19 April 2023

Second appeal denied – Medical clinics & payroll tax: The Thomas & Naaz appeal decision

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Recent decision emphasises the need to review your current arrangements with doctors regardless of where you are in Australia.
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Thomas & Naaz Appeal Decision

In late 2021, a New South Wales Civil and Administrative Tribunal (NSWCAT) decision saw a GP practice lose their legal battle over a large payroll tax bill, confirming that practices can be liable for payroll tax with regard to payments made to doctors who are engaged as independent contractors. Ever since the original decision by NSWCAT, the medical practice community has understandably kept a keen eye on any subsequent appeals. On 6 June 2022, the Tribunal rejected Thomas and Naaz Appeal on all seven grounds. Recently, Thomas and Naaz applied to appeal the decision again, this time to the NSW Court of Appeal. However, on 14 March 2023, their case was similarly dismissed on the basis that the challenges did not give rise to any question of law.

The Earlier Decision: A Refresher

In Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAP 220, Thomas and Naaz Pty Ltd was found to have owed the State almost $800,000 in the retrospective payroll tax. This was due to payments to doctors being deemed by the Tribunal as assessable for Payroll Tax as payments under a 'Relevant Contract.'

This case highlighted issues with the drafting of independent contractor agreements and that the relationship between Thomas and Naaz and their practice doctors more closely resembled an employee-employer relationship, as opposed to a tenant or contractor relationship.

For more information about the facts of the original case, and NCAT's reasoning, you can read our earlier blog article here- Independent Practitioner Arrangements: Payroll Tax Case.

So. What was the Appeal Decision?

Initially, Thomas and Naaz appealed the decision to the Tribunal, which was rejected. In Thomas and Naaz's most recent appeal to the NSW Court of Appeal, the main issues which arose were:

  1. whether payments made by Thomas and Naaz to the medical practitioners contributed to 'taxable wages for the purposes of payroll tax under Division 7 of Part 2 of the Payroll Tax Act 2007; and
  2. whether the Appeal Panel erred in concluding that the challenges before it did not give rise to questions of law.

The Court dismissed both issues, holding the services medical practitioners provided to Thomas and Naaz were 'for or in relation to the performance of work' and contributed to Thomas and Naaz' taxable wages for the purposes of payroll tax. The Court also held that the Appeal Panel did not err in dismissing the appeal on the basis that its notice of appeal did not give rise to one or more questions of law.

What does this all actually mean?

In contrast to the dismissed appeal in 2022, the most recent decision was a Court decision which holds a much higher authority than a less authoritative tribunal decision. Hence, the original decision in Thomas and Naaz holds extremely strong, reiterating how important it is to look at the flow of money between the doctor and the practice.

A key takeaway from the Court's original decision was that a medical practice which provides administrative services, such as billing and appointment booking to its doctors, was not entitled to claim input tax credits on those services because they were not directly related to the provision of medical services. Therefore, as the rules and regulations surrounding payroll tax can be complex, it is important to seek professional advice from a tax accountant or lawyer to ensure your payroll tax is set up correctly and that you are not overpaying or underpaying your payroll tax obligations.

Our Recommendations

Although payroll tax laws are not identical across the States and Territories, the legislation in most states is largely harmonised. Therefore, this decision continues to emphasise the need to review your current arrangements with doctors regardless of which state you are in. It is essential that all medical practices review their current arrangements with doctors, including practice owners who are doctors. It is important to ensure that your contracts accurately reflect the full extent of the arrangement with the doctor and should be comprehensive and up to date.

To minimise the risk of an unfavourable Payroll Tax Finding, it is recommended to take a thorough review of independent contractor arrangements.

A review should cover the following areas:

  1. The Agreements the practice has with doctors
  2. Banking and Practitioner Payment processes
  3. Accounting Treatment of practitioner payments
  4. Any tax audit insurance cover

We encourage owners of medical practices to contact their accountants and legal advisor if they have any concerns about the contractual arrangement that they have in place for the engagement of medical practitioners.

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