What’s clear, what’s not so clear and why this ruling could plausibly be challenged and overthrown.
Here’s the good news on payroll tax and the Queensland Revenue Office ruling.
Not only is it possible to comply with the relevant payroll tax legislation while retaining your services entity structure, and not go bankrupt, but fixing your setup may also dramatically reduce red tape and increase your viability and value as a business.
Typically SROs go after the low-hanging fruit. They won’t proceed with an audit and tax demand if there is a chance of facing a publicly embarrassing loss that may set a precedent.
A key is to defending a payroll tax position is to ensure you are able to show evidence that you are not running a “medical centre”.
That is going to sound strange to a lot of practice owners because so many still have a sign out the front with those words on them. What I mean is that you can prove you are just a landlord and service facility provider, for example Westfield is not Woolies, you are not a provider of actual medical services.
The key to that is the relationship you establish between your entity and the doctors who are your tenants. There’s a lot of detail you have to cover now to be on firm ground.
What is an ‘employee’?
Throughout the different levels of government, there is not a commonly agreed definition of the term “employee”. The term is defined (or deemed) by Act or common law.
Two recent High Court cases, CFMEU V Personnel Contracting and ZG Operations Australia Pty Ltd & Anor Appellants 2022 both dealt with employee v independent contractor rulings.
Often regulators have to refer to court cases in order to interpret their own rules. A number of recent High Court rulings have triggered a flurry of regulator rulings across the nation beyond payroll tax, which include income tax.
In response, regulators publish non-legally binding rulings (like clinical guidelines) that reflect their own, and not the court’s, interpretation. Sometimes they may be considered by the public to be out of touch or overreaching.
In the end, courts make their decisions based on the principles of the law and the evidence before them e.g. practice agreements, all the way down to details like how the receptionist answers the phone.
This is why taking any public ruling literally, as some people seemed to have to in the case of the recent QRO ruling, can be tricky.
Technically, rulings are not law. Every decision is specific to a case. On the surface, your arrangements may look similar, but underneath they are remarkably different.
Ultimately the High Court is where the buck stops, unless parliament votes to change the statutory (regulators’) rules.
A court’s opinion will generally carry in absence of a parliament passing new legislation.
This does not mean you have to go through an expensive court trial to win an audit. All you have to do is have sufficient evidence beyond a written and signed contract to convince the tax investigator that your case is so strong they would be ill-advised to proceed to court, and make their methodology/interpretations/opinions available for public scrutiny.
These matters are usually settled confidentially, so you will never hear about the ones that got away and how they accomplished this feat.
In the QRO ruling, the “medical centre” payroll tax definition reference and the example used are unnecessarily striking fear into practices owners and doctors.
The key points in the ruling are below with paragraph numbers (note that a “relevant contract” is one where payroll tax applies):
13. If a medical centre engages a practitioner to practice from its medical centre, or holds out to the public that it provides patients with access to medical services of a practitioner it is likely the relevant contract provisions will apply unless an exemption applies.
14. A practitioner engaged by a medical centre to serve patients for or on behalf of the medical centre under a relevant contract supplies services to the medical centre as well as to patients.
47. It does not matter that payments to a practitioner are paid from money received by the medical centre on behalf of practitioners, whether from patient fees or Medicare payments, even if the practitioner is beneficially entitled to that money. When the practitioner’s entitlement is recognised and the money is paid or becomes payable, it constitutes wages for payroll tax purposes.
48. The source of the funds used to pay the practitioner’s company does not affect the classification of an amount as wages, even if the payment is made from money held in a trust account for the practitioner or the practitioner’s entity.
50. “Third party payments” of money or other consideration may be taken to be wages paid or payable by an employer to an employee. This provision applies to a third-party payment under a relevant contract that would be wages if paid by an employer to an employee under the contract.
53. The tenancy contract will reference the specific space being leased or licensed and generally includes provisions for fit-out and alterations to accommodate the practitioner’s requirements and services such as building maintenance and signage for the practitioner’s operating hours.
54. A tenancy contract is not a relevant contract if the practitioner does not supply work-related services to patients for or on behalf of the landlord. In these circumstances, the practitioner must operate their own independent medical practice responsible for such matters as advertising and attracting patients, providing medical services to their own patients (i.e. not for or on behalf of anyone else), managing patient appointments and records and directly submitting claims for medical benefits to Medicare; with Medicare paying those benefits to the practitioner (or the practitioner’s entity).
55. If a tenancy contract refers to a medical centre as a landlord and the practitioner as a tenant, but in substance the practitioner is providing medical services for or on behalf of the medical centre to its patients, the tenancy contract is more likely to be a relevant contract.
58. A contract between a medical centre and a practitioner may state the practitioner is the principal, and/or the medical centre only provides administrative services to the practitioner. Such clauses do not prevent the application of the relevant contract provisions if the medical centre is able to exercise operational or administrative control over the services provided to patients or is able to exercise operational or administrative control over a practitioner to influence decisions about who practises at the centre, when they practise, and the space within the centre where that occurs. The manner in which the parties describe or label their relationship in contract cannot change the character of the relationship established by their rights and obligations.
Is this regulatory overreach?
It is easy to wrongly interpret these guidelines and jump to the wrong conclusion without seeking experienced legal and accounting advice. It appears even high-profile, experienced medical advisers may be not clear on these new rules.
Many parts of the ruling appear valid. But some other sections look like they will be open to interpretation and challenge.
The danger here is that QRO seems to be attempting to create and influencenew laws with their interpretation of law.
Parliaments have the authority to create law, the courts provide their interpretation. Regulatory bodies may only enforce the law. It is not the job of the QRO to create a new pathology-like “Red Book” (which, for the record, is not law).
The QRO ruling is a carefully drafted document.
Nevertheless, a number of examples provided in that document may be considered misleading and have questionable legal authority.
If a taxpayer accepts the ruling as set in stone they may unwittingly submit themselves to irreversible regulatory scrutiny.
Such actions may inadvertently cause systemic undue harm to others and the community at large. The recent national media reports are a case in point.
What is a medical centre?
A key part of the QRO ruling attempts to define what a medical centre is.
The ruling has however cherrypicked words from a cited federal tax judgement: Commissioner of Taxation v Healius Ltd [2020] FCAFC 173 para 97, and ignored recent High Court cases.
There is no useful commentary of what would be appropriate in satisfying the exemption test of “holding themselves out to be providing services to the public” in Queensland’s Payroll Tax Act 1971 s.13B(2)(b). Similar provisions exist in all other state acts.
The ruling is focused on legalising a new characterisation and definition for a “medical centre”. This would give it a Trojan horse opportunity to attack the entire practice arrangement beyond a written contract which was upheld in the High Court in CFMEU V Personnel Contracting.
Although it is always helpful for a regulator to settle on a single definition of an essential term, the High Court may take exception to the QRO having completely disregarded well established concepts of professional services and tenancy contract agreements that characterise a non-medical centre arrangement simply because they declared their particular definition in a public ruling.
This was confirmed in the High Court case and ZG Operations Australia Pty Ltd & Anor Appellants 2022.
In this case the court found that where the terms within a legal contract are in doubt and unclear, one must revert to the “totality of the transaction”. In lay terms if it looks like a duck, and quacks like a duck, it most likely is a duck (a services entity duck).
Another example of overreach is paragraph 58, which appears to unilaterally undermine many legitimate service agreement arrangements. This is especially so if your facility is characterised by the QRO as a “medical centre” that provides services such as reception staff that directly or indirectly have administrative influence or control over the practitioner. It is not clear what they mean by “direct control” or “influence”.
This appears to ignore what a service agreement/contract may outline and how it is associated and advertised with a “medical centre”.
The QRO implies that co-branding between the landlord and the medical practitioner where there is no exclusive possession of a specified area/premises may be a problem if administrative support services are provided that may influence the practitioner’s conduct.
This type of catch-all requirement is extremely broad and ambiguous.
The QRO ruling cited the case Commissioner of Taxation v Healius Ltd which is a federal case about tax on lump sum payments to doctors for acquisition of their practices, not payroll tax. In the case, the judge says the characterisation of the medical centre as holding out services to the public or not had nothing to do with the tax ruling in the case.
The QRO implies the case identified a holding-out/perception problem – essentially, whether services were offered directly to the public – yet the Federal Court rejects this assertion in paragraph 100 of the proceedings: “The present case is not concerned with whether the activities of Idameneo involved the provision of services to members of the public whether directly or incidentally.”
Maybe the QRO didn’t read that far in.
Paragraphs 47 and 48 of the QRO Ruling seeks to disregard the Super Optical Court decision and subsequent Tribunal decisions that highlighted the importance separate banking, which triggers the extended definition of what constitutes a “deemed relevant contract” that led to theThomas And Naaz decision. This decision extended the definition to include the provision of medical services such as after-hours rosters, teaching and restraints of trade.
Paragraph 53 of the ruling is too narrow in offering Tenancy contracts as “safe harbour”. It should be made clearer the same safe harbour rules apply if a tenant doctor is independently advertising their services separate to a service or landlord entity that has no direct control and influence. This is how the current Court rulings stand.
But based on relevant judgements, a scenario where a judge overturns the Queensland ruling seems entirely feasible.
The QRO ruling implied that if you were described as a “medical centre” then your payments to contractor doctors may be deemed a relevant contract and subject to payroll tax.
The QRO forgot to mention paragraph 100 of the Healius case and its own payroll tax law which outlines that practices may rely on the s.13B(2) exemption by providing services to the public generally.
The Ruling also heavily relies on the 2016 Healius Trademark case (which is not about tax). The judge in this case visually described what the characteristics of a “Medical Centre” were, including how the practices:
1. advertise themselves,
2.receptionists answer phones,
2.1 make appointments,
2.2 meet and greet patients, and
2.3 bill and take payments from patients etc.
The ruling states that similar arrangements may be deemed a “relevant contract” and thereby attract payroll tax bill, unless you have a “tenancy contract” with the doctor in question. The ruling starts to blur the lines at this point by presenting a combination of broad arrangements that may trigger a payroll tax liability. The arrangments may appear similar but they are not necessarily the same as the terms in a traditional service entity contract.
To define a medical centre the QRO referred in their ruling to the Healius tax case, where the judge did not consider the use of such a characterisation in its decision which was a decision on federal tax.
Again, the QRO cites examples based on this case, without deeply exploring other commonly held arrangements?
An important reference case not cited is the 1978 Federal Court Phillips service trust case.
This case was upheld in the taxpayer favour. The landmark case permitted income splitting of professional income if commercial services or management fees are being charged from the service entity to a professional practitioner. In this case it was an accounting firm.
The principles of this case remained sound, but were mutated by the advent of corporatisation of the professions especially in medicine and law.
Some medical practices have now become medical businesses and some of these medical businesses (or GP corporates) did not properly apply the principles of the service entity model. From the outside looking in, in systematising their services with things like established targets and monitoring of performance, many of our GP corporates do appear to be non-compliant for payroll tax as a result.
But many practices have never adopted this approach to their businesses and their structures reamain largely compliant as a result.
The federal tax ruling clearly delineates what is a business and what is personal professional earnings. Of note it clearly defines what a profession is. This may go someway to establishing who can be a tenant doctor or provider, or whether you are running a practice company or trust for legal and taxation purposes or a medical business i.e. “medical centre”.
This ATO Ruling refers to what constitutes a “profession” in paragraph 33:
“A professional is a member of a recognised profession. The term ‘profession’ is not defined by tax legislation.
For the purpose of this Guideline, the Australian Council of Professions provides useful reference for defining a profession.[2] From this guidance, we consider the following as indicators of a professional:
- those who are required to be accredited and adhere to ethical guidelines in order to enter into and maintain practice in the relevant field
- those who are accepted by the public as possessing special knowledge and skills in a widely-recognised body of learning, derived from research, education and training at a high level and who are prepared to apply this knowledge and exercise these skills in the interest of others
- their behaviour and practice are beyond the personal moral obligations of an individual
- they uphold a high standard of behaviour in respect to the services provided to the public and in dealing with professional colleagues.”
There is a clear convergence of unwavering principles being adopted by the Courts, QRO and the ATO. Such convergence makes the idea of a payroll tax exemption very unlikely.
Careful drafting of service agreements that reflect the daily operations of the service entity in question makes payroll tax compliance ultimately achievable.
For some practices, significant systemic and operational cultural changes will be required to satisfy the somewhat extreme interpretations outlined by the QRO But remember, much of this ruling is yet to be decided upon by a court of law.
Note: The ATO has a useful Employee or contractor “Myth and Facts” sheet that is worth taking a look at HERE.
Disclaimer: I’m a chartered accountant experienced in advising medical sector businesses. I’m not a lawyer, though these opinions have been reviewed by lawyers for legal accuracy. I am not providing legal advice.
David Dahm is principal of Health and Life. This is an edit of an article, the original of which can be found HERE.
