Introduction

Relying on recent Court and Tribunal decisions,² the NSW and Victorian Revenue Offices published Rulings clarifying the circumstances in which Medical Centres will be required to pay payroll tax on payments to contractor Practitioners.

The Rulings stand in contrast to the industry-wide practice that payroll tax does not apply with respect to contracted Practitioners (e.g., independent GPs providing services out of Medical Centres). As a consequence of the Rulings, Medical Centres may be required to pay payroll tax on amounts paid to contracted Practitioners on a historical and ongoing basis. Interest and penalty tax may also apply for historical underpayments.

Importantly, the Victorian Revenue Office is reportedly not offering payroll tax amnesties to general practices.³ Compliance activities appear to have already begun, with the Royal Australian College of General Practitioners reporting that a Victorian Medical Centre has already been issued a substantial "payroll tax bill".⁴ By contrast, an amnesty has been approved in South Australia and Queensland which, subject to certain requirements having been met, allows general practices to exclude payments to GPs in assessing their payroll tax liabilities until 30 June 2024 and 30 June 2025 respectively.

Notably, NSW Parliament legislated a 12 month moratorium starting on the day the Bill⁵ receives royal assent on Revenue Office audits and the imposition of interest and penalty tax (including penalty tax for historical tax defaults) for certain general practices. However, any payments of interest and penalty tax made before the date of assent are not refundable. The moratorium only applies to medical practitioners who, under the Health Practitioner Regulation National Law (NSW), hold registration as a general practitioner. This moratorium does not apply to other medical or health practitioners, including dentists, physiotherapists, chiropractors and optometrists, to which the NSW Revenue Ruling is addressed.

The Rulings will have widespread impact on Medical Centres, facing the prospect of being issued payroll tax bills for historical underpayments. Medical Centres will also be required to ensure payroll tax returns (both retrospectively and going forward) reflect the Revenue Offices' position in the Rulings.

Should you wish to understand more about these developments or if you are currently undergoing a review of your arrangements with Practitioners, please reach out to a member of Baker McKenzie's tax team for assistance with historical and ongoing payroll tax obligations.

In depth

General background

Employers are required to pay payroll tax in a state or territory where the total Australian 'wages' paid exceed the tax-free threshold for that state or territory. The thresholds vary between each state and territory. Relevantly, the annual tax-free thresholds are AUD 1.2 million and AUD 700,000 in NSW and Victoria respectively.

Broadly, payroll tax is imposed on:

• 'Wages' (including salaries, bonuses, fringe benefits, equity awards, superannuation payments) paid by an employer in respect of an employee
• Certain amounts deemed to be 'wages' which are paid under a 'relevant contract'.

The Rulings clarify the Revenue Offices' position on which arrangements between Medical Centres and contracted Practitioners are a 'relevant contract' for which amounts paid are deemed 'wages' subject to payroll tax in NSW and Victoria.

Relevant contract provisions

The 'relevant contract' provisions were introduced into the Payroll Tax Act 2007 (NSW) and Payroll Tax Act 2007 (Vic) (together, the Acts) to ensure that payments made to certain contractors providing services in the nature of work and who were not employees in the ordinary sense were subject to payroll tax.

Broadly, the 'relevant contract' provisions operate by deeming an amount to constitute 'wages' subject to payroll tax where the amount is paid:

• For or in relation to the performance of work under a 'relevant contract'
• By a deemed 'employer'
• The work is performed by a deemed 'employee'.

What is a 'Relevant Contract'?

Unless an exemption applies, a 'relevant contract' is a contract under which a person, in the course of carrying on their own business (i.e., a Practitioner), supplies services for or in relation to the performance of work to another person (i.e., the Medical Centre).

The Rulings set out the Revenue Offices' position that the requirement that a Practitioner supplies services in the nature of work to a Medical Centre is satisfied if the contract provides, expressly or by implication, that the Practitioner serves patients for or on behalf of the Medical Centre. Those services are work-related because the Practitioner performs work in the course of supplying the services.

The Rulings stand in contrast to the general understanding of the health sector that a Practitioner contracts the Medical Centre to provide services for them (i.e., in the administrative nature of collection of client fees, provision of rooms etc).

Where the contracting party is an entity controlled by the Practitioner

The Rulings make it clear that the 'relevant contract' provisions can also apply where the arrangement is structured such that:

• The 'relevant contract' is between a Medical Centre and an entity controlled by or related to the Practitioner
• The Practitioner's entity engages the Practitioner to provide services under a separate contract (either as a contractor or employee)
• The Practitioner's entity, in the course of its business, supplies the services of the Practitioner to the Medical Centre.

Exemptions

Even where a contract satisfies the criteria above, a contract is exempted from the 'relevant contract' provisions where:

• The Practitioner performs 90 days or less of work in a financial year for the Medical Centre
• The Practitioner provides services generally (i.e., they are engaged by various Medical Centres and hospitals during the financial year)
• The services are performed by the Practitioner and at least one other person who is engaged by the Practitioner (such as a dental nurse).

If any of the exemptions apply to a contract between a Medical Centre and the Practitioner, amounts paid pursuant to that contract are exempted from payroll tax. When claiming an exemption, a Medical Centre must be able to substantiate the exemption with sufficient evidence.

Deemed employer

The Acts provide that a taxpayer (i.e., Medical Centre) is deemed an 'employer' where it is supplied services of persons for or in relation to the performance of work under a 'relevant contract'.

The Rulings state the Revenue Offices' position that a Medical Centre satisfies this requirement and will be deemed an 'employer' because a Medical Centre receives the services of the Practitioner who in turn serves the patients of the Medical Centre. In other words, the Practitioner provides services both to the Medical Centre and patients, satisfying this requirement. Those services are work-related because the practitioner performs work in supplying the services.

Deemed employee

The Acts provide that a person (i.e., the Practitioner) is deemed an 'employee' where they perform work for or in relation to which services are supplied to another person under a 'relevant contract'.

The Rulings state the Revenue Offices' position that the Practitioner is deemed an 'employee' on the basis that the Practitioner is the person who performs the work-related services for the Medical Centre under the 'relevant contract'.

What amounts are subject to payroll tax?

The Rulings make it clear that amounts paid or payable under a 'relevant contract' by a Medical Centre are deemed 'wages' subject to payroll tax if the amounts are paid in relation to the performance of work by the Practitioner pursuant to the 'relevant contract'.

This includes amounts paid to the Practitioner out of money received by the Medical Centre on behalf of the practitioner (e.g., patient fees or Medicare payments).

Certain arrangements under which amounts are channelled through a third party and ultimately received by the Practitioner can also be deemed 'wages' subject to payroll tax.

Going forward

Medical centres and Practitioners should review their arrangements to determine whether amounts paid pursuant to those arrangements are subject to payroll tax.

Given the retrospective and ongoing impact of the Rulings, Medical Centres may wish to engage expert assistance and consider proactively engaging with Revenue Offices to mitigate the imposition of interest and penalties.

Should you wish to understand more about these developments or if you are currently undergoing a review of your arrangements, please reach out to a member of Baker McKenzie's tax team for assistance with historical and ongoing payroll tax obligations.

1 See NSW Revenue Ruling PTA 041 – Payroll Tax Act – Relevant Contracts – Medical Centres and VIC Revenue Ruling PTA-041 Relevant contracts - medical centres.

2 Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd [2019] VSCA 197 and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259.

3 https://www1.racgp.org.au/newsgp/professional/plea-to-premier-minns-as-nsw-and-victoria-exposed

4 https://www1.racgp.org.au/newsgp/professional/call-for-urgent-intervention-after-practice-receiv

5 Revenue, Fines and Other Legislation Amendment Bill 2023 (Bill). Once a bill proposing legislation has passed both houses of parliament, it is forwarded to the Governor for royal assent. The Bill will not become enforceable legislation until it receives such royal assent. The Bill is expected to receive royal assent soon.