Medical accountant Kym Nitschke explains why a recent payroll tax case has raised concerns for doctors and medical practice owners in Australia.
The NSW Civil and Administrative Tribunal (NCAT) recently found a doctor liable for backdated payroll tax totalling almost $800,000, potentially setting a major precedent for doctors and medical practice owners Australia-wide.
In Thomas & Naaz Pty Ltd v Chief Commissioner of State Revenue, the key finding that has sent shockwaves through the medical profession is that despite doctors operating as contractors and individual sole traders while co-located on the same premises, their income was still classed as a relevant contract because of the fact that patient billings were paid into the medical clinic’s account and not the doctor’s account. This money trail demonstrated an employee relationship, which meant the clinic was liable for payroll tax on the payments made to the doctor. You can read the full decision here.
Because most doctors structure their practices like this, the outcome opens Pandora’s Box. Adding further salt to the wound, the NSW government has hinted at backdating this payment up to five years.
While this complex issue is still evolving, all Australian medical and allied health practices are advised to speak to a tax professional as soon as possible.
Flow of funds a determining factor
This case was a typical example of an everyday working relationship between doctors and medical practices.
Like many other Australian doctors, Dr Thomas offered his services to medical centres for a certain amount of time each month. The centre would bill patients on his behalf and add a flat 30% service fee.
Dr Thomas set himself up as a ‘contractor’ to his medical practice, operating as a sole trader instead of an employee.
However, the Commissioner saw a ‘relevant contract’ between the doctor and the medical centre. It justified this by how payment was handled, saying payments were made ‘for or in relation to work performance.’
The nail on the head of the case was the medical centre used one bank account to pay its contractors.
Relationship deemed of an employer/employee nature
The NCAT found the written agreements between the centre and the doctor characteristic of an employer/employee relationship.
They also saw the commitments to rostering, restraints of trade, leave policy, the doctor’s obligation to promote the clinic and other basic commitments as further evidence of an employer/employee relationship.
All of this meant his services were judged as taxable wages and subject to payroll tax; a backdated tax bill of nearly $800,000 for three years.
What does that mean for doctors?
Worryingly, this case could set a precedent in NSW and even across the country.
Where doctors considered themselves a tenant or a contractor, the law now sees them as an employee.
Every practice, and other business groups, could be liable for retrospective payroll taxes going back five years.
What should you do?
Before making any hasty decisions, speak to an experienced medical tax accountant. It is crucial to have a strategy in place as soon as possible, tailored to your personal circumstances.
At Nitschke Nancarrow, we specialise in tax strategies for doctors and also work closely with medical practice owners. We’re ready to help you, now.
Don’t delay getting advice about this matter. Contact us now.
The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Nitschke Nancarrow’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Nitschke Nancarrow specialises in accounting, tax and financial advice for superannuation. Contact us now for a no obligations discussion about your needs.