Take your payroll tax exposure seriously

5 minute read

It’s time to review the aspects of your practice’s structure that may make it liable under the recent Thomas and Naaz tribunal ruling.

In recent weeks, we have been contacted by many concerned clients regarding the Thomas Case and the potential impact it may have on the medical industry.

There is a concern among practice owners that their current service agreements and existing service arrangements could leave them exposed to pay payroll tax, as in the case of Dr Jawahar Thomas, who is now owing close to $800,000 to NSW Revenue in retrospective payroll taxes.

Key points of the case

Some of the facts of the case that were not in dispute included the following:

  • Thomas and Naaz operated three bulk-billing medical centres in NSW
  • Each doctor had a written agreement with one of the medical centres
  • The agreements noted that the medical centre would provide administrative staff for the “charging and collection of Medicare fees on behalf of the doctors”
  • The doctors had the option to collect the patient fees themselves or allow the medical centre to do so on their behalf; all but three of the doctors nominated that the medical centre would collect their patient fees; all patient fees were received into the bank account for the medical centre

The application of the payroll tax legislation was said to occur under provisions within the Payroll Tax Act which extend the imposition of payroll tax to contractors. Under this section of the payroll tax legislation, the concept of “wages” for payroll tax purposes is extended to certain payments made under a “relevant contract”.

Essentially, the Civil and Administrative Tribunal decided that while the doctors were providing services to patients, they were also providing services to the medical centre in the operations of its business.

Furthermore, the tribunal decided that the nature of the service agreement in place between the doctors and the clinics, and the requirements it placed on the doctors, established a “relevant contract” for payroll tax purposes. This decision has effectively opened the gate for the imposition of payroll tax on contractors.

Drafting service agreements that minimise payroll tax exposure and other risks

With its near $800,000 decision, the Thomas case highlights the importance of having current service agreements in place with your practitioners and demonstrates that even where an agreement is in place, if its terms are not properly written, understood and implemented, payroll tax can apply.

Verbal “handshake” agreements never suffice and could accrue quite the legal bill should a dispute arise.

To minimise exposure and establish clear rights and responsibilities for the provision of services, we put together a few key points for consideration when reviewing the service arrangements with your doctors:

Work hours

The doctor should have discretion around when he or she can work, without the need for consent by the practice, but subject to compliance with laws and regulations. The practice should not mandate the doctor to work or attend the practice at set times and days, as doing so would establish a regular and systematic engagement to provide a service, as opposed to making a serviced office available to the doctor.

Collection of patient fees

Patient fees collected on behalf of a doctor should be received into a bank account used solely for the collection of his/her patient fees. These fees should be held in trust on behalf of the doctor. The practice should not receive fees into the practice bank account, that is, the same account it uses to pay expenses and operate its business cashflow.


The practice should invoice patients in the name of the doctor, using the doctor’s ABN, and not issue invoices to patients using the practice’s ABN and the doctor’s Medicare number. There are some practical issues to consider here as some medical software does not currently allow this.


In any advertisement of the practice, refer to the practice as being a place for patients to visit their doctor or practitioners. Do not advertise the premise as the provider of medical services. Again there can be issues here where the practice employs registrar doctors, allied health professionals and even nurses.

Financial records

The financial statements of the practice should show income as the service fees collected from the doctors or practitioners. Do not record the patient fees as income of the practice (remember, it is not the practice’s income but the doctors’ income) nor should you show the payments to practitioners as an expense (remember, it is not an expense of the practice but net fees collected on the doctors’ behalf).

Written agreements

Ensure you have written agreements in place between the practice and the doctors and review these agreements regularly. The use of verbal “handshake” agreements will leave you exposed.

In any case, it is important to review the actual actions, processes, procedures and interaction between the practice and its doctors. If there are any inconsistencies with the agreement, it will be the actual process that will matter for payroll tax purposes. In other words, do not put an agreement in place that does not reflect the way you actually do business.

We anticipate the results of the Thomas case to increase review and audit activity of medical centres by state revenue authorities. Should you have concerns regarding your own specific arrangements, please contact William Buck or your business adviser urgently to review and discuss your specific circumstances.

Paul Copeland is director, business advisory at William Buck; please visit William Buck’s Health industry page

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