Is there light at the end of the tunnel for medical practice owners in relation to payroll tax exposure?

By William Ma, Director at MEDIQ Financial

Running a profitable medical practice, or any business for that matter, is tough. Practice owners, who are usually the doctors in the practice too, are tasked with the responsibilities of attracting and retaining other doctors in their practice, recruitment and management of administration staff and nurses, as well as dealing with a myriad of regulatory and financial compliance. Unfortunately, in recent years, state revenue authorities have started to set their sights on practice payments to doctors as a potential tax base for payroll tax. We examine in this blog how recent court cases may turn future judicial interpretation in favour of medical practice owners.


Payroll tax is a serious matter and may well turn an existing profitable practice into a loss making one. It is calculated as a percentage (typically around 5%) on the quantum of the payment. Therefore, unlike income tax, payroll tax is payable regardless of whether the practice is profitable or not.

Let’s delve deeper into why payroll tax is now becoming an issue for medical practices. A typical agreement between the practice and a doctor usually involves a contract whereby the practice provides the practice premises, nursing and administrative services to the doctor to carry out his or her medical business, in consideration of service fees calculated as a percentage of the doctor’s gross patient billings. This model reflects the commercial reality of the arrangement, in that, by and large, patients choose their medical service provider based on the doctor, and the medical clinic provides the setting in which the medical service is carried out. This is especially true for specialist doctors, whose patients are often referred to them specifically by their GPs.

As part of the administrative services provided to doctors, the practice would ask the doctors to nominate the practice bank account from which the patient billings (Medicare or private fees) are paid. In turn, the practice reconciles the payments and passes on the billings to the doctors after the service fee is deducted. The commercial effect of the arrangement is that the medical practice is the service provider to the doctor, and this is the basis for the assertion that no payroll tax is applicable on payments that already belonging to the doctor.

In Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue (a decision handed down by the NSW Civil and Administrative Tribunal on 3 September 2021), the tribunal rejected the medical practice’s argument that it is a service provider to the doctors and instead accepted the Commissioner’s argument that the medical practice is in the business of providing medical services to patients, and by extension, engaged doctors to provide that service, and therefore rending payments to doctors to fall within the scope of payroll tax. This case was a significant win for the state revenue office and sent a chill across the healthcare sector. It generated a lot of concerns about potential exposure from historical and future payroll tax costs.

One significant defence under payroll tax law made by the practice in the Thomas case was that the doctor’s services were services performed by the doctor who ordinarily performed services of that kind to the public generally in that financial year. The practice owner submitted that many doctors in his practice also work at other practices rather than solely in his practice and therefore should fall within the payroll tax exemption provision. Unfortunately, the tribunal did not consider this defence in detail and rejected it due to the lack of evidence submitted by the practice.

Does the contract between parties matter?

Fortunately, the issue is not so simple as to be settled by one case. In a landmark decision of ZG Operations Australia Pty Ltd & ANOR v Martin Jamsek & ORS handed down by the High Court (the highest judicial body in Australia) on 9 February 2022, the court examined whether two truck drivers (using their own trucks) supplied delivery services to a company were independent contractors or deemed employees of the company under the relevant Fairwork, long service leave and superannuation guarantee law. All seven judges ruled that the service contract entered into by the parties validly described the nature of the relationship as a contract for service, and not contract of service. As the High Court was satisfied that the contract was not a sham, it rejected the lower court’s various reasonings which looked at the conduct over the decades to imply that the truck drivers behaved as employees.

In coming to its decision, the High Court considered the commercial context in which the services under the contract were performed. For example, the High Court did not find it a valid basis to disregard the contract simply because the truck drivers did not actively seek work from other customers, occasionally wear uniforms bearing the company’s logo, or that the truck drivers’ businesses generated no substantial goodwill (noting many single customer businesses don’t generate goodwill). In a nutshell, where the contract represents a “reasonable commercial arrangement”, it cannot be simply sidestepped by the courts.

In summary of the High Court decision by way of an analogy, if you are contracted to act like a cat and you in fact act like a cat, it is not open for the court to hold that you should in fact be classified as a dog actor even though you may also like to wag your tail. If your contract is clear that the doctor provides medical services to their patients, and the medical practice provides services to the doctor, it reduces the likelihood of adverse findings by the state revenue office.

Payroll tax implications of High Court case

What does this mean for payroll tax? It means that the contract between the parties is very important in ascertaining the nature of the doctor-practice relationship. In the Thomas case which preceded the High Court case, the tribunal disregarded the relationship established in the contract and concluded that the patients’ medical services were provided by the medical practice, not the doctor, citing the clauses of the contract that the doctor agreed to:

    Provide the services five days a week and provide advance notice of planned vacations;
    Promote interest of the practice, including not channelling patients away from the practice;
    Abide by the operating protocols and complete all necessary documentation; and
    A restrictive covenant upon the doctor leaving.

However, these findings perhaps did not fully reflect the reality of the doctor-practice relationship. The tribunal did not consider whether it is possible for the doctors to carry on their own medical business whilst still complying with the above terms. Applying the reasonable commercial analysis approach of the High Court, the tribunal may well have come to a different decision that is in favour of the medical practice.

Providing set times for the doctor to work at the practice with advance notice for absences makes good commercial sense. If there was no pre-agreement of when the doctor will be coming to work, this can lead to patient appointments being cancelled at the last minute, leading to lost revenue for the doctor and medical practice, not to mention the potential verbal abuse directed at front desk staff.

Likewise, not harming the interest of the practice is a form of professional courtesy that doctors observe, and is not by itself an indicator of an employment relationship. Furthermore, many doctors choose to work in a second practice sufficiently distanced from the first practice so as not to overlap their catchment areas.

Moving forward

It remains to be seen whether the state revenue offices would alter their approach in analysing doctor payments. Going to court is a costly process in time and money and many businesses may choose to settle before going to court. Without another payroll tax court decision on substantially similar facts, uncertainty remains on how to best minimise exposure to payroll tax assessments on doctor payments without affecting operation efficiencies.

Despite the uncertainties, one very important thing you can do as a practice owner is to ensure you have appropriate contracts signed by all of your doctors. There are still a lot of medical practices who do not have contracts and instead rely on verbal agreements with their doctors. These practices are sitting ducks for the payroll tax auditors. A contract provides the fundamental basis for asserting that your doctors are independently running their own medical business within the setting provided by your medical practice.

For those with low risk appetites, the practice should not manage cash receipts of patient billings at all. After all, if no payments are paid by the practice to the doctor, then arguably there can be no payments under which payroll tax can apply. The practice will simply invoice the service fees to the doctor to pay into the practice account. In practice however, reconciliation of patient billings receipts is limited unless the practice has access to each doctor’s business account and that a separate EFTPOS terminal will need to be set up to handle card payments for each doctor, e.g. 10 doctors means 10 EFTPOS terminals on the reception desk. In addition, direct marketing of the clinic to the public without also marketing the doctors may need to be limited in case it attracts payroll tax exposure.

What the High Court decision in ZG has shown is that practice owners who are already conducting their business in line with the contractual agreements with their doctors as independent associates may not need to alter their business practices significantly, whilst waiting for further clarification from the state revenue offices and any subsequent court rulings. It is important that each element is examined with your tax and legal advisors to determine if any operational or contractual changes are required:

    Review of the contracts entered into with each doctor on whether it reflects the independent nature of the doctor’s practice;
    Review of any inconsistencies in the relationship or conduct of the medical practice and the doctor vs the clauses in the contract;
    Documentation of the doctor’s work hours and information regarding the hours they work in other practices; and
    Documentation as to degree of actual control of the practice over the operations of the doctor.

We encourage you to have these discussions with our MEDIQ Partners and Directors. If you are not yet a client of MEDIQ, we can offer a free 30 minute consultation to determine if we can be of service to you and your medical practice.