A recent payroll tax case heard in New South Wales (NSW) has confirmed growing concerns that other states will begin treating medical professionals under a service agreement as employees for payroll tax purposes. While we understand that the case is being appealed, it is a wake-up call for all medical practices to review their agreements to reduce the potential for payroll tax assessments, which can go back many years.
The decision in the case of Thomas and Naaz Pty Limited v Chief Commissioner of State Revenue relates to a medical practice. The broad facts are as follows:
- The various doctors operated from one of the Thomas and Naaz medical centres, and each doctor or related entity entered into a written agreement with the practice entity.
- The doctors were provided with rooms, shared administrative and medical support. The collection of Medicare fees on behalf of the doctors was undertaken by the practice entity. The patients paid the medical centres and did not pay the doctors directly for the medical services provided.
- In accordance with the written service agreement, 70% of the of the patient billing went to the doctors (without any deduction for tax or superannuation) and the remaining 30% was retained by the practice entity as a service fee.
The arrangements Thomas and Naaz had in place with the various doctors are similar to many medical practice arrangements. The decision that a payroll tax liability existed for the practice entity was based on two key issues:
- The agreements with the various doctors were "relevant contracts" under section 32 of the NSW Payroll Tax Act and;
- The payments to doctors by the practice entity were "for or in relation to the performance of work relating to" the Agreement.
The Agreements with the various doctors were considered a "relevant contract" between the medical centre and the doctor mainly because of the terms included in their service agreements and the actual conduct of the doctors. The terms of the written agreements between the medical centre and the various doctors included some terms typical of an employer/employee relationship including:
- The doctors promoted the clinic.
- The doctors met roster commitments and were physically present during rostered sessions.
- There was:
- a minimum rate per hour in the first three months.
- a leave policy with a requirement for four weeks leave per twelve month period.
- a restraint of trade of up to five kilometres for up to two years after a doctor left the clinic.
- The medical centre would retain ownership of the patient records.
- The doctors would abide by the protocols of the practice and complete all necessary documentation.
"Relevant contract" provisions exist in most states
except for Western Australia (WA); WA holds the view that these
could still be common law employees. There is also the risk the
employment agent provisions could apply in WA because of the
broadness of the definition in the law.
Many of these terms appear in standard agreements with health professionals.
What should medical practices do?
- Ensure your service agreement adequately describes the actual arrangement (do you have an up-to-date service agreement in place?)
- The devil is in the detail. For example, in this case the terms of the agreement indicate that the doctors agreed to meet rostering commitments and provide advanced notice of planned vacations (which were limited to four weeks and had to be approved by the medical practice). It is important that written agreements are reviewed to ensure the arrangements, while reflecting what actually happens, are not akin to an employer/employee relationship.
- How do you collect your fees? A stronger argument against employment is collection of fees directly by the doctor, rather than by the practice.
- Get the accounting function right. This includes setting up a specific medical practice chart of accounts and accounting for assets, liabilities, income and expenses correctly and consistently. Put internal controls in place to ensure that the bookkeeping is appropriate. The financial statements must accurately reflect the practice arrangements.
- Consider whether or not the ownership of clients and client records is critical to the practice. Such retention may lead to the conclusion that the patients belong to the practice and not to the doctors.
This is a rapidly changing landscape. Regardless of the outcome of the appeal in the current case, the arrangements and agreements within medical practices need to be closely scrutinised to ensure they correctly describe the arrangement and do not trigger a payroll tax liability.
This article is issued as general commentary - please contact us about your specific circumstances.