Payroll Tax Warning for Medical, Dental and Allied Health Practices
It has been a standard procedure in most medical centres to collect fees on behalf of independent contractor doctors and provide them with premises and administrative services to see their patients in return for a service fee. In fact, the majority of medical centres are set up this way. However, as a result of a recent case Thomas and Naaz Pty Ltd v CCSR , medical centres should review their arrangements with independent contractor doctors to minimise the risk of potential payroll tax exposure.
Payroll Tax is levied on a State basis and based on wages paid to employees. The Victorian threshold is $58,333 and the rate is 4.85% or 1.21% for regional businesses. To assess what payroll tax is you need to distinguish between employees and contractors.
Typically amounts paid to contactors would not attract payroll tax. However, Payroll Tax Act (Vic) extends the concept of ‘wages’ to certain amounts ‘paid or payable’ to contractors under ‘relevant contracts’. i.e. a contract under which a person, in the course of carrying on a business, supplies services to another person for or in relation to the performance of work. This is where the probem lies.
What happened in Thomas and Naaz Pty Ltd v CCSR?
Thomas and Naaz Pty ran three medical centres, from which multiple doctors provided medical services and provided them with rooms and shared administrative and medical support services.
The doctors did not get paid by the patients directly. Instead, the doctors bulk-billed each patient, and the patients assigned their Medicare benefits.
The Doctors had the option of dealing directly with Medicare to obtain the benefits that had been assigned to them by the patients, or having the Medical Centre do so. All but three Doctors requested that the Medical Centre do so;
- The Medical Centre, on behalf of the Doctors, made claims on Medicare and the funds received by the applicant from Medicare were placed into an account held by the medical centre in which the Doctor saw the patient. Each medical centre had a separate account and all of the billings of the Doctors relating to that medical centre were received into that account;
- The medical centre claimed with Medicare, and the funds received were placed into an account held by and controlled by the practice.
- The medical centre recorded and reconciled these payments then 70% of the claims paid by Medicare for a particular doctor were paid from the practice’s bank account to the doctor. The practice retained the remaining 30% as a service fee.
- The engagement agreements entered between the doctors, and the practice contained conditions such as the doctors working hours and the obligation to follow the roster and leave policy.
- The medical centre also imposed trade restraints, would retained the patient records and required doctors to promote the medical centre.
In the decision, it was held that the payments to doctors 70% of the claims paid by Medicare were ‘wages’ and subject to the payroll tax, on the basis that the Agreements were ‘relevant contracts’. This being the case, we recommend that all medical centres review their existing relationship with independent contractor doctors and, make sure they are propertly documented and reflect what actually happens in practice
What's Your Action Plan?
We believe a safer structure is where each doctor collects their patient fees directly from the patient and or directly with Medicare and separately pays their service fee to the medical centre. We consider that this will minimise the risk of payroll tax exposure. This is because no amount is 'paid' or 'payable' from the medical centre to the doctor.
If your medical centre has independent contractor doctors, you should ensure the following:
- Each doctor has their own PRODA account separate from the medical centre PRODA account. Whilst it is common for the medical centre to set up 'one' PRODA account through their practice software for all doctors to share, this is a problem. If there is only a single PRODA account, the doctor’s invoice will have the medical centre ABN, not their own ABN. This will undermine the argument that a doctor is an independent contractor. It will also strengthen the argument that money paid to that contractor qualifies as ‘deemed wages’ for payroll tax.
- Invoices must be issued under the doctor’s own ABN and not the medical centre ABN. This can be set up in the practice management software so that the invoice refers to the doctor.
- Each doctor must have a bank account set up in their own name and linked to their ABN.
- Professional fees earned by the doctor are deposited into the bank account linked to independent contractor doctors ABN and not the medical centre's bank account. Payments to multiple doctors can be managed using TYRO EFTPOS system.
- The service fees paid by the doctor to the medical centre can be managed by setting up a third-party authority authorising the medical centre to transfer the payment for service fees based on the doctor’s billings. It must also isssue the doctor with a tax invoice for service fees.
- The independent contractor doctor must declare their gross fees earned on their tax return, and then claim the service fee paid to the medical centre as an expense. The doctors will also be responsible for their own income tax, work cover, annual and sick leave, long service leave , superannuation guarantee levy and PAYG withholding Tax.
- As well as having all of the above in place, you should review your written independent contractor doctors agreement with your independent contractor doctors to ensure it reflects the above. This applies to owners and non-owner doctors and must signed by the medical centre and the doctor. In addition to the above, the agreement must clearly state that the independent contractor is not an employee of the practice and that the doctor responsible for their own income tax, work cover, annual and sick leave, long service leave , superannuation guarantee levy and PAYG withholding Tax. NOTE: Any agreement where the medical centre collects fees on behalf of doctors, rosters shift for the centres, has trade restraints or does not allow the doctor to takes copies of his patients files, could be at risk of potential payroll tax exposure.
- Finally, the medical centre should also, review its website and communications to ensure it does not refer to the independent contractor doctors as 'our doctors'. This is because they are independent contractor doctors and not employees which means they can offer their professional services to the general public and have their own website.
Now is the perfect time to review the agreements with your independent contractor doctors to ensure they are consistent with the systems and procedures in your medical centre. If you need advice on setting up your practice to minimise the risk of potential payroll tax exposure and review your systems and procedures, please contact us today.
Disclaimer: This article contains general information only and no responsibility can be accepted for errors, omissions or possible
misleading statements. It is not designed to be a substitute for professional advice and does not take into account your individual
circumstances. Therefore, no responsibility can be accepted for any action taken as a result of any information contained in this