Deep Dive: New Payroll Tax regulator and case law developments for the healthcare industry

One of the many complexities of State-based Payroll Tax laws is its application not only to employees, but also, to non-employed service providers (often termed as consultants, contractors and subcontractors) under complex extended rules within the Payroll Tax legislation. The application of the extended Payroll Tax provisions has continued to present significant complexity for many organisations, particularly for industries that rely on relationships with non-employed workers such as the healthcare industry. 

We have had varying forms of guidance on this area over the last few years, through a series of court judgments and tax/revenue authority publications. 

Late last year, the Queensland Revenue Office (QRO) released Payroll Tax Ruling PTAQ000.6.1 (the Ruling) directed towards the application of the ‘relevant contract’ provisions to businesses that operate medical centres, followed last month by the announcement of a concessional Amnesty available to medical centres which engage General Practitioners (GPs). 

More recently, the Court of Appeal denied the taxpayers’ leave to appeal in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 (Thomas and Naaz), having found that there was no error in the Tribunal's finding that the medical practitioners were providing services to the taxpayer and that the grounds of appeal were in fact questions of fact, rather than law. 

The content below is focussed on the topic of the ‘relevant contract’ provisions and medical centres engaging professionals under facility and services arrangements (FSAs) (read our Deep Dive series for further information on this topic, hereafter referred to as our ‘Healthcare Deep Dive’) and more specifically, the latest developments on this topic!

Each of these developments and the key takeaways for affected businesses have been addressed below.

Thomas and Naaz

As outlined in our previous Healthcare Deep Dive, many medical centres have historically been of the view that the ‘relevant contract’ provisions do not apply to certain types of arrangements with medical practitioners, on the basis that those medical practitioners were understood to supply services to patients, rather than the medical centre itself.

Following decisions in the Optical Superstore series of judgments and the Thomas and Naaz decision of the New South Wales Civil and Administrative Tribunal (NCAT), we have observed Revenue Authorities in a number of jurisdictions adopt the position that, while a factual analysis of each case is required, the relevant contract provisions are generally applicable to FSAs. The consequence is the application of Payroll Tax to amounts paid by medical centres to medical practitioners, subject to the eligibility of each arrangement for an exemption. 

Following the initial decision of the NCAT in Thomas and Naaz, the taxpayer’s appeal to the Appeals Panel had been dismissed on the basis that no question of law had been established. The taxpayer sought to further appeal this decision by seeking leave from the Court of Appeal, however last week, the Court of Appeal again dismissed the taxpayers’ application for leave, for similar reasons to the Appeals Panel (i.e. there had been no error of law in the NCAT decision).

The judgment of the Court of Appeal highlighted some important takeaways for businesses grappling with the ‘relevant contract’ provisions, particularly those in the healthcare industry. In particular, businesses operating under FSA-style arrangements will need to be aware that: 

• a medical practitioner that is providing medical services to their individual patients at the medical centre may simultaneously be viewed as providing services to the medical centre itself for the purposes of the ‘relevant contract’ provisions;
• a FSA-style contractual arrangement between medical practitioners and medical centres (e.g. dealing with matters such as attendance at a premises in accordance with a negotiated roster, adhering to the medical centre’s guidelines, not soliciting patients away from the medical centre, etc.) may be regarded as amounting to a contract for services between the medical practitioner to the medical centre; and 
• payments to which the practitioner is contractually or beneficially entitled will be captured under the 'relevant contract' provisions.

Interestingly, the Court of Appeal observed that the risk associated with FSA-style business models may be mitigated in certain circumstances - for instance, where medical practitioners collect their fees directly and subsequently remit fees payable to the medical centre. 

It is important to note firstly, that these comments may be construed as ‘obiter’ such that they may not be accepted by the State Revenue authorities as being legally binding for such arrangements. 

Secondly, the existence of ‘third party payment’ rules within the Payroll Tax legislation have some scope to capture payments made by third parties, under certain circumstances; notably, the Court of Appeal does not appear to have been asked to consider the application of these rules in Thomas and Naaz. Relevantly, the QLD Ruling discussed below would appear to contemplate the application of these rules. 

Lastly, anti-avoidance provisions within Payroll Tax laws should always be considered by any business seeking to reform their business practices, particularly if the commentary above is among the key reasons for such changes. 

QRO - Payroll Tax Ruling PTAQ000.6.1

On 22 December 2022, the QRO released Payroll Tax Ruling PTAQ000.6.1 which broadly explains the basis for the relevant contract provisions applying to FSAs entered into between medical centres and medical practitioners. Notably, the Ruling was developed factoring in guidance from the first instance decision of the NCAT in Thomas and Naaz (noting the Court of Appeal had not yet dismissed the taxpayer’s application for leave). 

For the purposes of the Ruling, the concept of a ‘medical centre’ extends beyond traditional GP practices and encompasses other healthcare providers such as dental clinics, physiotherapy practices and radiology centres. Accordingly, this Ruling is likely to have wide-ranging ramifications across the healthcare industry.

The Ruling outlines that, a contract between an entity which conducts a ‘medical centre’ and a practitioner will fall within the ‘relevant contract’ provisions for QLD Payroll Tax purposes if: 

1. the practitioner carries on a business (or practice) of providing medical-related services to patients; 
2. in the course of conducting its business, the ‘medical centre’:
   1. provides the public with access to medical-related services; and 
   2. engages a practitioner to supply services to the ‘medical centre’, through serving patients on its behalf; and 
3. no 'relevant contract' exemptions are applicable (e.g. the ‘90 days in a financial year’ exemption).

In relation to B. above, the Ruling appears to take a broad approach - “If a medical centre engages a practitioner to practice from its medical centre, or holds out to the public that it provides patients with access to medical services of a practitioner, it is likely the relevant contract provisions will apply”.

The Ruling further indicates that the source of the funds holds no bearing as to whether a payment may be classified as taxable wages. This suggests that Payroll Tax applies in the below scenarios, which have become commonplace within the industry:

• where trust accounts are used to pay the practitioner/the practitioner’s entity;
• where ‘medical centres’ are merely remitting monies that the practitioner is beneficially entitled to; and
• where a payment structure is adopted such that the ‘medical centre’ itself is not the entity collecting the patient fees (note, however, the potential contrasting comment in the Court of Appeal regarding certain payment flows).

Outside of more standard landlord/tenancy contracts, it appears that the Ruling is of wide import over the industry. Relevantly, the ruling specifies that under ‘tenancy contracts’, the practitioner must be responsible for matters such as advertising and attracting patients, providing medical services, managing appointments and records, and directly submitting medicare claims (including direct receipt). 

While the Ruling may well operate in many cases, in congruence with the Thomas and Naaz series of judgments, as an observation, the Ruling would appear to present a slightly lower threshold for the relevant contract provisions becoming applicable - this of course is likely a product of the need for the Ruling to offer guidance to the industry more broadly. 

Finally, we draw attention to the Ruling specifying its application “where a payment structure is adopted such that the ‘medical centre’ itself is not the entity collecting the patient fees.” While the Payroll Tax laws do contain ‘third party payment’ provisions (discussed above), we note again the commentary by the Court of Appeal which may be viewed as sitting in contradiction. Those judicial comments will undoubtedly draw interest and feature in taxpayer / adviser / revenue authority interactions in months to follow.

Amnesty for eligible medical practices

Recently, the Treasurer and Minister for Trade and Investment (QLD) approved an Amnesty which, in effect, will exclude payments to GPs in assessing the medical practice’s Payroll Tax liability until after 1 July 2025. Importantly: 

• new medical practices and medical practices already paying Payroll Tax on payments to contracted GPs are not eligible to apply for the Amnesty;
• the Amnesty is limited to contractor payments made to GPs registered with the Medical Board of Australia, excluding other medical and allied health practitioners;
• each eligible medical practice that wishes to take up the Amnesty must lodge an Expression of Interest (EOI) form with the QRO by 29 September 2023;
• each eligible medical practice that has lodged an EOI must review their arrangements by 30 June 2025 and voluntarily disclose relevant details, including annual wage information for the last five financial years. Requirements and Amnesty conditions vary in individual circumstances (for example, for practices under audit). Relevantly, payroll tax will only be assessed from 1 July 2025; and
• where certainty on the application of the relevant contract provisions is required, copies of contracts with GPs may be supplied to the QRO for review.

Of note, medical practices that do not register under the Amnesty, if subsequently audited, may be audited for the full period available by law (i.e. the previously announced limitation to FY21 onwards would cease to be applicable). 

Key takeaways

The findings in Thomas and Naaz offer insight into the potential breadth of the ‘relevant contract’ provisions. In particular, any business that contracts with a service provider, but does not consider the potential for Payroll Tax to apply on the basis of that service provider supplying services to another party under that contract, would benefit from reviewing these decisions. In the Thomas and Naaz series of decisions, it was evident that both the NCAT and the Court, when assessing whether or not a service provider supplied services to the contracting party, will look to both the terms of the contract and also the nature and operation of the contracting business itself.

For businesses that operate medical centres with a presence in QLD, a determination must be made (and actioned) by 29 September 2023, as to whether or not an EOI is to be lodged with the QRO for Amnesty relief. This determination requires an assessment of arrangements held by the medical centres, with a focus on the applicability of the ‘relevant contract’ provisions. 

Businesses should bear in mind that the Amnesty is limited to QLD, that it is limited to arrangements with GPs, and that it amounts to a temporary exemption from Payroll Tax. In addition, businesses should consider the extent to which their evaluation of GP arrangements under the Amnesty may be reflective of arrangements with other medical practitioners in QLD, and across their portfolio in non-QLD States/Territories. It should also be noted that the QLD Amnesty makes it clear that businesses which do not disclose under the Amnesty may be subject to a full investigation if identified. 

Finally, we view as a positive step, the willingness of the QLD government to implement an Amnesty to an industry which is facing increasing pressure. More generally, this form of approach could be viewed as a ‘middle ground’ in circumstances where a technical issue/development emerges that was previously unknown to an industry, and where that development presents a significant impact to that industry. 

Nevertheless, the Amnesty does raise important questions with respect to tax policy and administration. For instance, in the case of the QLD Amnesty, it appears that broader social implications have influenced the decision to create the relevant concessions. However, such an approach, being so limited in its application, may be argued as inequitable, for reasons as follows:

• In the context of the QLD Amnesty, this concession only applies to GP arrangements, to the exclusion of other industry participants which operate under similar models that play a critical role in the healthcare system. 
• A ‘settlement’ achieved for GPs may be viewed as inequitable by other industries faced with analogous systemic issues (e.g. security, mortgage broking, etc.). 
• Additionally, as previously noted, a unilateral approach taken by one jurisdiction (QLD) presents significant complexity for any multijurisdictional GP business. For example, if a national ‘medical centre’ business has not previously paid Payroll Tax on such arrangements, and commences paying Payroll Tax in QLD as a result of the ‘settlement’, could this potentially open up scrutiny in other jurisdictions for retrospective periods?  

With the QLD Amnesty being the first “industry” concession of this nature that we have seen for Payroll Tax, it will be interesting to see if this is a potential new avenue that State governments/regulators will seek to adopt (particularly for arrangements prevalent in certain industries where participants have only recently become aware of the potential for Payroll Tax to apply). We also now wait and see whether other States/Territories will offer their own Amnesty-like measures for GP arrangements to augment, and likely ensure effectiveness of, the QLD measure.

Should you wish to understand more about the case law or legislative developments in this space (including the potential relevance/impact of the QLD Amnesty), or if you are currently undergoing an examination of your arrangements with medical practitioners, please reach out to your PwC Employment Taxes specialist for assistance.