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Norman Waterhouse

Taxing times for medical and financial services professionals – the payroll landscape has changed

Australian medical practices and financial service providers should be ready to face the local implications of new interstate interpretations of payroll tax legislation, which have widened the scope of when independent contractors and sublicensees of Australian Credit Licence (ACL) and Australian Financial Services Licence (AFSL) holders will be deemed to be employees for payroll tax purposes.

The issue of evolving judicial interpretation of payroll tax legislation has been extensively discussed across Australia in recent months (and years) due to landmark cases such as Chief Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Optical Superstore) and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAP 220 (Thomas and Naaz).

These cases have solidified the current position in Australia that payments made from a medical practice entity to contracted doctors (including distributions of patient fees collected by the practice on behalf of those doctors) will be taken to be wages for the purposes of payroll tax legislation – being the Payroll Tax Act 2009 (SA) in South Australia.

On the back of these cases, the revenue office of New South Wales (Revenue NSW) has signalled its intent to similarly apply relevant payroll tax legislative provisions to payment arrangements involving AFSL and ACL sublicensees (including aggregators and mortgage brokers).

In this article, we will outline how these interstate decisions impact the state of play in South Australia (and Australia more generally), and what can be done to protect yourself and your contractors against excessive future payroll tax liabilities.

Payroll tax – in a nutshell

Unlike federal taxes such as income tax and CGT, payroll tax is a creature of state-based legislation and is overseen by state revenue authorities. It is essentially a tax imposed on each dollar paid in wages that exceeds a threshold set in each state and territory.

South Australia’s payroll tax legislation essentially creates two separate thresholds, the first being for when payroll tax is triggered, and the second being for how your payroll tax liability is calculated. The first relevant threshold is $1.5 million – once your total annual payroll (including superannuation, fringe benefits etc.) exceeds this amount, payroll tax liability will be triggered.

However, your total payroll tax liability will not be calculated on each dollar above $1.5 million. Rather, a general deduction of $600,000 is applied (in most cases), the effect being that once your payroll exceeds $1.5 million, payroll tax will become payable on every dollar in wages over $600,000.

While legislation typically differs from state to state (or territory), payroll tax legislation is ‘harmonised’ across Australia (except WA), meaning that it is usually interpreted and applied in the same manner.

Harmonisation is the main reason why medical practices and financial services professionals across Australia should be concerned about the NSW decision in Thomas and Naaz and subsequent postulating from other interstate revenue authorities.

Effect of recent cases – medical practice perspective

Optical Superstore and Thomas and Naaz primarily centred on the interpretation of the ‘relevant contract’ provisions. Broadly speaking, the intent of these provisions is to enable state revenue authorities to capture payments made to independent contractors in the payroll tax web. These provisions are drafted very broadly.

Where a ‘relevant contract’ is deemed to exist, the person who supplies services under that contract is deemed to be an employee for payroll tax purposes, and the person (or entity) receiving those services is deemed to be the employer. Payments made by the ‘employer’ to the ‘employee’ under such an arrangement are then taken to be wages and will be included when determining the employer’s total wages and payroll tax liability for a given period.

For example, for medical practices, this can operate so that the medical practice is deemed to be the employer of each doctor it has engaged, with the result that payments made to those doctors are included in the practice’s wages for payroll tax purposes.

Until recently, payroll tax legislation had not been interpreted to include doctors and deemed ‘employer’ practices in this way. This new interpretation could have significant implications for medical practices.

Using South Australia as an example, given the threshold of $1.5 million in wages, we expect that a practice with more than three to four full-time GPs will find themselves exposed to payroll tax, so that the payments to GPs will be added to the wages paid to administration staff, nurses, etc.

Notwithstanding the example above, it should be noted that the application of the ‘relevant contract’ provisions is not limited to GPs – it also applies to other medical specialists including dentists and allied health professionals. If applicable, the provisions can pick up payments made from Medicare, insurance providers, gap payments and practice incentive payments.

Operating as a service entity (that is, providing administrative services only to allow doctors to conduct their own medical practice) provides some protection, but it does not by itself stop the application of the ‘relevant contract’ provisions – and particular attention will be paid to how the service entity actually provides its services.

The result of these cases means that many practices and service entities may now be unwittingly in breach of their payroll tax obligations (and may also have substantial historical liabilities as a result).

Further, in a ruling published on 22 December 2022, the Queensland Revenue Office (QRO) has signalled its intent to drag in medical billings from angles outside the ‘relevant contract’ regime, by relying on other provisions contained in the payroll tax legislation relating to third-party payments and employee-agency contracts (which, like relevant contracts, may be deemed to exist if certain broad conditions are satisfied). While we do not agree with the QRO’s position, in our view the QRO has signalled where the next battle may be fought across Australia.

Financial services perspective

As noted above, the NSW Commissioner of State Revenue has also recently released a revised “Commissioner’s practice note” (available here) stating the position of Revenue NSW that the “relevant contract” provisions of payroll tax legislation are likely to also apply to arrangements between AFSL licensees and their agents (called Authorised Representatives), and ACL licensees (including aggregators) and their agents.

The effect of this position, as outlined in the Commissioner’s practice note, is that:

  • an AFSL licensee or ACL licensee may be taken to be an employer;

  • their relevant agent may be taken to be an employee; and

  • remuneration, commonly commission payments (including trail commissions) made to agents will be taken to be wages and potentially subject to payroll tax.

What can be done?

Aside from creating fear and uncertainty, these recent developments have transformed the general position of payroll tax in a medical practice and financial services context, potentially exposing many around the country to retrospective and future payroll tax liabilities.

It is important to note that the new interpretations will not affect all medical practices and AFSL/ACL holders (as this depends on the particular facts and circumstances of each individual arrangement). Some service arrangements may already be structured so that the new interpretations have no application.

If your practice is exposed, proactive steps may be able to be taken to stop the operation of the ‘relevant contract’ provisions and limit the potential payroll tax liabilities. This involves careful tax planning and commercial structuring (including a detailed review of the contractor agreement or service/agent arrangements) to ensure that the reasoning applied in Optical Superstore and Thomas and Naaz, can be countered.

These protective arrangements may, by necessity, result in some operational and administrative shifts but, once implemented, the practice’s administration should proceed largely as before. Safeguarding yourself in this rapidly changing environment does not have to jeopardise the fundamental functionality of your business.

We are pleased to have worked closely with the Australian Medical Association (SA) (AMA(SA))on these issues and can offer a discounted fee to its members due to our close relationship.

We are also exploring avenues for providing similar benefits to other professional associations, including in the financial services industry.

To discuss your potential payroll tax liabilities, and whether the recent cases affect your practice or service arrangements, or if you would like us to present to your association, please contact Kale Rigano on 08 8210 1207 or, Marissa Mackie on 08 8217 1361 or or Alexander Belperio on 08 8210 1230 or

Our experience advising clients in relation to State and Federal tax jurisdictions extends over a large variety of industries and diverse range of tax profiles, including high net worth individuals, small to medium enterprises and individual taxpayers with complex arrangements and asset structures.

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