October 2, 2019

Professionals

PAYROLL TAX Alert for businesses using service entity arrangements

Any business using service entity arrangements should be aware of a recent Victorian payroll tax case which changes the position on how those arrangements are treated.

We had been put on notice that the outcome of the case, which involved optometrists providing services to The Optical Superstore, could have a significant impact on how service entity arrangements are treated for payroll tax purposes. 

This is particularly important for medical, dental and allied health practices which commonly operate using service entity arrangements.

Whilst not binding in Queensland, the outcome of the case should be carefully considered as the harmonisation of payroll tax by the states and territories leaves it open to the other revenue offices, including the Queensland Office of State Revenue,  to adopt the same or a similar approach taken by the Victorian State Revenue Office.

What is the concern with the decision?

The position has long been that amounts paid under service entity arrangements were not treated as “taxable wages” for payroll tax purposes because they were amounts to which the practitioners (in a medical service entity arrangement) were always entitled and the service entity merely collected and disbursed the monies for the practitioner.

The question in this case arose as to whether the payments to the practitioners were “for or in relation to the performance of work”. This is because there is a “payment” to the practitioner and work had been performed. 

The risk with the view that payments are taxable wages for payroll tax purposes is that there will be an increase (in some circumstances a substantial increase) in the payroll tax liability for the service entity. 

what can you do now in respect of your arrangements?

If you or your clients have service entity arrangements in Victoria, they should be immediately reviewed to see whether the arrangements fit within the facts covered by the case.

If in other states and territories, arrangements should still be reviewed to determine whether any of the key indicators raised in the case are present in the arrangement. As mentioned above, there is no guarantee that other revenue offices (including Queensland Office of State Revenue) will adopt this same approach, but steps may be able to be taken to mitigate any ongoing risks should it do so.

contact us

Contact Taryn Hartley at McInnes Wilson Lawyers if you require any assistance in reviewing service entity arrangements to see whether payments are at risk of being treated as taxable wages for payroll tax purposes.