Payroll tax

Payroll tax risks for Medical, Dental and Allied Health Providers… And more?

03 December 2021

A recent decision of the NSW Civil and Administrative Tribunal (NCAT) is anticipated to increase the risk of payroll tax audits of medical and healthcare practices which use service entities to provide administrative services to practitioners.

In Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, NCAT held that payments made by medical practice service entities to doctors who operated from the applicant’s medical centres were ‘wages’ for payroll tax purposes. As a result, Thomas and Naaz Pty Ltd (the applicant) was liable to payroll tax totalling $795,292 plus penalties and interest.

While this case was determined in New South Wales, it will have application across jurisdictions due to the harmonisation of payroll tax legislation in Australia. This case will be of particular interest to the Victorian State Revenue Office (SRO) in light of the 2019 decision in The Optical Superstore Pty Ltd & Ors v Commissioner of State Revenue.

Overview of payroll tax regime

Payroll tax is a state-based tax which is imposed on employers and calculated on wages paid to employees. Victorian employers who pay wages which exceed the monthly threshold of $58,333 will be liable to pay monthly payroll tax at the rate of 4.85% (reduced to 1.2125% for regional Victorian employers).

In order to assess an employer’s payroll tax liability, it is necessary to distinguish between employees and contractors. Typically, a worker who is engaged via a company or trust would not be considered an employee and may instead be a contractor.

However, Division 7 of the Payroll Tax Act (Vic) (the Act), entitled Contractor provisions, extends the concept of ‘wages’ to certain amounts ‘paid or payable’ to contractors under ‘relevant contracts’. The contractor provisions apply regardless of whether the contractor provides services via a company, trust, partnership or as a sole trader.

A ‘relevant contract’ is defined to include a contract under which a person, in the course of carrying on a business, supplies services to another person for or in relation to the performance of work.

Facts in Thomas and Naaz Pty Ltd v CCSR

In this case, the applicant operated three medical centres, from which various doctors provided medical services. The applicant provided rooms in its medical centres to the doctors, as well as shared administrative and medical support services (including nurses, reception and administrative staff).

The patients did not pay the doctors directly for the medical services provided. Instead, the flow of money was as follows:

  • the doctors bulk-billed each patient, and the patients assigned their Medicare benefits to the doctors;
  • the applicant, on behalf of the doctors, made claims with Medicare, and the funds received by the applicant from Medicare were placed into an account held by the medical centre;
  • administrative staff employed by the applicant recorded and reconciled these payments; and
  • on a fortnightly basis, amounts equal to 70% of the claims paid by Medicare for a particular doctor were paid from the medical centre’s bank account to that doctor. The remaining 30% was retained by the applicant as a service fee.

NCAT held that the payments to doctors representing 70% of the claims paid by Medicare were ‘wages’ and subject to payroll tax, on the basis that the Agreements were ‘relevant contracts’.

Significant to this outcome was that the engagement agreements which were entered into between the doctors and the applicant stipulated matters such as doctors’ hours of work (including the obligation to meet roster commitments), leave policy, the applicant’s policy to retain business records, and obligations upon doctors to comply with protocols and promote the business of the medical centre.

NCAT essentially concluded that because the applicant could not operate its medical centres without the services of the doctors, the doctors provided their services not only to the patients but also to the applicant (for which the doctors received the 70% payment – despite the fact that these funds represented claims paid by Medicare).

Facts in The Optical Superstore Pty Ltd & Ors v CSR

In this case, The Optical Superstore Pty Ltd, the trustee of four related trusts, operated an optical dispensary business through a number of retail stores.

The trustee entered into agreements either directly with optometrists, or companies or trusts through which they operated, for the provision of optometry services at its stores.

Under these agreements, the trustee was described as the ‘Landlord’ and each optometrist the ‘Tenant’. The patients paid consultation fees for the optical services rendered not to the optometrists but to the trustee. These fees were paid into the trustee’s main operating account and held on trust for the optometrists. The optometrists were required to nominate the trustee as the recipient of any Medicare payments.

The optometrists were paid on the following basis:

  • At the end of each month, each optometrist submitted the number of hours worked in a given store. After the number of hours was signed off, a monthly payment was made to the optometrist, calculated by multiplying the number of hours worked by applicable rates at the time.
  • The optometrist did not raise an invoice to the trustee for the reimbursement amount on the basis that it was considered to be a return of moneys belonging to the optometrist.
  • The balance of the consultation fees were retained by the trustee as payment of the occupancy fees due from the optometrist.

The Commissioner of State Revenue (Commissioner) claimed that the payments of the trust moneys to the optometrists were subject to payroll tax.

At first instance, the VCAT disagreed with the Commissioner and held that the consultation fees were held by the trustee in an express trust for the optometrists, and the return of money from an express trust was not ‘wages’. The Supreme Court dismissed the Commissioner’s appeal, similarly holding that the amounts could not be ‘payments’ because the optometrists beneficially owned the funds that were distributed to them.

The Court of Appeal allowed the Commissioner’s appeal, holding the payments were wages, as they were paid based on hours worked and approved by the store manager. Further, the optometrists in each store facilitated the sales of optical products by the trustee and so could be said to be ‘working’ for the trustee.

The ‘express trust’ argument did not assist the trustee – the Court held that at no point did the legislation articulate as a relevant inquiry whether the flow of money was beneficially owned by the recipient. The fact that the payment had a connection with the performance of work was enough, it was irrelevant that the money was held ‘on trust’ for the optometrists.

The High Court denied the trustee’s application to appeal the decision of the Court of Appeal.


The above cases will leave medical, dental and allied health practices which utilise administrative service arrangements, at risk of exposure to payroll tax.

We understand the SRO has been investigating practices in the medical industry, including reviewing their structuring arrangements to determine whether such arrangements may be taxable under the contractor provisions. It is anticipated that these reviews will escalate following the decision in Thomas and Naaz.

Any arrangements whereby the practice owner collects fees on behalf of doctors and other specialists, and rosters shifts for the centres, will be at risk of potential payroll tax exposure. It is irrelevant that the specialists provide their services to patients; the SRO will focus on the relationship between the practice owner and the specialist.

A safer structure would be one whereby each doctor collects their own patient fees directly from patients, deals directly with Medicare and then separately pays a fee to the practice owner for the occupancy and any administrative services. While it may not be seen as commercially desirable for practice owners to not control the flow of funds, we consider this structure will minimise the risk of payroll tax exposure. This is because there is no amount that is ‘paid or payable’ from the practice owner to the doctor in order to trigger the contractor provisions.

How can Rigby Cooke help?

Please contact the Tax team if you would like us to review your structuring arrangements with practitioners you engage.

If you are currently being investigated or audited by the SRO, please get in touch so that we can work towards achieve a satisfactory audit outcome and consider if any payroll tax exemptions may be applicable in your matter. We can also represent you in objecting against any payroll tax assessments raised following audit activity.

The risk of payroll tax exposure is not limited to medical and healthcare practices and may extend to other industries and groups that utilise administrative service arrangements, for example, accountants and financial planners. We will continually monitor SRO compliance activities targeted towards other industries.

1.Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259

2. The Optical Superstore Pty Ltd & Ors v Commissioner of State Revenue [2019] VSCA 197

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