The recent payroll tax activity continues. Is your practice at risk?
As you are probably aware, the recent payroll tax cases in NSW and Victoria have demonstrated the Office of State Revenue’s renewed vigour to try to undo well accepted medical and dental practice structures, none more so than in the Optical Superstore case where recently the Victorian Court of Appeal found payments made to Optometrists by the Optical Super Store were subject to payroll tax.
It has long been thought that the payments by the practice to a dentist under a service fee arrangement are not subject to payroll tax, as the money being paid to the dentist already belongs to the dentist, and is only being held by the practice on trust for the dentist. Thus, were not deemed to be taxable wages under the ‘relevant contract’ provisions in the payroll tax law.
However, our traditional understanding of a healthcare provider engaging a practice to provide facilities and administration services in return for the payment of a service fee has now been turned on its head by the recent decision by the Court of Appeal of Victoria in the Commissioner of State Revenue v Optical Superstore Pty Ltd.
Prior to the most recent appeal it was agreed in the Supreme Court that as the funds received by Optical Superstore from patients were always held in trust for, and beneficially owned by, the optometrists’ entities, then the transfer of those funds to the optometrists’ entities were not ‘payments’ for the purposes of the Payroll Tax Act.
However, the most recent decision found that the ‘payment’ referred to above, was instead considered to be a payment to the optometrists’ entities under the Payroll Tax Act.
As the funds transferred to the optometrists’ entities were held to be payments made for or in relation to the performance of work by the optometrists in providing services to the Optical Superstore and patients under ‘relevant contracts’, the amounts transferred were taken to be ‘wages’ under the Payroll Tax Act, with the effect that Optical Superstore was liable for payroll tax.
What was so unique about the Optical Superstore case?
Importantly, there were some unique features of the Optical Superstore model that are often not seen in dental practice arrangements which were arguably what caused the contracts to be ‘relevant contracts’ in the first place, including:
the percentage that the optometrist received was calculated by reference to the hours that the optometrist worked;
if the deduction of the occupancy fee resulted in a negative amount, the payment would be treated as a ‘location attendance premium’
the hours worked by the optometrist were submitted to, and signed off by, the relevant store manager; and
the stores were selling products in conjunction with the services provided by the optometrist.
The unique features meant that the arrangements had an ‘employment- like’ quality about them. In that sense, arguably the arrangement was one for which payroll tax should have been payable.
More recent activity for payroll tax
Again, practice structures are under the microscope in the most recent payroll tax case, Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue. In this case the scenario was similar.
The practitioner engaged a third party to collect its medical billings and then received income net of a service fee, however the outcome was different to that of the Optical Superstore.
The NSW Civil and Administrative Tribunal determined that Medicare payments made to contracted general practitioners were in fact not subject to payroll tax and payments made by the practice did not fall under the definition of salary and wages.
This decision was made despite the practice collecting ‘assigned’ payments directly from patients and remitting a percentage (post service fees being deducted) to the practitioners.
However, it was determined that payroll tax would be payable on ‘top up’ payments made and these were considered to fall under the definition of salary and wages. These ‘top up’ amounts were payable to the medical practitioner in their initial engagement and had the effect of guaranteeing income of a set amount each week regardless of patient billings.
Given this recent flurry of cases, medical and dental practices should urgently review their arrangements to ensure they will not be caught paying unnecessary payroll tax.
Need more information? Please don’t hesitate to get in touch with a member of our team today!