The Payroll Tax Trap: Protecting Medical Practices after Thomas and Naaz

Following the Thomas and Naaz ruling, along with earlier decisions such as the Optical Superstore case, medical practices across Australia are facing increased scrutiny from State Revenue Offices. What was once considered a low-risk service entity model is now under intense payroll tax reassessment, creating considerable uncertainty for many clinic owners. For many, the issue isn’t intentional non-compliance but rather a misunderstanding of how relevant contracts payroll tax provisions apply under Australian state legislation.

Across New South Wales, Victoria, and Queensland, the interpretation of medical clinic payroll tax liability has evolved. Arrangements that were previously considered contractor-based are now being re-evaluated under deemed employee provisions. As a result, medical practices are facing growing exposure to payroll tax, making it one of the most significant financial risks for general practices, dental clinics, and allied health providers. This shift in compliance expectations requires careful attention to avoid costly liabilities and ensure proper structuring for tax obligations.

 

Why the ATO and SRO Are Targeting Medical Service Trust Arrangements

Although payroll tax is administered at the state level in Australia, there has been increased cooperation between the Australian Taxation Office (ATO) and State Revenue Offices (SRO), resulting in a more coordinated compliance environment. This shift has led to greater scrutiny of medical service trust structures, particularly focusing on how practitioner payments are structured. Authorities are now examining the flow of funds, from patient fees to payments made to medical practitioners, to determine whether these payments should be considered taxable wages under state payroll tax laws.

Medical service trusts and service entity arrangements are under close investigation, as revenue offices seek to confirm that practices are not circumventing payroll tax obligations by structuring payments as service fees rather than wages. Practices that rely on independent contractor models, such as doctors operating through their own entities, may find themselves at risk if their arrangements are deemed to constitute employment for tax purposes. This increased scrutiny has raised healthcare payroll tax obligations to a critical governance issue for medical practices. Understanding the broader landscape of key business risks in Australia and how to mitigate them is a valuable starting point for any practice owner seeking to get ahead of this compliance challenge.

 

Understanding the Thomas and Naaz Case Summary

The Thomas and Naaz case summary highlights that the contractual form does not automatically determine payroll tax outcomes. This ruling emphasised that the substance of an arrangement prevails over its label. Even if doctors operate through their own entities and identify as contractors, payroll tax may still apply if the arrangement falls under the relevant contracts payroll tax provisions outlined in the Payroll Tax Act. The case clarified that the nature of the relationship between the parties, rather than the title of the agreement, is what matters most when determining tax liability.

Following the appeal, the Thomas and Naaz ruling has had a significant impact on State Revenue Offices’ approach to conducting compliance audits. Medical practices that previously relied on generic contractor templates are now reassessing their arrangements. They must ensure that their contracts truly reflect the independent status of practitioners, or risk facing payroll tax liabilities for which they might not have initially accounted. This has heightened the importance of reviewing contracts and compliance within medical centres. For a definitive overview of how the ATO draws the line between employees and contractors, the ATO’s guidance on employee versus contractor classification provides essential background for any practice reviewing its engagement arrangements.

 

The Relevant Contract Pitfall: Are Your Doctors Employees for Payroll Tax?

The relevant contracts regime under the Payroll Tax Act NSW, Payroll Tax Act Victoria, and Payroll Tax Act Queensland is expansive. Payments made under certain contractor arrangements, even if they are labelled as such, may be deemed wages subject to payroll tax unless a clear exemption applies. This is particularly problematic for medical practices that engage doctors under independent contractor agreements, as it opens the door for payroll tax assessments on what were thought to be non-taxable payments.

The challenge arises from the distinction between contractor and employee classifications. A doctor may be considered an independent contractor for income tax purposes, yet still fall under the payroll tax definitions, triggering liability. This highlights the importance of carefully structuring practitioner agreements and understanding the nuances of non-employee practitioner tax provisions. Medical practice owners must assess their agreements to ensure they are not inadvertently creating payroll tax obligations through misunderstood or poorly structured contracts. For practices operating across state lines, it is also worth reviewing the Victorian payroll tax regional rate eligibility rules, as the thresholds, rates, and classifications differ between metropolitan and regional areas and can significantly affect overall liability.

 

How Practitioner Payment Flows Are Assessed

State authorities in Australia assess practitioner payment flows to determine if payments are subject to payroll tax. If a medical centre collects all patient fees and then remits a percentage to the practitioner, the revenue office may classify these payments as wages, subject to payroll tax. This assessment considers whether the practice effectively controls the commercial elements of the doctor’s work, such as patient relationships, fee structures, and overall business risk.

As part of their auditing process, the State Revenue Office (SRO) increasingly examines how a practice sets its fees and manages patient interactions. Practices that bear the commercial risk, such as setting fees or assuming financial responsibility for patient care, may face payroll tax liabilities. To defend against these assessments, medical practices must maintain clear and accurate documentation, ensuring their structures align with the intended contractor relationships. Proper bookkeeping and transparent financial management are crucial to demonstrating compliance with Australian payroll tax laws. The State Revenue Office Victoria has published specific guidance on payroll tax and medical centres that sets out how payment flows are interpreted under the relevant contracts provisions, required reading for any Victorian clinic.

 

The Growing Risk of Payroll Tax Assessments

The growing risk of payroll tax assessments is becoming a significant concern for medical practices across Australia. State Revenue Offices (SRO) are increasingly conducting audits in both metropolitan and regional areas, with a particular focus on medical businesses. As part of these audits, many medical groups are now facing retrospective payroll tax assessment reviews that span several years, creating a risk of large financial exposure for clinics.

Given the potential for substantial liabilities, clinics must act early to protect themselves from payroll tax debt. Once an assessment is issued, the SRO can apply interest and penalties, which can dramatically increase the total amount owed. Implementing proactive payroll tax risk management strategies, such as regular audits and consulting with tax professionals, can help mitigate these risks and ensure compliance with Australian payroll tax laws, reducing the chances of costly surprises in the future.

 

Service Fee Arrangements Under the Microscope

Service fee arrangements have long been a critical aspect of payroll tax compliance for medical practices in Australia. These arrangements often involve practices paying a service entity to handle administrative and support functions, with doctors receiving income through independent entities or as contractors. However, authorities are increasingly scrutinising whether these agreements genuinely represent a separate service provision or if they merely act as a mechanism to distribute income that would otherwise be considered taxable wages under payroll tax laws.

The key issue lies in whether the service fee arrangements align with the operational reality of the practice. If the structure is found to be more of an income-sharing model than a legitimate service agreement, the practice may be exposed to significant tax liabilities. State Revenue Offices across Australia are examining the substance of these arrangements and focusing on whether the documentation accurately reflects the true nature of the doctor-practice relationship, especially when it comes to service entity tax risks.

 

Implications for Dental, Surgical and Allied Health Clinics

The payroll tax issue extends beyond general practice, affecting dental clinics, surgical centres, and allied health services across Australia. These sectors are also facing increasing scrutiny from State Revenue Offices, as authorities focus on whether practitioner arrangements align with payroll tax requirements. Like general practice, dental and allied health clinics often rely on contractor-based models, which are under greater examination for payroll tax obligations.

Any healthcare business model that involves contractors must thoroughly assess its tax exposure. Across all these sectors, the key issue remains ensuring that contractual arrangements match the operational realities of how practitioners work. Whether it’s a dental practice, surgical clinic, or allied health service, ensuring compliance with relevant payroll tax provisions is critical to avoiding significant liabilities. The importance of reviewing contracts regularly and ensuring transparency in payments cannot be overstated, as the consequences of non-compliance can have a serious impact on the financial health of these clinics.

 

Medical Practice Structuring for Risk Management

Optimising medical practice structures in Australia involves ensuring that the operational and financial models align with both legal and tax obligations. This does not necessarily mean abandoning contractor models but rather reviewing independent practitioner agreements to ensure they reflect the true nature of the relationship. Practices should focus on structuring agreements that are compliant with Australian payroll tax legislation, ensuring that the terms accurately represent the business arrangement and reduce the risk of reclassification during audits. For a broader perspective on how structure affects tax outcomes and liability, Bentleys’ guide to choosing the right business structure in Australia outlines the key considerations for sole traders, companies, and trusts, many of which are directly relevant to how medical service entities are set up.

Effective payroll tax risk management requires a careful review of contract revaluation clauses and tax indemnity clauses to ensure that they provide adequate protection against potential liabilities. It is important to confirm that practitioners remain genuinely independent, as superficial arrangements will not suffice under Australian payroll tax laws. By optimising the structure in this way, medical practices can minimise exposure to financial risks and secure long-term sustainability, ensuring compliance with state-specific regulations under the Payroll Tax Act in New South Wales, Victoria, and Queensland.

 

Strengthening Governance and Compliance

Strengthening governance and compliance in medical centres is now more crucial than ever. As payroll tax obligations come under closer scrutiny, practice owners and boards must recognise this as a strategic governance priority. Conducting internal reviews of contractual arrangements and operational structures before external SRO compliance audits can help mitigate potential risks. By proactively assessing the financial and legal aspects of the practice, owners can identify and address any compliance gaps early, reducing the likelihood of costly surprises.

Healthcare business tax compliance requires expert guidance from professionals who are well-versed in Australian medical industry tax law. Staying on top of the latest payroll tax compliance updates, including superannuation contribution rules and wage withholding obligations, is essential for practices that want to maintain a robust and audit-ready compliance framework. Regularly reviewing administrative service agreements and practitioner payment flows ensures that practices are aligned with state regulations. This ongoing process not only reduces uncertainty but also provides a solid defence if questioned by revenue authorities. A well-structured compliance strategy safeguards a practice’s reputation and financial health while promoting long-term sustainability in an increasingly regulated healthcare landscape.

 

The Role of Deemed Employee Provisions

Deemed employee provisions are a critical aspect of payroll tax disputes in Australia. These provisions allow state revenue offices to disregard the contractual status of workers and reclassify them as employees for payroll tax purposes. This means that even if a medical practice has established agreements with independent contractors, those payments may still be subject to payroll tax if the revenue office determines that the nature of the relationship aligns more closely with that of an employee.

Understanding how deemed employee provisions interact with relevant contracts payroll tax exemptions across different states is essential for medical practices. While exemptions do exist, they are complex and must be applied with caution. Incorrectly interpreting or failing to meet the conditions for exemptions can result in significant payroll tax liabilities and potential penalties. To avoid unexpected tax duty consequences, it is crucial for practice owners to regularly review their contracts and seek expert advice on maintaining compliance with Australian payroll tax laws.

 

Preparing for Revenue Office Investigations

Preparation for revenue office investigations is essential for Australian medical practices. It is crucial to maintain organised records, detailed service agreements, and clear evidence of practitioner independence. This documentation will serve as a foundation for demonstrating compliance with the Payroll Tax Act in states like New South Wales, Victoria, and Queensland. Medical practices should ensure that all practitioner contracts are up to date and accurately reflect their working arrangements.

Aligned billing systems and operational procedures also enhance legal protection during an audit. A transparent flow of practitioner revenue, along with disciplined bookkeeping practices, not only helps prevent errors but also ensures that practices can quickly respond to any inquiries from the State Revenue Office. Understanding what triggers a tax audit and how to prepare for one is also critical, the Bentleys guide on tax audits in Australia and how to prepare covers the compliance fundamentals that apply equally to SRO investigations. By having thorough records and systems in place, medical practices can reduce the risk of payroll tax liabilities and avoid costly penalties. Proper preparation also strengthens the credibility of the practice’s compliance narrative during any potential audits or investigations.

 

Turning Compliance into Commercial Strength

The payroll tax landscape in Australia is evolving, and while this shift may initially seem like a challenge, it presents an opportunity for medical practices to enhance their business models. Rather than viewing compliance as a burden, clinics that take proactive steps to address payroll tax exposure can turn potential risks into long-term strategic advantages. By reviewing agreements, strengthening internal structures, and staying ahead of regulatory changes, practices can build a more robust, compliant foundation for growth.

When medical practice owners prioritise compliance, they safeguard their business operations and reputation. This not only helps avoid costly audits and penalties but also positions the practice as a trusted entity within the healthcare sector. With the right approach, businesses can optimise their structures to remain agile in a changing regulatory environment, while enhancing their financial stability and credibility within the Australian healthcare system. Investing in compliance today ensures that medical practices are well-prepared for the challenges of tomorrow.

 

Final Thoughts …

The Thomas and Naaz ruling has significantly altered how payroll tax applies to healthcare providers across Australia. It has made clear that assumptions about contractor status are no longer sufficient to avoid payroll tax liabilities. Medical practices must now reassess their existing structures to ensure they comply with state-specific payroll tax regulations. This shift has brought the issue of payroll tax to the forefront of governance discussions for practice owners, highlighting the need for ongoing vigilance and accurate contract management.

Instead of viewing payroll tax as a challenge, clinic owners should see this as an opportunity to strengthen compliance, enhance transparency, and improve financial stability. By implementing careful structuring, disciplined governance, and seeking expert advice, practices can not only mitigate risk but also safeguard their long-term success in an increasingly regulated environment. The evolving payroll tax landscape presents a chance for healthcare providers to adapt and thrive within Australia’s regulatory framework. The chartered accountants and tax advisors at Bentleys specialise in helping Australian businesses navigate complex state and federal tax obligations, including payroll tax structuring for medical and healthcare practices.

 

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

 

FAQs

What was the primary outcome of the Thomas and Naaz case for Australian medical centres?

The NSW Court of Appeal confirmed that most payments made by a medical practice to its contracted doctors are deemed “wages” under the Payroll Tax Act. This means even if a doctor is an independent contractor, the money they receive from the practice for seeing patients may still be subject to payroll tax.

Does the Thomas and Naaz ruling apply to all Australian states?

While the case was decided in New South Wales, the payroll tax laws are largely harmonised across Australia. Revenue offices in Victoria, Queensland, and South Australia have issued similar rulings, making this a national concern for medical practice owners.

What is a “relevant contract” in the context of Australian payroll tax?

A relevant contract exists when a medical practice engages a practitioner to provide services to the public on its behalf. Under these arrangements, the practice is deemed the employer and the practitioner the employee for payroll tax purposes.

Why are patient fees collected by a practice considered “wages”?

The courts found that when a service entity collects Medicare benefits or patient fees and then remits a portion to the doctor, that payment is made “in relation to the performance of work.” This link is enough to classify the funds as taxable wages.

How does the “flow of funds” impact payroll tax liability?

If a practice collects all billings into its own bank account before paying the doctor, it creates a clear “payment” from the practice. Many practices are now exploring “tenant doctor” models where patient fees are paid directly to the doctor to minimise this risk.

What is the “90-day exemption” for contractors in Australia?

Under the Payroll Tax Act, payments to a contractor are exempt if they provide services to the practice for no more than 90 days in a single financial year. This is often used for locum doctors but rarely applies to permanent practitioners.

Can a practice claim an exemption if a doctor works at multiple clinics?

Yes, if the doctor “ordinarily performs services of that kind to the public generally,” an exemption may apply. However, this is difficult to prove if the doctor spends the majority of their time at one primary medical centre.

What is the impact of the Thomas and Naaz case on allied health practices?

The ruling is not limited to GPs; it applies equally to dentists, physiotherapists, and other allied health professionals who work under a service fee or percentage-based arrangement within a clinic.

What are the bulk billing thresholds for payroll tax relief in NSW?

From late 2024, NSW introduced a rebate for practices that meet specific bulk billing targets. Clinics in metropolitan Sydney generally need to bulk bill 80% of services, while regional practices have a 70% threshold to qualify for relief.

Does having a signed Independent Contractor Agreement protect a practice?

Not necessarily. The State Revenue Office (SRO) looks at the “substance over form.” If the practice exerts control over rosters, requires the doctor to follow specific protocols, or manages the billing, the SRO may still deem the relationship a relevant contract.

How does the SRO define “control” over a medical practitioner?

Control can include setting fixed hours, requiring attendance at meetings, providing all equipment, and preventing the doctor from working elsewhere. High levels of administrative control increase the risk of a payroll tax assessment.

What is the payroll tax threshold in Victoria for medical practices?

In Victoria, from July the 1st 2025 the payroll tax-free threshold increased from $9,000,000 to $1,000,000 for annual returns per year. If the combined total of staff salaries and “deemed wages” paid to contractors exceeds this amount, the practice must register and pay payroll tax.

Are payments to GP Registrars subject to payroll tax?

Generally, yes. Because registrars are typically viewed as employees rather than independent contractors, their entire salary is included in the payroll tax calculation, though some state-specific exemptions for bulk billing may apply.

What happens if a medical practice is audited by the State Revenue Office?

The SRO will review bank statements, service agreements, and billing records. If they find that contractor payments were not declared, the practice may be issued an assessment for unpaid tax, plus significant interest and penalties.

Can a practice back-date their payroll tax liability?

The SRO has the power to look back up to five years. Unless an amnesty applies, a practice found to be non-compliant could face a retrospective tax bill that threatens its financial viability.

What is the difference between a “service entity” and a “tenant doctor” model?

A service entity usually manages everything and “pays” the doctor, whereas a tenant doctor model treats the doctor as a separate business who merely rents a room. The latter is often viewed as lower risk for payroll tax if structured correctly.

Does the Thomas and Naaz ruling affect the doctor’s personal income tax?

No, this case specifically concerns state-based payroll tax. The doctor’s obligations to the Australian Taxation Office (ATO) for income tax and GST remain separate, though the SRO and ATO do share information.

Should medical practices change their billing software to mitigate risk?

Many practices are moving to software that allows Medicare to pay doctors directly. By ensuring the practice never “handles” the doctor’s portion of the fee, they aim to break the link required for a “relevant contract” payment.

Where can Australian medical practice owners get advice on payroll tax?

Practice owners should consult with specialist healthcare accountants or legal firms familiar with the Payroll Tax Act and recent rulings like Thomas and Naaz to ensure their specific contracts are compliant.