In an important win for healthcare clinics, the Supreme Court of Victoria in Commissioner of State Revenue v The Optical Superstore Pty Ltd [2018] VSC 524 dismissed the Commissioner of State Revenue’s appeal and agreed with the Victorian Civil and Administrative Tribunal (VCAT) that trust distributions made to Optometrist Entities were not “wages” within the meaning of Payroll Tax Act 2007 (Vic) (PTA).

By way of background, The Optical Superstore Pty Ltd (Trustee) is the trustee of four related trusts which together carry on a business known as The Optical Superstore. The stores owned by the Trustee (Stores) are either operated by the Trustee or are licensed to other parties (Licensees).

The Trustee and Licensees had entered into contracts either directly with optometrists or with the companies or trusts through which the optometrists operated their respective businesses (collectively, Optometrist Entities) in relation to the provision of optometry services at the Stores (Agreements).

Under the Agreements, the optometrists’ consultation fees (Medicare payments and patient fees) were paid directly to the Trustee to hold that money in one of its four trusts on behalf of the Optometrist Entities (Consultation Fees). The Optometrist Entities would receive a monthly “Reimbursement Amount” from the Trustee based on the number of hours the particular optometrist worked at the Stores (regardless of the actual Consultation Fees earned). Finally, any surplus funds from the Consultation Fees, after paying the Reimbursement Amounts to Optometrist Entities, was retained by the Trustee as an “Occupancy Fee”.

At times the Reimbursement Amounts actually exceeded the Consultation Fees. In this event, the amount by which the Reimbursement Amount exceeded the Consultation Fees were paid to the Optometrist Entity from the Trustee’s own funds, and these excess payments were referred to as “Location Attendance Premiums” (LA Premiums).

VCAT findings

Broadly, VCAT had made the following key findings:

  1. The Agreements were “relevant contracts”, being contracts under which the optometrists supplied services for or in relation to the performance of work.
  2. The LA Premiums were taxable wages, on the basis that they had a close connection to the performance of services by the optometrists.
  3. The Reimbursement Amounts were not taxable wages, on the basis that these payments came from the consultation funds held in the express trusts, rather than from the trustee’s own funds and, as such, a return of money from an express trust could not meet the condition of an amount “paid or payable” by the Trustee for the purposes of section 35(1) of the PTA (amounts under relevant contracts taken to be wages).
  4. The exemption for contractors who provide services to the public generally was applied to some of the optometrists on a case by case basis, based on the activities of the optometrist.
  5. The 25% penalty rate had been fairly imposed by the Commissioner in relation to any outstanding payroll tax liability.

Issue for the Supreme Court

The principal issue for the Court, in determining whether the Reimbursement Amounts paid to the Optometrist Entities constituted “wages”,  was whether the money was “paid or payable” by an employer for or in relation to the performance of work.

Court findings

The Court held that the meaning of “payments” for the purposes of section 35(1) of the PTA did not extend to the return of money to a contractor where that contractor earned that money from providing services to a third party and directed the fees to be held on trust for the contractor or the contractor’s business. Accordingly, the Court upheld VCAT’s decision that the Reimbursement Amounts paid to the Optometrist Entities were not “paid or payable” by the Trustee for or in relation to the performance of work, and the Reimbursement Amounts were not subject to payroll tax.

Further, Justice Croft made the following observations:

  • The use of the trust structure could not alter the essential character of the payments as the return of monies by way of distributions under an express trust. This is to be distinguished from distributions from discretionary trusts or distributions from trusts to employees.
  • It was of critical importance that the source of the distribution was the beneficiaries’ own funds – the Optometrist Entities were the beneficiaries of the consultation fees that they had derived.

This decision strengthens the authority of the VCAT decision, and is a significant win for medical practices and similar allied health clinics at a time when revenue authorities are focusing on payroll tax compliance. On the basis of this case, a practice that runs in a similar way to Optical Superstore, which is a common structure, should not be subject to payroll tax on payments ultimately made to practitioners from a pool of the funds accumulated by the practitioners’ consultation fees. This should not be confused with a practice that derives the patient fees itself and pays the professionals a wage from their own funds.

In light of this, unfavourable assessments issued by revenue authorities in the past should be reviewed, and businesses in this industry are encouraged to reassesses their arrangements with contractors.