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Could your practice structure make you subject to an additional tax liability?
Lately state revenue authorities have increased their focus on professionals.
Their focus has been on reviewing whether payments to professionals are “deemed wages” and therefore accountable for payroll tax. Could your practice structure make you subject to the additional tax liability?
In many instances being made subject to a payroll tax liability, which often could be backdated to include a number of past years, could place a practice in a dire financial situation.
Yes, but what can we learn from these recent cases and how can you ensure that your practice isn’t also at risk of triggering payroll tax?
In the Winday case, Winday International Pty Ltd v Chief Commissioner of State Revenue , which involved radiologists working at an imaging facility, the radiologists bulk billed patients, the fees were collected by Winday, and an amount was paid to the practitioners less the percentage for their service fee. On face value this arrangement sounds like common practice in dental practices.
However, under the service agreement entered into by Winday it was stated that a minimum amount would be paid to radiologists for every day they provided services – this was critical to being “deemed employees” and therefore triggering payroll tax.
Also important in the payroll tax judgement were other factors, for example Winday advertised the radiologists on their website as ‘our staff’, and that patients were considered patients of the practice and not the practitioner. All of these things make it look as though an employee/employer relationship was in place.
The final nail in the coffin for Winday focused on the cashflow of patient payments. The way fees were paid alluded to Winday having earned the patient fees, rather than the practice being a collection house of all professional’s fees, and then passing those funds on.
It is imperative that the terms of your Service Agreement are practically carried out day-to-day when it comes to who is billing patients, who is receiving the fees paid, and how these funds are then accounted for.
Proof of this is the Optical Superstore case who ensured that by having correct bank practices in place, including the use of a patient clearing account, meant that the Victorian Supreme Court found in the favour of the taxpayer – thereby creating great precedence for dental practices who have correct Service Agreement arrangements in place.
It was confirmed that there is no intention to impose payroll tax liabilities on the simple passing of money from a bank account held in trust for a practitioner, and that the meaning of ‘payment’ cannot extend to the return of monies where the second party earned that money from providing services to a third party.
It is not enough to rely blindly on the written contract in place, as a review from state revenue will look beyond the paperwork and into the physical cashflow that reflects the relationship in place.