April 9, 2019
State Revenue Offices are currently targeting service entity arrangements in the medical and healthcare sector for payroll tax investigations and audits. The time is right to review any existing arrangements to determine whether ”taxable wages” have been correctly reported and to ensure that any payroll tax groups have been identified and notified.
Why is the medical and healthcare sector targeted?
Typically, medical and healthcare practitioners will enter into a service agreement with a service entity that they control. In exchange for a fee, the service entity will provide, among other things, staff, clerical and administrative services, premises and plant and equipment. The service entity employs the service staff and may separately report for payroll tax (if the threshold is met).
Service entity arrangements have long been targeted by the Australian Taxation Office with the Australian Taxation Office critical of the mark-up on the services provided by service entities. Now it appears State Revenue Offices are targeting these arrangements for payroll tax compliance.
Example of the arrangements being targeted:
In a recent case involving The Optical Superstore (TOSS), the Commissioner of State Revenue determined that TOSS had failed to satisfy its payroll tax obligations relating to the optometrists practising within its superstores. TOSS disagreed with the decision and challenged it in the Victorian Civil & Administrative Tribunal (Tribunal) (the outcome of the Tribunal hearing has since been confirmed by the Victorian Supreme Court).
The basis of the challenge was that the relationship between TOSS and the optometrists was one of tenancy rather than employee or contractor. It was argued that in order to remove the risk of non-payment of the occupancy fee, optometrists were asked to direct Medicare and private patients to pay the consultation fee directly to the store owner. After deducting the occupancy fee, the remaining money was held on trust and distributed to the optometrists at the end of the month. TOSS argued that the arrangement did not amount to a payment of wages, but rather a return of funds.
An additional incentive payment, characterised as a ‘location attendance premium’ in the tenancy agreement, could also be paid. This premium would be payable if the consulting fee was less than the amount the optometrist was entitled to based on their hourly rate and time spent in the store. This essentially guaranteed a minimum amount for the optometrist. TOSS argued that this payment too should not be classified as wages.
The Tribunal found that the agreements would fall within the payroll tax net as they were ‘relevant contacts’. However, the Tribunal agreed with TOSS and held that the trusts distributions were simply a return of money that belonged to the optometrists, even though separate trusts were not set up for each individual optometrist.
Importantly, the Tribunal disagreed that the incentive payment fell within the scope of the tenancy agreement. The incentives were held to be ‘wages’ and therefore subject to payroll tax.
What does this mean for medical and healthcare professionals?
This case sends a strong warning to medical and healthcare professionals that their service entity arrangements or arrangements for the delivery of services are under the microscope. Any incentive or similar payments are also at risk of falling within the scope of “taxable wages” for payroll tax purposes.
We recommend that all agreements and arrangements are reviewed to ensure that payroll tax obligations are being met – not just for contractors but also for any additional payments and for grouping arrangements.
How can we help?
We can help you:
- review service entity arrangements;
- assist in determining your compliance with relevant laws such as payroll tax, superannuation guarantee charge, and employment law obligations; and
- restructure any existing service entity arrangements to accommodate your business.