In February 2022 we published an article regarding a recent payroll tax case (Thomas & Naaz) likely to have a significant impact on medical and allied health practices.

Last week the NCAT Appeals Panel released their decision in Thomas & Naaz. Medical practices, advisors and the various Offices of State Revenue were waiting for some clarity, and the former for some positive news.

In the end the decision felt somewhat anti-climactic. Much of the decision was a rejection of all appeal grounds but on the basis that they only raised questions of fact (the Appeals Panel effectively only being able to decide questions of law).

However, amongst the “noise”, there are some useful points to be found. Essentially, these can be divided into two broad categories:

  • Many service agreements between medical practices and doctors will be “relevant contracts” for payroll tax purposes, but each service agreement must be considered on its own facts – that is, no one can assume that every agreement is caught.
  • Payments directly by patients, Medicare or the DVA to doctors may be excluded.

Service agreements as “relevant contracts”

To date, all the cases have concluded that many (but not necessarily all) service agreements provide for services in both directions, that is:

  • By medical practices to doctors; and
  • By doctors to medical practices.

This means that when practices collect money on behalf of doctors, the subsequent payment of that money to the doctor’s own bank account would be subject to payroll tax.

However, there is not a “one size fits all” approach to service agreements. Each and every aspect of every agreement must be reviewed. For example, in Thomas & Naaz, the Appeals Panel (consistent with earlier decisions in the relevant line of cases), determined that critical factors unfavorable to the taxpayer were:

  • Doctors were subject to a roster, including having to share weekend shifts;
  • Doctors were limited to four weeks’ leave per year;
  • Leave had to be approved by the practice with an agreed amount of advance notice; or
  • Restraints on ceasing to provide medical services via the practice.

Where service agreements are different in these respects (and potentially others) it may be arguable that the agreements do not constitute relevant contracts.

We are hopeful that the Offices of State Revenue will bear this in mind when undertaking reviews. However, unfortunately, we have already seen cases where despite the taxpayer providing information showing substantial differences between their agreements and those in Thomas & Naaz (and others), particularly in the areas outlined above, notices of assessment have been issued:

  • Without any comments as to whether these differences were considered; and
  • In any event, concluding (whether by positive application or omission) that such differences were irrelevant.

Payment mechanism

The line of cases at least now make one issue clear – it does not matter that the amounts remitted to the doctors were beneficially theirs from the start (whether collected by the practice as agent or held on trust).  This is because the various Payroll Tax Acts provide that the liability attaches because there is a payment by the practice to the doctor, irrespective of who “owns” the funds.

However, there is one point that may be worthy of further consideration.  In this case, the Tribunal at first instance and the Appeals Panel both noted that there were three doctors who chose to directly deal with, and be paid by Medicare (rather than have the medical practice do so).  In this respect, the following statement was made by the Appeals Panel:

“Payroll tax has been levied by the respondent only in respect of the payments made by the appellant [the medical practice] to doctors from the Medicare benefits it collected in its bank account on the doctors’ behalf (i.e. the amounts equal to 70% of the claims paid by Medicare). No payroll tax has been levied in respect of the payments made directly by Medicare to the three doctors.”

There is no further explanation given to this statement. But given that Revenue NSW did not levy payroll tax in the first instance and there was no appeal or cross-appeal from the original Tribunal decision on this point, maybe the manner in which doctors are paid for their services to patients is still crucial.


Unfortunately, for medical practices, the decision of the Appeals Panel in Thomas & Naaz appears to put paid to the long-held view of the medical profession (and other professions) that service agreements between medical practices and doctors are not subject to payroll tax. 

While some doors may have been left ajar for the future, there must be a real concern about the power of the Offices of State Revenue to levy payroll tax for up to five completed years.

In a previous article following the original Tribunal decision, we noted that retrospective payroll tax liabilities could force many medical practices out of business.  Based on information comprised in various reports regarding GP practices, general medical practices report an average $136,000 service fee (on $389,000 gross patient fees) and $35,000 pre-tax profit per full time equivalent GP.  Assuming the practice is already above the payroll tax threshold, this would give rise to a payroll tax liability of approximately $12,500 per annum per GP.  Extrapolating this over five years, incorporating interest and penalties, the overall liability per GP could be in the order of $115,000.

As medical practices are not designed, nor intended, to retain much in the way of historical profits, owners would either have to put their hands in their pocket for these amounts or close the practice down.

This is unacceptable in the current environment, where there are fewer doctors (particularly GPs), more demand for consultations, Medicare rebates that haven’t kept pace with inflation for a long time and still being in the middle of a global pandemic.  Now is not the time for Offices of State Revenue to pursuing retrospective liabilities – the revenue gained from collecting payroll tax will be offset many times over by the impact of the public health system and the general population. 

What are we doing?

We are discussing potential solutions with a variety of stakeholders including medical practices, the AMA and banks.  Some time will be needed to let the dust settle somewhat, but rest assured we are working towards practical, pragmatic solutions that will hopefully allow your medical practice to remain open, doctors and other health professionals to continue to provide their services to their community, not put undue financial strain on practice owners and enable the health system to stay afloat.

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