Medical and allied health industry businesses using service entities must check their service entity arrangements comply with payroll tax laws.
A recent case concluded that the amounts a service entity received from patients on behalf of a practitioner, and then distributed to that practitioner, were ‘taxable wages’ for payroll tax purposes.
Common business structures for medical and allied health industry businesses
Medical and allied health industry businesses often fall within one of two types of business models:
- An employee or contractor model (or both). In this structure, a practice entity carries on the business and contracts with its patients. The practice entity then separately engages either employees or contractors (or both) to provide the services the practice entity needs to serve its patients.
- A service entity model. In this structure, practitioners carry on their own businesses and contract with patients directly. The practitioners pay a fee to a services entity for the provision of administration and other support services, and they often obtain the right to occupy the premises to carry on their businesses.
The two models have very different PAYG withholding, superannuation and payroll tax consequences.
In some cases, we see documents that incorrectly mix both models: this results in increased tax and superannuation risks. We also see cases where what happens in practice (particularly in relation to invoicing) does not match the documents. This also increases the tax and superannuation risks.
One consequence of a service entity model is that, generally, payments from a practitioner to a service entity are not subject to payroll tax. However, a recent case has highlighted circumstances where these payments may still be subject to payroll tax.
The structure in The Optical Superstore
The taxpayers in The Optical Superstore cases carried on an optical dispensary business – selling glasses and frames to the public. As part of their business structure, the store owner, The Optical Superstore Pty Ltd as the trustee of one of four trusts (each, an Optical Superstore) contracted with optometrists (or the optometrists’ related entities).
Under the arrangement between the Optical Superstore and the optometrists:
- the optometrists provided optometry services at the Optical Superstore stores
- when the optometrists provided services to patients, the optometrists directed that the consultation fees paid by the patients (Consultation Fees) be paid to the Optical Superstore
- the Optical Superstore held the Consultation Fees on trust for the relevant optometrist
- the optometrist paid the Optical Superstore an occupancy fee to use the premises
- the Optical Superstore retained the occupancy fee from the Consultation Fees it held on trust for the optometrist
- the Optical Superstore distributed the Consultation Fees (less the occupancy fee) to the optometrist.
Please see our previous article if you would like further detail about the structure.
In The Optical Superstore litigation, the Tribunal and Courts considered whether:
- the arrangement between the Optical Superstore and optometrist was a ‘relevant contract’ for payroll tax purposes
- all the payments the Optical Superstore made to the optometrists under the relevant contract were wages for the purpose of calculating payroll tax.
What happened in the Tribunal and Supreme Court in The Optical Superstore?
The Commissioner of State Revenue issued payroll tax assessments on the basis the arrangement was a ‘relevant contract’ and that the amounts the Optical Superstore transferred to the optometrists were wages. At first instance, the Tribunal found that:
- there was a relevant contract between the Optical Superstore and optometrist for payroll tax purposes
- the Consultation Fees distributed to the optometrists each month were not wages for payroll tax purposes because they were not ‘payments’ ‘for or in relation to the performance of work under the relevant contract’, but were distributions of the optometrist’s own funds that the Optical Superstore held on express trust for the optometrist
- other amounts referred to as premiums were wages for payroll tax purposes because those amounts were ‘for or in relation to the performance of work under the relevant contract’.
The Commissioner appealed the Tribunal’s decision to the Supreme Court on the second issue and Croft J dismissed the Commissioner’s appeal. Croft J found that the Consultation Fees were not payments because they were not ‘paid or payable’. This was on the basis that ‘paid or payable’ did not extend to this situation where the Consultation Fees were simply returned to the optometrists who always beneficially owned the Consultation Fees.
Interestingly, the Court also observed that if the distribution of the Consultation Fees were payments, then they would be ‘for or in relation to the performance of work relating to the relevant contract’. This was despite the fact that the bulk of the work was done by the optometrists for patients – not Optical Superstore.
What happened in the Court of Appeal in The Optical Superstore?
The Commissioner appealed the decision to the Victorian Court of Appeal.
The Court of Appeal said the ordinary meaning of ‘payment’ included a payment to a person who was already entitled to that money. When the money was provided or transferred to the person, it was ‘paid’ to that person.
When the Optical Superstore distributed the Consultation Fees to the optometrists, it ‘paid’ the Consultation Fees to the optometrists. As a result, the Consultation Fees were subject to payroll tax.
One feature of The Optical Superstore case is that Optical Superstore was carrying on its own separate business of selling glasses and frames. It was not merely a service entity.
Why is The Optical Superstores important?
The Optical Superstores decision highlights that where funds flow from a service entity to a practitioner, those transactions will be ‘payments’. In certain circumstances, those payments will potentially be subject to payroll tax.
The structures most at risk are where a ‘service entity’ is also carrying on a separate business selling goods or services to patients in its own right. In these cases, based on The Optical Superstores, the relevant OSR may be more likely to argue that payments distributed to practitioners are payments in relation to services the practitioner provides to that business.
Medical and allied health professionals should review their structure and operating procedures to ensure they are complying with their payroll tax obligations.