Case Notes:
- Commissioner of State Revenue v Optical Superstore Pty Ltd (as trustees for the OS Management S Trust [2019] VSCA 197 (Optical Superstore Case)
- Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (Thomas Case)
In these two decisions (collectively, the Payroll Tax Decisions), the Victorian Court of Appeal and the NSW Civil and Administrative Tribunal held that an optical dispensary (in Victoria) and a medical practice (in NSW) were liable for payroll tax on earnings passed through to optometrists and medical practitioners who had been operating under facilities and services agreements.
Could health practices in Western Australia be similarly at risk of unexpected payroll tax liabilities? The answer is dependent on a number of factors.
Copies of the decisions are available on the following web page links:
Introduction: Contracting arrangements in health practices
It is common across the health sector that practices (whether medical, dental, specialist or other) will engage – or purport to engage – practitioners not as employees but as contractors who are engaged to supply professional services. Or, practices will attempt to structure their contractual arrangements in reverse, so that it is they who are notionally supplying facilities and services (in the nature of administrative and/or support services) to the practitioner.
These arrangements, which may be labelled a ‘contractor agreement’ or ‘facilities and services agreement’ (or similar) can vary. For the purpose of this update, we will therefore refer to ‘contracting arrangements’ in a general sense only.
Payroll tax legislation
The Payroll Tax Assessment Act 2002 (WA) (the WA PT Act) generally imposes payroll tax on ‘taxable wages’. Determining what are ‘taxable wages’ means determining:
- which payments are ‘wages’ (and which are not);
- whether payments that are wages are nevertheless exempt from payroll tax; and
- whether non-exempt wages are taxable based on (i) where the wages are earned; (ii) where the employee is based; or (iii) where the employer is based.
The payroll tax legislation cited in the Payroll Tax Decisions is materially different to the WA PT Act. Amongst other things, the WA PT Act does not contain the same general ‘contractor deeming’ provisions that influenced the (Victorian and NSW) Payroll Tax Decisions.
The Payroll Tax Decisions therefore do not automatically have any bearing in Western Australia.
Interpreting contractual arrangements
Differences in payroll tax legislation aside, the Payroll Tax Decisions are a stark reminder that (in WA and elsewhere), ‘labels’ alone are not determinative. Contracts and working arrangements may be purportedly structured or labelled as one thing, but interpreted by a Court, tribunal, or tax or revenue office to be something else.
For example, absent of the right precautions, ‘facilities and services agreements’ may be characterised in a way that a practitioner is unintentionally deemed the ‘service provider’ to the practice – rather than the other way round. Or, contracting arrangements which specifically do not label the parties an employee or employer can nevertheless still be characterised as an employment relationship.
There are two recent High Court of Australia cases of importance:
- In Construction Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pt Ltd [2022] HCA 1 (Personnel Contracting) the Court, in determining whether a person was an employee or a contractor, held it is appropriate look for indicators or whether a relationship is employment or contractor, solely within the terms of the written agreement and not the subsequent conduct of the parties, unless the written agreement is a sham, is incomplete or has been varied.
A link to our earlier summary of the Personnel Contracting case is here.
- ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 shows, however, that although the primary test for contractor / employee is to characterise the relationship by reference to the terms of their written agreement, practical evidence of how the parties conducted themselves (consistent with their agreement) is both admissible and may be practically useful to determining the nature of their relationship.
Positions vary between decision makers. But in accordance with the Office of State Revenue’s (OSR) most up to date ruling, for example (titled Revenue Ruling PT 6.1 – Payroll Tax, Guidelines on Subcontracting Arrangements and Employment Agents), OSR will apply common law principles and the ‘multifactorial test’ (looking at all the circumstances of a relationship) to determine whether a relationship is one of employment or contractor.
Where to from here?
Unexpected categorisation of contracts and working arrangements by a Court or other decision maker, can have significant implications for the rights, obligations and entitlements of parties. Possible implications may include but are not limited to payroll tax liability – as in the Payroll Tax Decisions.
There is no one tool that will necessarily cover all scenarios. However, it is usually possible to reflect contractual terms with relative certainty through a combination of the following:
1/ Contractually prescribe a number of factors which, collectively, will create the intended legal relationship at law (whether it be that the practice as contractor supplies facilities and services to the practitioner, for example, or some other arrangement).
The importance of having a clear, well-drafted contract between health practices and practitioners, has never been more important. Parties who have no written agreement or an incomplete agreement, will be most exposed.
2/ The handling and flow of payments may also be reviewed in consultation with an accountant and/or tax advisor.
Arrangements whereby monies are paid from a practice to a practitioner may be a factor indicating a relationship that is employment (or deemed employment) for payroll tax and similar purposes. Conversely, payments made by practitioners to a practice as payment for facilities and services, may help to establish a different legal relationship.
If you require advice or assistance in relation to a contractor agreement, or a facility and services agreement in any healthcare setting, please contact David McMullen, Sean Foy, or any member of our employment and workplace team.
For a limited time we are offering fixed price reviews of these types agreements. Please contact us to discuss your requirements.
