decision has similarly featured in many articles in recent months, given the way the matter unfolded and, in particular, the inconsistency resulting from the decision (which found a dentist to be engaged wholly or principally for his personal labour and, therefore, an employee for SG purposes) with existing regulatory public guidance on offer.
With Special Leave having been requested by Dental Corporation and refused by the High Court, citing a key factor as being the absence of the Commissioner of Taxation from the proceedings, businesses - not limited to healthcare centers - are left with a decision that in the view of many, expands the types of arrangements caught by the ‘wholly or principally for labour’ test beyond those one might arrive at, if applying ATO guidance.
Specifically, the Moffet vs Dental Corporation decision begs the question of what a contract is ‘for’, from the perspective of the principal. In arrangements where the benefit received cannot be ascertained to be (wholly or principally) anything other than the services or labour of an individual, it becomes challenging to argue that SG should not apply.
Considered in the context of FSA arrangements - which have been addressed to an extent in existing ATO guidance - healthcare centers in particular should be closely monitoring how this issue unfolds, as the risk of SG applying seems closer than it has been before.
We would offer a similar caution for businesses relying on the ‘results’ test as a basis of not paying SG more broadly, as it doesn’t seem to feature in the Federal Court’s reasoning.
3. The common construct of healthcare centres
Last but not least, and not unrelated to points one and two, consider the description often provided when understanding the business of a healthcare practice. To reiterate, this typically involves arrangements summarised as including:
- Healthcare centres which supply facilities and services to medical practitioners;
- Medical practitioners which supply services to their own patients from these premises and no such services are supplied to the healthcare centres;
- Patients are not those of the healthcare practice and the practice does not supply healthcare services; and
- Any payments made are the remittance of medical practitioners’ own monies, and are not in connection with the provision of services.
An observation is that a review of a medical practices’ arrangements, including its practical form, its documentation and how it describes itself, is not always consistent with the depiction outlined above.
Instead, we often observe departures from this depiction - and for good reason. For example, a healthcare practice may market itself as being a ‘one stop shop’ for patients to receive medical treatment, and it may promote the volume of patients it treats each year, or the culture of its doctors as a reason why patients should attend. It may also take measures to ensure it has ownership over patient records and reduce the ability for departing practitioners to ‘entice’ patients to follow them. Such narratives may well enhance the image and value of the practice. But, when such factors are considered together, we must ask ourselves how this aligns with the depiction described above - which has been fundamental to the traditional positions of healthcare centres in the context of Payroll Tax and SG. The Tribunal in Thomas and Naaz applied this very logic in arriving at its decision.
Takeaways
The purpose of this article is not to create alarm, but rather, to provide broad context to the issue currently faced by many within the healthcare sector.
It is true that further developments in case law and regulatory guidance is desirable to ‘iron out’ with certainty some of the matters discussed above. However, at this stage it would appear the risk presented by these issues is far from remote, and that businesses would be wise to perform an honest assessment of their arrangements and the broader nature of their business.
Any risks identified could be a function of documented or practical dealings with medical practitioners, or they may be attributable to how business practices have evolved over time. In some cases, certain ‘problematic’ hallmarks may be the result of unintentional deviations from desired business objectives. Alternatively, it may be that any such risk is simply inherent to the industry in which one operates.
Either way, dealing with this issue and evaluating strategies available proactively would appear far more beneficial to being reactive in the event of an audit - which typically comes with an automatic penalty.
If you would like to understand where your business stands on the risk spectrum, the options available and what strategies you should be considering, we would welcome a conversation.
1 The Optical Superstore Pty Ltd as Trustee for OS Management S Trust & Ors v Commissioner of State Revenue [2018] VCAT 169; Commissioner of State Revenue v The Optical Superstore Pty Ltd [2018] VSC 524; Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197; The Optical Superstore Pty Ltd as Trustee for OS Management S Trust & Ors v Commissioner of State Revenue [2020] HCASL 16.
2 Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259.
3 Homefront Nursing v Chief Commissioner of State Revenue 2019 NSWCATAD 145
4 Moffet v Dental Corporation Pty Ltd [2019] FCA 344; Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118; Dental Corporation Pty Ltd v Moffet [2021] HCATrans 16.
