We are aware that many clients have read media articles and been privy to online discussions surrounding this recent NSW Payroll Tax case and that this has caused some alarm and concern.
It is essential to understand the underlying facts of the Thomas and Naaz case.
We have prepared a scaled-down summary of key discussion points and takeaways below so that you can make an informed decision regarding any impacts to you or actions required in your business.
We also highlight some key set-up concerns relating to the reporting of income and doctor payments on the tax lodgements of Thomas and Naaz.
Key points of Thomas and Naaz
Thomas and Naaz operated three bulk billing medical centres in NSW
Doctors engaged with these medical centres undersigned written services agreements, paying a 30% service fee for room rental and shared administration and medical support
The medical centres collected Medicare benefits from patients on behalf of the doctors and remitted 70% to the doctors (comprising billing after the withholding of a 30% service fee)
Revenue NSW issued five assessment notices totalling $795,292 to Thomas and Naaz, covering 1 July 2013 to 31 March 2018, on the basis that payments to doctors were taxable wages for payroll tax purposes. The assessments included payroll tax, interest, and penalties
Thomas and Naaz objected to the assessments on the basis that the doctors were not supplying services directly to the medical centre and that a large proportion of the doctors were providing services to the public each year (outside of the medical centres and therefore, an exclusion applied)
The commissioner rejected the objection, and Thomas and Naaz subsequently applied to the NSW Civil and Administrative Tribunal (NCAT) to review the objection decision
NCAT upheld the NSW Revenue assessments, including the application of penalties and interest
Key Issues of Concern from the NCAT decision
Our opinion is that the first and major issue of concern to our clients in the Thomas and Naaz case is whether there was a "relevant contract" between the medical centre and the doctor. A relevant contract is required to establish that payments to contractors may be considered taxable wages and be subject to payroll tax.
The second issue of concern is whether the payments made to doctors are "for or in relation to the performance of work relating to" the agreements. Can the payment of the 70% net billings paid to doctors be considered a payment relating to the provision of services and, therefore, payment of taxable wages for payroll tax purposes.
Findings – Issue One
NCAT found that doctors were providing services to patients AND the medical centre, and therefore a "relevant contract" between the medical centre and the doctor existed.
The basis for this decision examined the terms of the service agreement between the doctor and the practice entity, including:
Reference to shifts, work hours and rosters provided/specified to the doctors
Doctors were to comply with protocols set by the medical centre
Doctors were to promote the business of the medical centre
Reference to a leave policy (6 weeks' notice, maximum four weeks per year, requirement to submit leave application to the medical centre for approval)
Doctors were paid hourly rates on occasion
A restraint covenant was present in the agreement (2 years, 5km radius)
The medical centre retained ownership of the patient records
Findings – Issue Two
NCAT considered whether the payments made to the doctors were "for or in relation to the performance of work".
Amongst other things, Thomas and Naaz argued that payments were simply a return of doctors' monies only and that the funds at all times belonged to the doctors.
NCAT did not accept this argument and cited a clear relationship between the provision of services by the doctor and the payment from the medical centre to the doctor, even if that relationship was indirect. Essentially this means that NCAT concluded that the source of the payments did not impede the operation of the Payroll Tax Legislation. Paying 70% net billings to doctors would be considered taxable wages for payroll tax purposes.
Key Takeaways
At this stage, our advice concerning the business operation and the minimisation of payroll tax exposure remains unchanged. GrowthMD has always taken the approach that this is a complex area with developing case precedents where medical service businesses should seek to minimise risk.
Takeaway One - Relevant Contracts
The backbone of the Thomas and Naaz case was a decision that a "relevant contract" existed between the medical centre and the doctors. The relevant contract feature appears to have been established predominantly on the terms of the service agreement in place. This highlights the importance of quality written agreements and carrying out day to day operations per the agreement.
Service and Facility Agreements should be regularly reviewed and updated by a reputable solicitor experienced in payroll tax legislation and the medical practice industry. Should you require, we can provide details of a solicitor who will draft agreements for your practice, considering the most recent case law and legislation. We highlight that many of the terms included in the agreement in the Thomas and Naaz case, such as rosters, leave policies, and restraints, have always been considered high risk, in our opinion.
Takeaway Two - Payment and Banking Arrangements
Previous cases have established that funds received by a medical centre from Medicare, where the medical centre acts only as a "collection agent" or a "bank of convenience", were not payments to the "performance of work". The Thomas and Naaz decision deviates from this concept and has caused some surprise across the medical practice industry.
Our advice in this area will be evolving, and we are currently consulting with industry and legal partners about this aspect. At this point, we encourage medical centres to focus on the method of and agreements involved in engaging with doctors as the first line of defence.
Takeaway Three - Financial and Tax Reporting
Although not widely discussed throughout the judgement, it is noted that Thomas and Naaz had reported amounts paid to the doctors as "contract, sub-contractor and commission expenses" of the business in their 2015 and 2016 income tax returns. Business income reported in the income tax returns and business financial statements also included ALL of the doctors' billing. GrowthMD has always stressed the importance of correctly reporting and reflecting the independent nature of doctors by only recognising service fees in the financial statements, BAS and income tax return lodgements. Again, this case decision highlights the importance of correctly structured accounting and tax records.
We will continue to keep you updated on any relevant information that may impact your business.