Uncertainty over common optical business structure after tax ruling
Optometry practices are being urged to review their payroll tax obligations and business structures following a court ruling that could put some healthcare businesses in breach of tax laws.
The alert follows a successful challenge by the Commissioner of State Revenue in the Victorian Court of Appeal concerning The Optical Superstore, which operates more than 65 practices across Australia.
The court ruled in favour of the commissioner, who argued payments the company made to optometrists operating out of its premises should have been subject to payroll tax.
The Optical Superstore adopts a co-location model with its optometrists, which it says are independent practitioners conducting their own optometry businesses. Experts say it classified payments to the optometrists as fees or revenue, as opposed to taxable wages.
Mr Matthew McKee is a tax lawyer and partner at the Sydney firm Brown Wright Stein Lawyers. He told Insight the ruling, which was handed down in September, could set a new precedent that affects medical and allied health practices.
He said the case centres on the use of a tenancy/agency model by The Optical Superstore, one of the most common business arrangements in the optometry industry.
In this instance, the practice collected fees from the patient or Medicare, and deducted a fee for providing management services such as rent, administration staff, marketing and practice supplies. The remainder is then paid to the optometrist.
McKee said the payments were treated as fees or revenue earned by the optometrists, rather than wages, which would be subject to payroll tax.
The system worked on the basis that the money being paid to the optometrists already belonged to them, and it was simply being held by the practice ‘on trust’. Therefore, it was understood that when the practice remitted the amount to the optometrist, it was not a payment to the optometrist for or in relation to the services provided to the practice.
“The intention of these arrangements is that the medical practitioners, whether it be an optometrist or otherwise, are plying their own trade effectively from the premises with certain administrative support from the practice, but ultimately they are meant to be running their own show,” McKee said.
“Such arrangements are intended to provide certainty as to the tax obligations of the practice.”
McKee said Victorian revenue officers considered the agreement between the optometrists and The Optical Superstore to be a ‘relevant contract’ for work, according to the laws around payroll tax, and should be treated as wages for payroll tax.
He added that there were unique elements in The Optical Superstore’s case. This included a reimbursement amount that was paid based on the hours worked by the optometrist, which involved a signed-off timesheet. Additionally, the optometrists did not provide an invoice for hours worked.
In addition, the optometrists received the same hourly rate regardless of how many patients they saw or how they were billed. An ‘occupancy fee’ was deducted from the payments to optometrists.
If the total consultation fees were less than the amount that the optometrist was entitled to, based upon their hourly rate, the difference was treated as a ‘location attendance premium’ (GST would be paid and a recipient created tax invoice issued).
McKee said while the arrangements adopted by The Optical Superstore may not align with more traditional structures, it appeared the judge adopted a broad view of what constituted a contract for work. This meant tax officers could review similar structures in future, and practices may be required to consult a tax professional to assess their risk.
“The arrangements in The Optical Superstore were particularly unique, they were quite crude in a way because there were aspects of it which clearly looked like employment-type arrangements,” he said.
“So the question then becomes, if I’m another practice, whether I’m an optometrist or otherwise who doesn’t have those aspects or features, does this case apply to me?
“The answer is: we really don’t know because the reasoning behind the decision, in my view, doesn’t suggest it would not apply [if you have different arrangements]. Until the revenue officers come out and let us know what they think, we are flying in the dark a little bit.”
In an online post, Ms Georgina Adams, general counsel for the Australian Medical Association, said the decision was a reminder that the commissioner will look behind the documentation to determine whether practitioners engaged under servicing arrangements are:
Genuinely providing medical services to their own patients and acquiring services from the practice, or are:
Actually working in the business of the medical practice, that is, supplying services to the medical practice and/or its patients.
This article was published on Insight 9 December 2019.
Author
Matthew McKee
Partner
E mpm@bwslawyers.com.au
P 02 9394 1032