Payroll tax is getting its time in the limelight!

Although we don’t usually talk about state taxes anywhere near as much as their Federal cousins, every now and then an issue pops up that takes the limelight. Payroll tax, for many a costly and annoying administrative burden, grudgingly accepted, has taken the limelight with the recent attention on medical centre arrangements on one hand and the grouping of closely held (and sometimes not so closely held) businesses on the other.

The medical centre issue

The payroll tax issue surrounding medical centres will nearly always be, whether the arrangements between a medical practitioner (the Practitioner) who practices in the centre and the medical centre operator (the Operator), amounts to what is called a “relevant contract”. The relevant contract provisions exist to treat certain independent contractor relationships between parties in a similar way to employer and employee relationships. If the provisions apply, payments made by the Operator to a Practitioner risk being treated as wages and subject to payroll tax. This can occur even where the source of payments to each particular Practitioner are consultation fees that have been charged to patients of that Practitioner, but collected by the Operator. Of course, if the parties are in an employment relationship, payroll tax applies in the ordinary way.

What do the recent cases say?

Although this isn’t the forum to deep dive into case law, there are some salient points worthy of mention. Firstly, what is generally implicit in those arrangements caught as relevant contracts, is the finding that Practitioners are providing services to both their patients and to the Operator. For arrangements where the Operator charges its fee as a percentage of Practitioner fees, it is very much a benefit to and in the interests of the Operator to maximise consultations, in order to maximise its fees. In cases where the following features exist, the risk of attracting the “relevant contract” provisions is significantly heightened:

• the Operator offers medical services to the public through its own advertising;
• the Practitioners agree to have their services associated with the service offering of the Medical Centre;
• there are features of the contract by which the Operator exerts employee like controls over the Practitioner, such as attendance requirements, consent for absences and control over administration; and
• the Operator collects fees on behalf of the Practitioners and pays the Practitioners.

So what can Operators who are concerned about falling into this category do to prevent it?

On the issue of payment in the last point above, a crucial and most useful observation is that the 2023 decision on appeal in Thomas & Naaz v Commissioner of State Revenue confirms that without this payment, there is nothing passing from the Operator to the Practitioner to treat as wages, so that the payroll tax issue falls away.

Another thing that the case law tells us, is that the wording of the contracts between Practitioners and Operators is crucial. The Court will have regard to the terms of the agreement, even where the actions of the parties fall short of mirroring, what they have agreed to.

Review your contracts

Operators should seek a review of their contracts for advice on how they stack up against the “relevant contract” provisions and whether improvements can be made that are consistent with how the Medical Centre does or can operate. It is the case that not all Operators are caught by the “relevant contract” provisions and being proactive is conducive to this outcome. It’s a lot easier to successfully rectify arrangements before the relevant contract provisions have commenced to be applied.