Thomas and Naaz v Chief Commissioner of State Revenue – what this recent court case means for you.

By Ben Ryan, Associate at Hillhouse Legal Partners
| 8 min. read

Key takeaways

  • Thomas and Naaz Pty Ltd were ordered to pay payroll tax of $795,292.00 after the Tribunal agreed with Revenue NSW that payments made under Service Agreements to Doctors who carried on medical business at the centres were “taxable wages” for the purposes of the NSW payroll tax legislation.
  • The payroll tax legislation in Queensland is similar to the NSW law, but not identical.
  • The decision made could possibly encourage state duty authorities (such as the Queensland Revenue Office) to audit medical centres more rigorously for payroll tax purposes.

The payroll tax decision of Thomas and Naaz v Chief Commissioner of State Revenue, in the Civil and Administrative Tribunal of New South Wales in September 2021, is causing significant concern for owner/operators of medical practices Australia-wide. 

It should be noted the risk is not unique to medical practices. This decision can potentially be applied by the Queensland Revenue Office and Fair Work Commission to any business where a consultancy fee or commission is paid. For example, real estate agencies, motor dealerships and other businesses where contractors/consultants are engaged rather than employed.

What was the decision in Thomas and Naaz?

Thomas and Naaz Pty Ltd, the owner/operator of four general practice medical centres in Western Sydney, was ordered to pay payroll tax of $795,292.00 after the Tribunal agreed with Revenue NSW that payments made under Service Agreements to Doctors who carried on medical business at the centres were “taxable wages” for the purposes of the NSW payroll tax legislation.

As noted above the decision is a tribunal decision in New South Wales and is not binding law in Queensland, nor binding precedent on higher State or federal Courts. There is currently very limited higher Court precedent on the subject matter Australia-wide.  The payroll tax legislation in Queensland is similar to the NSW law, but not identical.

Notwithstanding, there is a possibility that the decision will encourage state duty authorities (such as the Queensland Revenue Office - QRO) to audit medical centres more rigorously for payroll tax purposes. We understand that this process has already begun.

Subject to the QRO’s findings, they may then turn their attention to other similar businesses (e.g. real estate agencies, motor dealerships and other businesses where contractors or consultants are engaged.)

If payroll tax is imposed on a business by the relevant authority, the business will be forced either to pay additional tax (and possibly fines or other penalties) or appeal the decision to the relevant tribunal, incurring significant cost with no assurance of avoiding the tax liability.

Business owners and operators, including service companies, should take this opportunity to seek legal assistance on their specific circumstances.

The facts of this case, and indeed every case, are distinct and each case turns on its own specific facts.

From the available case law there are some common elements of service, consultancy, agents and contractors agreements which may expose a business to heightened risk. For example:

 

Higher risk (don’t)

Lower risk (do instead)

Work Hours (control)

A ‘specialist’ is required to work specific hours, or to attend the Business on regular/ set days or times.

A specialist is required to provide notice if they will not be at work or if they intend to take leave.

Specialists have discretion about when to work, including the days and hours that they do so.

Specialists are able to (and do) work at other unrelated businesses.

Invoicing

Invoices to clients/customers are issued under the Business name or ABN (for medical practices - noting the Doctor’s Medicare number does not mitigate this).

Invoices are issued in the name of the specialist and their ABN.

Fee collection

Client/customer fees are collected on behalf of specialists and received into the general business bank account (i.e. the same account used to pay general business expenses including wages).

Client/customer fees are either collected into a separate account used solely for this purpose and then held on trust for a specialist (essentially a clearing account).

Alternatively, the fees are paid direct to the specialist who is then invoiced by the business for any service fees (i.e. fees less commission or service charges).

Advertising

Advertising portrays the business as the provider of the services and the specialist as a member of the business.

The business is advertised as a place for patients to visit their specialist.

Restraints

A specialist is restricted from working in competition with the business for a set period within a set area after they cease engagement with the business.

A specialist is only restricted from soliciting staff, clients/customers and other specialists for a period after they cease engagement with the business but otherwise free to conduct their own business elsewhere if they so choose.

Written Agreements

Using verbal or short form letter agreements are not sufficient and will leave the business exposed.

Ensure the business has written agreements in place between the business and the specialists and that it is regularly reviewed. The terms of the agreement must then be followed to in order to avoid conflicts.

 

For medical practices now is an excellent time to roll out new precedent service agreements as most medical practitioners are aware of the Thomas and Naaz decision.

You should seek proper legal advice to ensure:

  1. that your service, agency, contractor or consultant agreements are up to date and comprehensive;
  2. that appropriate systems are in place to enforce the agreements.

To get in contact, simply send us an email or call 07 3220 1144 to discuss your specific circumstances.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.