Medical Clinics, Relevant Contracts & Payroll Tax– an update

There is still no clarity (by way of public ruling or other guidance) from the Victorian and/or NSW Revenue Office as to the PRT treatment of service agreements widely used throughout the medical and allied health professions.

Recent Developments

In this article we will provide an update of more recent developments and discuss where we see the next issue arising.

If you want to follow the story so far have a read of a few of our earlier articles which explore why such agreements give rise to taxable wages under PRT relevant contracts rules (see January 2023, ‘Queensland Revenue breaks rank with payroll tax and medical clinic ruling’ and February 2022 ‘Taking another look at the Optical Superstore litigation’).

In our January 2023 article we notified that on 22 December 2022, Queensland Revenue Office issued PTAQ 0006.1 ‘Relevant contracts – medical centres’. As the underlying law is similar across Australia (save for Western Australia) the Queensland ruling was potentially a significant guide as to the likely position of other jurisdictions.

Almost as quickly and unexpectedly as Queensland had issued the ruling:

• intense lobbying secured an amnesty for relevant contracts involving GP’s. The terms of the amnesty have changed since it was introduced and the current terms can be viewed here. To participate in the amnesty (if eligible) an expression of interest needs to be lodged by 29 September 2023. The effect of the amnesty is explained by Queensland Revenue as “Medical practices that successfully apply for the amnesty will not be required to pay payroll tax on payments made to contracted GPs up to 30 June 2025 and for the previous 5 years (i.e. 2018–25)”. Of concern though is why the amnesty only relates to GPs, when the arrangements in question are common across many medical and allied health professions. Surely the law must be applied equally to all taxpayers?; and
• if the ruling was intended to provide clarity/certainty this is of limited success given:
  • the narrow application suggested by Revenue for the various ‘relevant contract’ exclusions; and
  • whether the flow of patient fees impacts the outcome is less than clear. Example 12 of the ruling uses a 3^rd party payment scenario to suggest PRT can apply where a party other than the medical clinic makes a payment to the practitioner. Example 12 reads:

Example 12—Wages paid by a third party to a practitioner—s.51

• ABC Pty Ltd (ABC), which operates a medical centre, enters into a contract with Dr Wolf who agrees to serve patients for or on behalf of ABC. The contract is a relevant contract under s.13B(1) and none of the exemptions under s.13B(2) apply.
• ABC is taken to be an employer under s.13C. Dr Wolf is taken to be an employee under s.13D(1)(a).
• The contract provides patient fees including bulk billed Medicare rebates are to be assigned by Dr Wolf to P Pty Ltd (P Co). At the end of each month P Co is required to pay 30% of the revenue to ABC and 70% to Dr Wolf.
• Under s.51, the payments by P Co to Dr Wolf are taken to be wages paid by ABC to Dr Wolf because the payments are remuneration for the services of Dr Wolf that would have been wages if they had been paid or payable by ABC (a person taken to be an employer) to Dr Wolf (a person taken to be an employee)

Example 12 (applying section 51 of the Queensland PRT law) is illustrative of equivalent unresolved issues in Victoria and NSW under similar 3^rd party payment provisions (namely section 46 of the Victorian and NSW PRT law).

The problem with (and caused by) the Example 12 is obvious:

• it covers a situation that isn’t common and doesn’t cover situations that are common, for example, where a practitioner collects fees directly (including assignment of Medicare benefits) and then makes payment of the service fee; and
• rightly or wrongly taxpayers (and advisers) assumed Example 12 had been used to implicitly confirm that there would be no PRT payable, where a practitioner (as a sole trader or through an entity controlled by the practitioner) collected fees directly from which service fees were paid.

This interpretation gathered support when the NSW Supreme Court of Appeal handed down its judgement in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 (‘Thomas and Naaz’).

 The Thomas & Naaz appeal confirmed the earlier Supreme Court decision that the arrangements in question were relevant contracts. The facts in the case were such that, as the clinic collected and distributed practitioner fees net of the service fee due to it, section 35 of the NSW PRT law was satisfied as there was an amount paid by the clinic “… for or in relation to the performance of work relating to a relevant contract…”.

For reasons that remain unclear, in the Thomas and Naaz case, 3 practitioners had collected fees directly (being assignment of Medicare benefits) and were not included in the amount of taxable wages originally assessed.

Leeming JA stated (when pondering whether the case was of as great significance as Counsel for the taxpayer indicated):

“67. It was further said that the fact that the three medical practitioners who processed their own claims for medicare benefits, and who therefore did not receive 70% paid to them by the applicant, but instead remitted 30% of what they received to the applicant, were not included in the calculation of assessable wages, showed that the construction adopted by the Chief Commissioner was absurd or capricious. I do not agree. Division 7 of Part 2 extends the scope of the concepts of “employer”, “employee” and “wages” so as to expand the basis upon which payroll tax is assessed. It does so in quite artificial ways. One of the elements upon which the deeming provisions operate is the making of a payment by the (deemed) employer to the (deemed) employee. The administratively convenient approach adopted by the majority of medical practitioners meant that there was a payment made by the applicant to those medical practitioners. The approach taken by the other three meant there was no payment, and so the deeming provisions were not engaged. That result does not bespeak error in the application of Division 7 to the majority of medical practitioners who did receive payments from the applicant.

…

73. Secondly, some submissions were made, directed to the question of leave, as to the general application and public importance of this particular decision. It may be that persons operating other medical practices have adopted similar administrative arrangements whereby medicare benefits which have been assigned by patients to the practitioners are collected by the operators of the centre and distributed to the practitioner. It may readily be seen how this might suit the operator (which will not have to rely upon the efforts of a practitioner to process claims and remit a percentage entitlement to the operator if the position resembles that in the present case). However, taking that course runs the risk of the deeming provisions in Division 7 of Part 2 of the Act being engaged. As is clear from the position of the three practitioners who processed their own claims for medicare benefits, there is a ready mechanism to avoid that result which is available. That tends against the conclusion that an important question of general application is thrown up by this .”

 

So PTAQ 0006.1 and the Thomas and Naaz decision appeared to have us headed towards a position that was readily capable of being understood and applied by taxpayers and one that potentially could explain Example 12.

However, until Queensland completes its review of the ruling and makes any required amendments/clarifications, and until Victoria and NSW Revenue declare their positions in relation to the question of whether flow of payments matter, things remain far from certain.

More specifically the wording of section 46 requires identification and characterisation of a payment as “…for the employee’s services as an employee of an employer” (where the payment is made by a 3^rd party and not the employer). Should Revenue Offices take the view section 46 applies where practitioners collect fees directly the difference in the wording between section 46 and section 35 begs to be challenged.