Recent case highlights the need for diligence when it comes to Service and Facility Arrangements and the interaction with payroll tax for Medical Practices

It’s common place for medical practices to use a Facility Fee arrangement where a Practitioner derives an income and the practice charges them a Facility Fee for the use of the premises, support staff, etc. This is typically excluded from payroll tax. A recent decision in NSW highlights the challenges for practices in getting this approach right and the implications if they get it wrong, or don’t follow the agreement in practise.

A recent and important decision given by the New South Wales Civil and Administrative Appeals Tribunal, in the case of Winday International Pty Ltd vs Chief Commissioner of State Revenue, sought to impose payroll tax on Winday’s service agreement with its practitioners.

We want to share with you the outcomes of this case and what it means for medical and dental practices when it comes to payroll tax obligations.

What is payroll tax and what payments are subject to payroll tax?

Payroll tax is a state imposed tax on wages paid to employees and certain deemed employees if the wages paid by the tax payer exceed a threshold amount which currently is set at $750,000 in NSW and $1,100,000 in Queensland.

What happened in this case?

Quick facts about the Winday International Pty Ltd case:

1. Winday provided fully operational radiology facilities to radiologists who then provided radiology services to the public.
2. Each of the radiologists entered into a service agreement with Winday for the use of its facilities.
3. The practitioners had access to the following provided by Winday:
   1. Place to conduct their services
   2. Specialist plant and equipment required to perform their service
   3. Medical supplies
   4. Staff to assist the practitioner
   5. Administrative staff
4. Winday collected all the patient fee on behalf of the practitioners and made a net payment to each practitioner after withholding the service fee.

The Tribunal’s decision challenges the agreements from a payroll tax perspective in that the agreement indicated that this was a typical arrangement that would not attract payroll tax, however the Tribunal thought otherwise, and ruled that Winday is incorrect and should be liable for Payroll Tax on its payments to practitioners. Here are some of the key points that led the tribunal to think the practitioners were actually employees for payroll tax:

1. Contrary to the agreement, the practitioners were obliged to provide locum cover if they were unable to attend the facility on any day.
   
2. Winday ensured that the amount payable to the radiologists would be no less than $2,000 for each day services were provided.
3. Winday referred to the radiologists as “our staff” on the website they advertised their services.
4. Winday’s actions and procedures differed from the terms of the agreements.

The Tribunal’s decision has since raised a number of points not usually present in service arrangements in the healthcare space.

What does this mean for medical and dental practices?

It is prudent for practice owners to carefully consider the wording of any contractual arrangements between themselves and their associate practitioners, with all potential tax consequences carefully considered with an accountant and a lawyer. This could help your practice to avoid potential payroll tax consequences down the track.

Further words of caution

If it has been a while since you have reviewed your service agreements, we would recommend that you undertake a review to check that these agreements reflect what they are intended for, and also ensure the clauses in the agreements are being followed in practise. Please note that payroll tax is a state based tax and the specific rules for payroll tax do vary state by state, but are similar. Also Payroll tax has interaction with income tax, however they are governed by different rules and being assessed as an employee for payroll tax will not necessarily be the same for income tax.

If you are in doubt about whether your processes are compliant or if you change your business model and need assistance to determine how you should deal with payroll tax, please contact a Prosperity Adviser to discuss your circumstances.

^Details of the decision in the Winday International Pty Ltd case can be found here.