Payroll Tax Developments for Dental and Medical Practices

5 September 2023

Dental and medical practices have been under the microscope of state revenue offices across Australia recently with the Australian Dental Association (ADA) and Australian Medical Association (AMA) releasing publications regarding recent payroll tax developments.

This article will aim to provide clarity and broad considerations for business owners in the dental and medical fields across Australia regarding the recent payroll tax happenings.

State revenue offices are looking to adjust how they apply existing payroll tax legislation to capture healthcare professionals and the structures they typically operate through. Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue in NSW is the key payroll tax case where the commissioner has applied this updated approach.

Dental and medical clinics can operate across state borders, which complicates payroll tax calculations as it is a state level tax. It is important to note each state in Australia has its own threshold and rate for payroll tax, and clinics that operate in multiple states need to carefully manage their payroll tax obligations in each jurisdiction.

What is the issue?
Simply put, within the case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue it was questioned if payments made to practitioners were subject to payroll tax under the “relevant contract” provisions within the NSW Payroll Tax Act. The ‘relevant contract” provisions are within all state Payroll Tax Acts, apart from Western Australia’s (this is expanded upon later in this article).

Typically, dental and medical practitioners operate as contractors engaged by service entities which business owners use to operate their clinics. The practitioners bill their patients through the service entities and pay a fixed percentage of billings as a management fee to the service entities for taking care of all administration, equipment, office spaces, and staffing.

Understanding the practicalities of how the service entity operates and the level of control exerted upon practitioners will assist in determining whether the “relevant contract” provisions apply and, fundamentally, if the service entity may be liable for payroll tax.

The starting point is to consider contracts in place between the service entities and the practitioners, some key considerations typically within these contracts include:

Ownership of patient files – Consider who owns the patient files, are there restrictive covenants within the practitioner contracts.
Control of work schedules – Are the practitioners instructed to work fixed days and hours or have flexibility to choose when they work and is this specified within their contract.
Invoicing – Consider which entity is issuing the invoice, is it the service entity or the practitioner’s details on the invoice to patients.
Collection of patient fees – Is the bank account owned by the service entity or the practitioner.

Of the above points, a key issue being discussed is where patient fees are received. Typically, we see the service entity receiving all patient fees, then the entity will calculate and pay the practitioner their share of income after deducting management fees. If the reverse occurred where payments were collected into a bank account owned by the practitioner, it may assist in building a case, in conjunction with other points explored above, that there are no payroll tax obligations for the service entity. Although, current public rulings take an aggressive view on this, suggesting that even with the practitioners collecting patient fees, payroll tax may still apply. Additionally, we understand for existing practices with more than a few practitioners, this change would be an administrative nightmare.

When considering the above points, it boils down to, how do you want to run your business? Certain business owners may want to have full control over working hours and patient files, running their practices in a specific manner. While other business owners, for various reasons, are happy to provide full flexibility to the contractors operating within their practices. After careful deliberation of the direction in which you wish to operate your practice, get in touch with us or your tax advisor to understand the potential outcomes.

Amnesty available across Australia
As the payroll tax focus has been going on for a number of years, state governments have received feedback from professional associations such as the ADA and AMA and some states have brought about amnesties.
Currently, only Queensland and South Australia have provided amnesty with it being specifically for general practitioners only. In Queensland, to be eligible for the Amnesty an expression of interest must be lodged by 29 September 2023 and additional requirements must be adhered to by 30 June 2025. In South Australia, the office of state revenue will provide a payroll tax amnesty on payments made to contracted general practitioners until 30 June 2024.

The NSW government has announced that it will pause payroll tax audits for general practitioners and their practices for 12 months to consult with the relevant professional bodies. During the 12-month period, NSW will pause penalties and interest accruals on outstanding payroll tax debts incurred before and at the commencement of the 12-month period. This does not apply to dental practices unfortunately.
The Australian Capital Territory and Northern Territory have not commented upon any amnesty being granted as of the publication of this article.

Finally, we come to Western Australia. In WA the Payroll Tax Act is different from all other states as there is no “relevant contract” provision within the act. The WA Treasurer has publicly said that Western Australia is not looking to include this section in the WA act and that RevenueWA would not be taking action against the medical practices. This is their current stance, however, it is important to note the current employment agent provisions could apply in WA due to the broad definition within the law.

The payroll tax landscape for dental and clinics in Australia is multifaceted and evolving per current case law as described within recent publications by the ADA and AMA. This requires business owners to work with knowledgeable tax advisors to review their business strategies and potentially adjust aligning with recent updates in the application of payroll tax legislation across Australia.

If you would like to discuss your circumstances, or receive further information, please contact your local Moore Australia advisor.