Medical and allied health professionals need to be aware of payroll tax obligations when structuring and operating their practices.
The payroll tax legislation is broad and can often apply unexpectedly. The consequences of getting it wrong can be dire – the recent litigation between The Optical Superstore and the Commissioner of State Revenue (Victoria) is a good example of the taxpayers getting it right.
What was the structure in The Optical Superstore?
The taxpayers in The Optical Superstore cases carried on an optical dispensary business – selling glasses and frames to the public. As part of their business structure, the store owner, The Optical Superstore Pty Ltd as the trustee of one of four trusts (each, an Owner) contracted with optometrists (or the optometrists’ related entities).
The optometrists provided optometry services at each of The Optical Superstore stores.
Under the contracts between the Owner and the optometrists:
- when the optometrists provided services to patients, the optometrists directed that the consultation fees paid by the patients (Consultation Fees) be paid to the Owner
- the Owner held the Consultation Fees on trust for the relevant optometrist
- there was a Reimbursement Amount each month, which was calculated as the number of hours the optometrist was available to see patients multiplied by an hourly rate
- the optometrists paid the Owner an Occupancy Fee each month to use the premises, which was calculated as the Consultation Fees less the Reimbursement Amount
- the Occupancy Fee was retained by the Owner from the Consultation Fees it held on trust for the optometrist
- the Consultation Fees (less the Occupancy Fee) were distributed by the Owner to the optometrist.
Importantly, the Reimbursement Amount was not affected by the number of patients the optometrist saw or the amount of Consultation Fees.
If the monthly Consultation Fees were more than the Reimbursement Amount, the Consultation Fees would be distributed to the optometrist less the Occupancy Fee as follows:
Where the Reimbursement Amount was more than or equal to the Consultation Fees, the practical effect was that the Owner wouldn’t be paid an Occupancy Fee.
In these cases, the Owner would pay the optometrist, from the Owner’s own funds, the difference between the Reimbursement Amount and the Consultation Fees – this was called the Location Attendance Premium (Premium).
Practically, the Premium was accounted for as a loan from the Owner to the optometrist. The ongoing loan could be recovered throughout the financial year, but only from excess monthly Consultation Fees (net of the Reimbursement Amount).
If the loans were remaining at the end of the financial year, an invoice was raised so that the Premium was characterised as a payment from the Owner to the optometrist as follows:
The Commissioner of State Revenue issued payroll tax assessments on the basis that:
- the contract between the Owner and the optometrists was a ‘relevant contract’
- all the payments the Owner made to the optometrists under that contract were wages for the purposes of calculating payroll tax.
At first instance, the Tribunal found that:
- there was a relevant contract between the Owner and optometrist for payroll tax purposes
- the Consultation Fees distributed to the optometrists each month were not wages for payroll tax purposes because they were distributions of the optometrist’s own funds that the Owner held on express trust for the optometrist – and, therefore, they were not payments ‘for or in relation to the performance of work under the relevant contract’
- the Premiums were wages for payroll tax purposes because those amounts were ‘for or in relation to the performance of work under the relevant contract’.
The Commissioner appealed the Tribunal’s decision.
The Supreme Court looked at the relevant parts of section 35(1) of the Payroll Tax Act 2007 (Vic), which states:
For the purposes of this Act, amounts paid or payable by an employer during a financial year for or in relation to the performance of work relating to a relevant contract…are taken to be wages paid or payable during that year.
The Supreme Court then considered whether:
1. the distribution of the Consultation Fees held by the Owner on trust for the optometrists were ‘paid or payable’ by the Owner
2. if they were, whether they were ‘for or in relation to the performance of work relating to the relevant contract’.
The Court dismissed the Commissioner’s appeal.
On the first issue, the Court found that the Consultation Fees were not ‘payments’ for the purposes of the Act because they were not ‘paid or payable’. This was because the definition of ‘paid’ does not cover a situation where funds are returned to an entity who always beneficially owned those funds.
Croft J commented that there may be circumstances where the creation of an express trust may be a payment and subject to payroll tax in the context of discretionary (rather than express) trusts. His Honour said:
Rather, the critical distinction is that an object of a discretionary trust in respect of which no relevant declaration has been made gains a beneficial interest in the sum to be distributed upon a declaration being made, while a beneficiary under an express trust to whom money is distributed from the trust fund does not gain a new equitable interest. Though it is not necessary to decide this question, it is incidental to this conclusion that, for the purposes of the [Act], the declaration in respect of a discretionary trust is the payment and the distribution pursuant to that declaration is merely the machinery by which that payment is effected. In this way, it is the creation of an express trust, not the distribution pursuant to such a trust, which may constitute payment within the meaning of the [Act].
Interestingly, the Court also commented that if the distribution of the Consultation Fees were payments, then they would be ‘for or in relation to the performance of work relating to the relevant contract’ – this was despite the fact that the bulk of the work was done by the optometrists for patients.
Why is The Optical Superstores important?
The decision in The Optical Superstores clarifies the circumstances in which amounts will not be deemed wages under the ‘relevant contractor’ provisions.
However, care should be taken by medical and allied health professionals relying on this decision and self-assessing for payroll tax. In deciding for the taxpayer, the Court also made statements including that a ‘payment’ could be made on the creation of an express trust and that if a ‘payment’ was made, the words ‘in relation to’ were broad enough to include the distribution of Consultation Fees in the meaning of wages in the ‘relevant contractor’ provisions.
In practice, we often see discrepancies between the contracts and the flow of funds. It is important that the contracts reflect what happens in practice. If this is not done, there is a greater risk of audit activity.
Please contact a team member if you would like to discuss.