New Medical Practice Payroll Tax Ruling: How you pay your contractor doctors may affect your bottom line
Did you know that payroll tax applies to your medical or healthcare practice?

This article was first published by the Medical Republic on 24th of September 2021.

The latest $795,292.95 payroll tax decision is Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (3 September 2021) reveals a clearer way in which State Revenue offices makes sure to collect revenue from sources other than income taxes. If you are not aware, or if you haven’t been paying attention, continue reading to learn how this affects you.

The latest medical practice payroll tax case is the Thomas decision. It is about a general practice with three locations that has engaged contractor GP doctors who were paid 30% of the patient fees they had generated.

Dr Thomas was billing, on behalf of his doctors, patient fees and charging a flat 30% service fee on everything the doctors had billed.

Despite the contractors holding themselves out as individual sole traders, co-located on the same premise, their income was deemed to be a relevant contract and subject to payroll tax.

For over three decades across Australia, I have seen this common type of arrangement. Many unknowingly share similar errors. Engaging lawyers and accountants can be a grudge purchase. Alternatively, something to put into the ‘I am too busy’ or ‘it’s too hard’ basket. With the benefit of hindsight, it may be a cheaper alternative to do something now while you can.

The case is a timely warning to reexamine your agreement and practice arrangements today.

This alarming decision sets a new NSW Tribunal precedent that many other hungry State Revenue Offices will be watching with interest.

It is clear it is next to impossible for an experienced well-trained barrister to help practices comply. The rules are opaque. They seem to have more mutated interpretations than the coronavirus and we might have stumbled on a Delta variant.

This is my optimistic assessment. Being subject to an audit can be a financially debilitating and demoralising experience. They can be never-ending. Some practices I know have been waiting for up to 8 years for a multi-million decision. In one case, a practice website triggered a full-scale investigation because it said “Our Doctors” and “Our AGPAL accredited general practice”.

Your next level option is going to Court. This is rare. It takes a special kind of person(s) who is prepared to put everything on the line. You need to be pretty sure of yourself. We thank those who are for their courage. We can learn from you. We all should do our utmost to help them.

In the end, we need everyone’s help to lobby for change.

  1. I did not know payroll tax applied to my practice?

Having written extensively about medical practices and complying with payroll tax before, this decision may come as a shock to you as it has to me. 

It’s important for those who practice as an independent medical or allied health contractor to know what type of practice they work with and what that means for them and their practice.

For my regular followers, you know I do not like the ”C”contractor word. When it comes to statutory authorities, this can be like holding out a red rag to a bull. We prefer the name Tenant DoctorTM  as a more appropriate description. 

Primarily because the practice should act as the landlord providing support services and the practitioner is the tenant who purchases these services based on a percentage of the individual practitioner’s gross billing.

If you happen to work at a large group practice (circa greater than 4 to 5 full-time equivalents, it is time to take careful notice.

One day, do not be surprised if your practice charges you a higher service fee to cover any payroll tax owed. For contractors, depending on your practice size and location, this can be up to 4.95% of what you are getting paid each month.

It is time to reexamine your agreement and practice arrangements now.

  1. The new payroll tax case that will affect many practices

One day, do not be surprised if your practice charges you a higher service fee to cover any payroll tax owed. For contractors, depending on your practice size and location, this can be up to 4.95% of what you are getting paid each month.

After working with many solicitors and barristers who have front row tickets to this and other similar payroll tax matters, it seems in this decision how you pay your doctors may irrevocably get you caught up in an audit and there is no clear solution.

If upheld, this decision could mean Uber, Deliveroo, building contractors and many other industries could easily be caught. This decision appears overwhelmingly too broad, unworkable and therefore appealable in a Court if you have the deep pockets to go with it.

The various State payroll tax laws are no different to the MBS interpretation rules. Currently, there are no clear Court precedents for general or medical practices, other than possibly confusing State Tribunal decisions. In 2016, the closest more authoritative Court case appeared in allied health called the Super Optical Court case. This had begun to reveal some key practical issues for practices to review.

The latest decision leaves open a new world of avoidable uncertainty. It can only fuel a hungry State Revenue Office to go after low-hanging fruit practices that have paid little attention to the ever changing interpretation of rules. You would be naive to think a well-written contract was a silver bullet solution. In this decision, the opposite may be true.

Unchallenged, it will have a significant systemic impact on general practice compliance costs and practice morale, valuations and succession planning. In these COVID times, our community’s front line GP defence teams are once again being hit with a greater threat, but this time it is from within.

Ultimately, practices will be forced to pass these costs to patients. Those on razor thin profit margins will be forced to significantly cut costs, merge or close. It is a problem that does not appear to be going away anytime soon.

Interestingly, smaller practices may stand to benefit over large practices. I would not be surprised to see GP contractors moving to smaller practices, if larger practices do not proactively address these concerns today.

Nobody is really immune, you still have to properly protect yourself and ensure you do not unintentionally self-incriminate. It is not easy and you are not alone.

Your accountants and legal advisers are also struggling to get a grasp of this problem.

  1. How the new ruling could affect your medical or healthcare practice

The recent Thomas decision is a less authoritative Tribunal decision. It has not dissimilar arrangements, from a favourable general practice decision called Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue, from the 25th of July 2019. 

A key takeaway from those involved in this case was their failed defence in arguing the effect of bulk billing and Medicare assignment of income.

As established in the Homefront Nursing home case, when GPs bulk billed Medicare and assigned the patient responsibility to the Government and not the practice, it appears to have been a key argument demonstrating the doctors individual clinical practice was separate from the practice who was in the business of providing practice management support services for a percentage of the doctors gross fees.

Unfortunately, in the Thomas case, this argument appears to have fallen on deaf ears.

Curiously, the judge spent little time explaining his reasons for knocking back the Homefront Nursing defence.

He simply relied on the Super Optical case. He relied on the “flow of funds/payment” argument.

This established, that if there is any flow of funds between the practice and the provider or anyone associated, this will be deemed a relevant contract where obligations are imposed, such as restraints of trade. The High Court had refused to hear the matter. In other words, only local State politicians can change this ridiculous outcome.

This has caused much confusion and angst amongst professional legal and accounting circles. Many feel the jury is still out on this one. I am less inclined to think so. The possible solution remains in your practice agreements and systems.

Deemed “relevant contract”

In the Thomas decision, this case would deem your contractors as employees if you have a “relevant contract” with them. The barrister from the case has advised me, the employee or contractor test is totally irrelevant. It is about how providers are paid and any obligations that are attached to the payment.

How the doctors are paid between associated bank accounts creates the problem. It deems a “relevant contract” for payroll tax purposes.

Ultimately, this leaves a practice and contractors open to a large retrospective payroll tax bill. I have seen some go back up to five years and be tied up for many years.

Practices face a significant payroll tax dilemma. They will feel forced to include their normal employee staff pays, e.g., for administration and nursing staff with how they pay their doctors or healthcare workers. This means each month they would need to add and submit each provider’s patient fees net of service fees charged against their individual gross patient billings.

If they exceed their relevant State’s payroll tax threshold (which varies from state from $650,000 p.a. to over $1.5m p.a.), payroll tax will be payable. Payroll tax on wages, fringe benefits, and now how much you have paid your contractors can vary depending on location and threshold from 0% to 4.95%

Getting contractor doctors to bank patient fees in their individual name will not save you

It does not matter if patient money is first banked in the contractor’s own bank account or the money is held in trust on behalf of the provider. Practices engaging in auto debit arrangements for a provider’s gross fees can be caught under the anti-avoidance provisions. If there is a doctor/director or employee connection, you will fall foul of the rules.

The banking arrangements trigger the deemed relevant contract provisions that may give rise to unexpected payroll tax liability.

This seems to fly in the face of how accountants, solicitors, and real estate agents’ trust accounts work. One may argue if this is true, surely payroll tax should apply to them as well as Uber, building contractors and other industries that have intra payment systems.

The ramifications are serious. There are practices with over 60 doctors and providers. Technically, each of them would have to have a separate EFTPOS/Credit card merchant facility at the front desk. This is impractical. As a former trust account and banking auditor at KPMG, this would open the practice to fraud. It would be impossible to introduce affordable watertight fraud controls.

Group practices with in excess of 4 full-time equivalent GPs or high billing specialist practices need to be very careful.

No obligations are key to any arrangement

A key takeaway from this case is to remove obligations on the provider which may be deemed a relevant contract (a second supply). The first supply was the provider providing clinical services to individual patients.

The second supply which appears to be the problem are obligations the provider has to the practice. In past articles, we have given numerous warnings about what not to put into your contractor agreements. These were raised again in this case: 

“Para 38 The terms of the Agreement indicate that the Doctors agreed to:


(1) provide the Services on a five day per week basis, including weekend rotation (cl 2) and in this regard agreed to meet roster commitments (cl 3.8) and to provide advance notice of planned vacations (which were limited to four weeks in a 12-month period and which had to be approved by the applicant (cl 6));


(2) promote the interests of the applicant (cl 3.4) including not channelling patients away from the applicant (cl 3.8);

Following protocols

(3) abide by the applicant’s operating protocols and to complete all necessary documentation for that purpose (cl 3); and

Restraints of trade

(4) a restrictive covenant, which would become operational upon the Doctor leaving the particular medical centre owned by the applicant, with such covenant to have an “exclusion zone” of 5 kilometres from that medical centre and to be in place for two years after the Doctor’s departure (cl 7).

The bottom is your contractors should not be providing services to the Practice! So be careful about asking them to turn up to clinical meetings to do care plans. Revise your agreements today.”

Doctors need to be seen to be working in other non-associated practices

Another eyebrow raiser, it might be a good idea to let your doctors work in friendly rival practices and keep a record of it.

Reporting Contractor income and expenses

It was noted that contractor income was recorded in the financial statements and tax returns. This is not a great idea if you are trying to establish two separate and independent businesses. Interestingly, the payroll tax office had directly contacted the accountant for information to check whether practice was registered for payroll tax.

I can hear what people are thinking. Are you serious? I am, that is the challenge. Many of these key issues can be mitigated.

  1. Tips on how to stay compliant with the law and avoid penalties

1. Don’t panic

Take a deep breath. You are not alone. Do not automatically notify your local payroll tax office. Think carefully. Find out more. You may find out your arrangements are not that bad, but could do with some fine tuning;

2. Remember, Court cases are more authoritative than Tribunal cases

One lawyer I had spoken to described this decision as “superficial”. It can or should be Court appealed. From time to time, flip-flop decisions do occur. The Super Optical, Homefront Nursing and this Thomas case illustrate how contrasting decisions can be, even though the facts may appear similar. Be prepared to keep clarifying your arrangements when necessary.

3. Seek experienced professional accounting and taxation advice

The devil is in the details. There is no such thing as a silver bullet. The right contract is a small part of the answer. You have to walk the talk. A common mistake is only a piecemeal and not a holistic approach is taken. It goes beyond a cleverly written practice agreement.

It must complement your policies and procedures, administrative and accounting systems. You need to walk the talk. The Courts take a holistic view.

Many practices use Mum and Dad and or traditional accountants and legal advisers. Many are totally unaware of the increasing complexity and nuances of the healthcare industry. You may find they are not obliged to let you know unless you ask. After all, this is a State and not a Federal tax.

You may be better served with specialist medical and health accounting and legal advisers who work exclusively in this area.

4. Tax audit insurance cover

It may be a little too late if an audit investigation has started. It becomes a lot harder to unsay or undo things and blame people for not letting you know. Tax audits can become quite expensive. However, cost effective tax audit insurance is available so your advisers can better respond to any concerns. Note, as we have been receiving reports from some Medical Defence Organisations, that they are no longer offering this cover. So do not forget to ask your accountant if they offer any insurance cover.

5. Write to your professional adviser: seek written advice

If you do not know what to ask or where to start, complete this free self-assessment checklist and provide your responses to your accountant and or legal adviser: review the article Don’t use the C word.

Be prepared to budget for it. The checklist creates an automatic agenda of key issues for you to send and discuss with your advisers. Confirm any important answers and decisions in writing. Be prepared to budget and implement changes where necessary;

6. Remember, payroll tax is tax deductible

Depending on your circumstances, you may not have to immediately write a check to get a tax deduction. Seek professional legal and accounting advice before acting on this information.

7. This is a political issue: it is a serious public interest issue

I have seen first hand practices being forced to charge already anxious patients more at the front desk. Furthermore, nobody wants to buy a practice that could be at risk to a lengthy and expensive payroll tax audit.

If the Thomas decision is upheld in Court, the viability of many practices across Australia is at systemic risk. We need all our GP practices focussed on fighting the virus and not be distracted fighting mercurial State payroll tax rules.

8. You can help change the law: Take the GP and healthcare provider Payroll Tax National Survey

Thank you for taking the time to complete this survey. This will be used to lobby State and Federal politicians. Thank you to Health and Life – Chartered Accountants and medical and health practice advisers for assisting The Medical Republic with this national survey.

For more insights visit our blog.

About me: David Dahm BA (Acc.), CA., FCPA, CTA, FFin, CPM, FAAPM, FAIM, FGLF.

Chartered Accountant, Chartered Tax Adviser, Registered Tax Agent, Former AGPAL Surveyor 10 years of service

David Dahm is CEO and founder of the national medical and healthcare chartered accounting firm Health and Life and global Founder and CEO of the not for profit project the International Healthcare Standards and Ethics Board (

After a serious work related car accident in 1989, and nine operations later I continue to be a patient and provider advocate. I enter my third decade as a national Chartered Accountant for Medical and Healthcare practices in Australia. I am a former 10-year Australian General Practice Accreditation surveyor. I come from a medico family. I have served on the AAPM national Board and was the inaugural national Chair of the Certified Practice Manager CPM post nominal. I continue to provide accounting tax and practice management advice to many practices all over Australia.

You know who you are and I thank you for this real honour and privilege to serve you and your community through you. Note, I am not a lawyer please seek appropriate legal and accounting advice. This information is for general information and discussion only.

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1 Comment

  1. Great article source to read. Thank you for sharing this info and tips.

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