The Thomas and Naaz case is often talked about in the payroll tax context, and justifiably so. However, it has recently resurfaced after the NSW Court of Appeal rejected Thomas and Naaz's application to appeal the initial decision which exposed Thomas and Naaz to an almost $800,000 retrospective payroll tax bill. This was following the 2022 rejection of a tribunal appeal.

Although the application for leave to appeal was dismissed, the decision still provided some useful guidance for the many medical practices in Australia navigating the increasingly-complex payroll tax landscape.

So, what can we learn from it?

There is a lot of commentary about the doctors that were captured by the 'relevant contract' provisions of the Payroll Tax Act 2007 (NSW) ('the Act'). However, one important aspect of the case and what we can take from it is from the three contractors at one of the practices (who were not GPs) that did not attract payroll tax.

Why didn't the payments to these contractors attract payroll tax?

Well, it all had to do with the flow of money.

The majority of the doctors were in an arrangement wherein Thomas and Naaz (the taxpayer) made a payment to them. Thomas and Naaz received the payments from the patients and then would pay the doctors 70% of that. This attracted payroll tax.

Whilst this was the administratively convenient option, the other three practitioners were in an arrangement that did not engage the provisions as there was no such 'payment'. These practitioners were paid fully by the patient and then remitted 30% back to Thomas and Naaz Pty Ltd. Despite having the same terms as the other doctors in the practice, they were not swept under the rug with the other doctors in the tax audit. As stated by the Court, it was 'clear from the position of the three practitioners who processed their own claims for Medicare benefits, there is a ready mechanism' which avoids the payroll tax that may otherwise result under Division 7 Part 2 of the Act.

What does this all actually mean?

This tends to indicate that if the doctor bills patients directly instead of billing via the medical practice, a medical practice may be able to avoid being liable to pay payroll tax.

However, notable sections of the Act were not considered by the Court. For example, section 46 of the Act, which can deem payments from a third party to a contractor as that which was made by the deemed employer (i.e. could still be 'paid' in a legal sense by the medical practice to the doctor), could potentially operate to deem the payment to be subject to payroll tax.

It's not just about the flow, though

Whilst the flow of money is important, it is not in isolation a 'solution'. You also need accurately documented agreements and accounting, for example. Additionally, the decision emphasises that most, if not all, payments to medical contractors are likely to be caught by the 'relevant contract' provisions. Although there are exemptions to these provisions, they weren't considered by the Court in Thomas and Naaz.

This should also be considered in the light of the Queensland Revenue Office's Ruling PTAQ000.6.1, which was a broad ruling and strict interpretation of the law which, in practice, made it increasingly likely that the various arrangements that medical practices currently use to contract with doctors will fall within the definition of 'relevant contract'. You can find out more about this ruling here, as well as details of the Amnesty that was offered by the Queensland Government following this ruling here.

Next Steps

Check out our Online Solution, 'Legal Advice on the Flow of Money', here. Our lawyers will work with you to discuss the proposed flow of money in your practice and advise on how to minimise the risk of being found liable for payroll tax in your state or territory. As this case has made very clear, the flow of money has a large influence on the risk of being found liable to pay payroll tax in your medical practice.