In 2021, the Australian medical sector was shaken by the outcome of Thomas and Naaz Pty Ltd vs Chief Commissioner of State Revenue. The ruling set forth a series of events that would significantly impact the taxation landscape for medical and allied health practices in Australia.

Although it was the catalyst, or the proverbial straw that broke the camel’s back, it wasn’t the first. Back in 2012, the Victorian State Revenue Office issued multiple payroll tax assessments to The Optical Superstore Pty Ltd for 2006 to 2011, to the tune of $267,560 (including interest and penalties). The details of each case and their broader impact on the health industry are outlined below.

The Optical Superstore vs Commissioner of State Revenue Office

On 4 May 2010, the Commissioner of State Revenue (Commissioner) notified The Optical Superstore (TOSS) that it was commencing an investigation into the business’s payroll tax compliance. At the conclusion of the investigation in October 2012, TOSS was issued with multiple payroll tax assessments for the financial years between 2006 and 2011 totaling almost $270,000 (including penalties and interest).

As a note, assessments for 05/06 and 06/07 were made under Pay-Roll Tax Act 1971. Remaining assessments were made under Payroll Tax Act 2007.

On three separate occasions, TOSS objected to the assessments in 2012 by correspondence. It wasn’t until November 2014 that the commissioner determined not to allow the objections but conceded that they were entitled to a threshold deduction.

One month later, on 22 December, TOSS requested that the matter be referred to VCAT (Victorian Civil and Administrative Tribunal) under section 106 of the Taxation Administration Act 1997 (TA Act), with the promise of providing further materials relating to the exemptions before March 2015. However, no such information was provided by TOSS and the referral to VCAT was finally completed in December 2016.

The hearing took place over 4 days in late December 2017.

Issues in the Proceedings

Under the Victorian payroll tax legislation, payroll tax is imposed on taxable wages paid by an employer to its employees in Victoria in a financial year. To that extent, any amounts paid to a person under a “relevant contract”, that are “for or in relation to the performance of work”, are taken to be wages.

However, there are conditions where services provided under certain contracts are excluded from the relevant contract provisions (contractor exemption provisions). For example, where they are provided for less than 90 days in a financial year (90-day exemption) or the services are provided to the public generally (i.e. the optometrist provides these services independently of TOSS across other stores, medical practices or via their own business).

As payroll tax is only payable on taxable wages where the taxable wages and interstate wages exceed a specified threshold, the payroll tax legislation includes provisions to group certain employers, such as where they are under common control. However, the Commissioner has a residual discretion to exclude a person from a group in certain circumstances.

With relation to optometrists carrying out eye tests in the Optical Superstore locations, there were 2 main issues in contention:

1. Whether the contractual arrangements by which optometrists deliver eye tests in the TOSS stores are relevant contracts and, if so, whether the amounts paid to them are for or in relation to the performance of work.
2. Whether any of the optometrists to whom wages may be treated as being paid under the contractor provisions are exempt from those provisions under the exemption for persons who provide services to the public generally. There were also a number of optometrists who only worked in the TOSS stores for a short period of time in the relevant financial years but, by the end of the hearing, the Commissioner had conceded they were exempt under the 90-day exemption.

In addition, the applicants argue that VCAT should:

• determine that no penalties are payable on the basis that they took reasonable care; or
• exercise the discretion to remit the penalties and interest due to the time the Commissioner took to investigate the matter, consider the objection and make the referral to VCAT.

TOSS’s Case

1. The agreements between optometrists and the stores are not relevant contracts because, properly construed, they are tenancy agreements between the applicable Store Owner and the optometrist, rather than a contract for the performance of services. Claiming that the arrangements are similar to a tenancy in a shopping centre.
   
   
2. If the agreements are to be interpreted as relevant contracts, TOSS contends that there are no payments that are made for or in relation to the performance of work. In this regard, they say that the majority of the flow of funds to optometrists are the return of Medicare and private patient fees received by TOSS and held in trust on behalf of the optometrists. Although paid after deduction of fees payable for use of the consulting rooms in the stores, the return of the consultation fees cannot be seen to be payments made for or in connection with any services under the relevant contract.
   
   
3. TOSS argued that some optometrists were also providing optometry services to other optical stores or practices during the above periods, and that the Tribunal should be satisfied that the exemption applies.
   
   
4. They also stated no penalties should be imposed because the Tribunal should be satisfied that they took reasonable care. In particular, the contractual arrangements were developed in the 1990s, at a time before the TOSS business had any exposure to payroll tax. Further, they point to reviews of the arrangements conducted by the Australian Taxation Office (ATO), Queensland Office of State Revenue and West Australian Department of Treasury and Finance. Each delivering the arrangements a 'clean bill of health'. TOSS also claimed there were strong grounds for the remission of the penalties and interest, as it took 2 years to investigate the matter, a further 2 years to consider the objections and a further 2 years to refer the matter to VCAT.

Commissioner’s Case

1. The Commissioner concedes that certain concessions and deductions should be made but submits that the remaining assessments should be upheld.
   
   
2. The Commissioner argued that a close analysis of the agreements demonstrated they are not truly representative of tenancy agreements. For example, there are no specific premises to which the contract relates, rather they are relevant contracts for payroll tax purposes as the optometrists provided services to TOSS (as well as the patients and customers of TOSS) for or in relation to performance of work.
   
   
3. The Commissioner states that it is clear the consultation fees are not held for the benefit of optometrists, but instead operate as a security mechanism for guaranteeing payment to TOSS. As such, these amounts are deemed to be wages for payroll tax purposes.
   
   
4. The Commissioner says that the penalties should be maintained as there is no evidence of the TOSS having taken professional advice on the arrangements or having sought a ruling from the Commissioner. Also, that the reviews by the other taxation authorities are irrelevant because they occurred after the Commissioner's enquiries commenced and involve different legislative schemes.
   
   
5. In relation to remission of the interest and penalties, the Commissioner submits that there was no significant delay between the commencement of the investigation and issue of the assessments, and much of any delay can be explained by the failure of TOSS to provide relevant information upon request.

Decision

1. The agreements are relevant contacts and the optometrists, in the course of their business, supplied services to TOSS for or in relation to the performance of work. Please note that VCAT originally ruled in favour of TOSS, however, the decision was overturned on appeal in the Victorian Supreme Court outlining that the aligned with the broader definition of ‘taxable wages’ under the legislation. That decision was further endorsed by the Court of Appeal when TOSS attempted to have the amendment reversed.
   
   
2. Some exemptions should be applied to specific optometrists, but a majority of the assessments remain intact.
   
   
3. Penalties and interest have been correctly imposed under the TA Act and should be recalculated to reflect the new assessment amounts. However, neither the penalties nor the interest ought to be remitted.

Full case details can be found here - http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VCAT/2018/169.html?context=1;query=optical;mask_path=au/cases/vic/VCAT#disp8

Thomas and Naaz vs Chief Commissioner of State Revenue

Thomas and Naaz Pty Ltd (Thomas & Naaz) operated 3 medical centres across Sydney’s north-west for independent doctors to use as private practitioners. The Applicant provided the doctors with rooms and shared administrative and support services, including nurses, reception, admin staff, and the charging and collection of Medicare payments on behalf of the doctors. The Applicant received 30% of the Medicare payments payable to each doctor in exchange for the services listed above.

In April 2018, the Chief Commissioner of State Revenue (Commissioner) issued 5 Notices of Assessment to the Applicant to the sum of $795,292.95. Inclusive of interest and penalties, the amount was for Payroll Tax accrued throughout the period 1 July 2013 to 31 March 2018 on the payments of 70% of the Medicare benefits to the doctors.

Upon receiving the assessments, Thomas & Naaz objected the Notices of Assessment on 15 May 2018. The objection was finally disallowed by the Commissioner on 3 April 2019. Dissatisfied with the response, Thomas & Naaz sought independent review and mediation where the case was finally heard by the NSW Civil and Administrative Tribunal (NCAT) on 28 August 2020.

NCAT upheld the Commissioner's assessments, prompting the Thomas & Naaz to lodge an appeal that was ultimately dismissed. They then escalated the matter to the NSW Supreme Court through the Court of Appeal, where the decision remained in favour of the Commissioner.

Crux of the Dispute

At the heart of this legal tussle was the proper characterisation of the working relationships Thomas & Naaz had with various doctors engaged in their business operations and the consequent tax implications.

The Commissioner's assessments were predicated on the assertion that the doctors were not independent contractors conducting their own businesses, but rather were akin to employees operating under ‘relevant contracts’. This distinction was pivotal, given that payments to employees attract payroll tax, while payments to independent contractors can be exempt – if certain conditions are met.

The discourse extended to the interpretation of the "relevant contract" provisions of the Payroll Tax Act (the Act). While Thomas & Naaz argued their contracts didn't fall under this purview due to the doctors’ autonomous operations, the Commissioner posited that the substance of the relationships exhibited employment traits, bringing them within the Act's scope. Furthermore, the methodology employed by the Commissioner in calculating the taxable wages was contested, with Thomas & Naaz alleging it was arbitrary and capricious.

Thomas & Naaz’s Case

1. Nature of Contracts: Thomas & Naaz strenuously argued that the doctors in question were independent contractors, not employees. They emphasised the contractual terms which explicitly designated them as contractors and pointed to attributes typical of contracting arrangements. This includes but isn’t limited to:
2. The doctors’ clinical independence in when and how they saw patients and what they prescribed.
3. Autonomy of schedule and no set roster by the medical centres.
4. The fees earned by doctors for the provision of medical services to patients were billed by the doctors with patients assigning their Medicare benefits to the doctors.
5. These fees were claimed and collected and retained in separate accounts by the Thomas & Naaz on behalf of the doctors.Doctors used their own medical equipment when treating patients.
   
   
6. Chain of Service: Central to their defense was the assertion that the doctors do not, in fact, provide any services to the medical centres. Conversely, the doctors provided services to the patients and Thomas & Naaz provided services to the doctors. This was further emphasised by the doctors providing these services to the public generally each financial year.
   
   
7. Penalties and Interest: Any penalties or interest should not be imposed as they took reasonable care to comply with the notices and did not obfuscate the Commissioner’s ability to identify a tax default.

The Commissioner’s Case

1. Servicing the Patient: The Commissioner countered that, Thomas & Naaz operated medical centres where the primary business activity was the provision of medical services to the public. Those services were provided within their medical centres by the doctors. Hence, Thomas & Naaz required the services of the doctors to operate as a medical services provider.
   
   
2. Relevant Contract Provisions: There were specific items within the agreements that were inconsistent with the argument of Thomas & Naaz providing services to the doctors and not the other way around. These include hours of work, obligations upon the doctors to comply with protocols and promote the business of the medical centre, a leave policy, and the payment of an hourly rate in certain circumstances.
   
   
3. Penalties and Interest: It was argued that the penalties and interest incurred should remain. The Commissioner sustains that there was a lack of reasonable care by not registering for payroll tax or responding to the Commissioner’s many enquiries.

Decision

1. NCAT confirmed the assessments. Finding that the agreements between Thomas & Naaz and the doctors were ‘relevant contracts’, securing the doctors’ services for the patients of the medical centres. As these contracted services were for the performance of work, the payments made to doctors we deemed to be wages and eligible for payroll tax.
   
   
2. They also held that there should be no remission of interest or exemption of penalties due to Thomas & Naaz’s failure to engage with the Commissioner’s repeated attempts to obtain information.
   
   
3. All subsequent appeals upheld the original decision of the NCAT.

Full case details can be found here - https://www.caselaw.nsw.gov.au/decision/17ba49dc933fd5acb37385cc

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