It has been common over many years for medical practices to engage practitioners on what has been colloquially described as a ‘contracting basis’. The term contractor is somewhat misleading as in most cases they operate as independents and are not contracted by the practice. This has led to some confusion in the industry and some lax processes around the treatment of the payments to ‘contractors’. If the practice does not put the correct arrangements and processes in place, it can increase the likelihood that contracting arrangements will subject practices to statutory leave entitlements, payroll tax, WorkCover and superannuation regardless of the agreement in place between the practice and the practitioner.
When looking at contractor arrangements it is important to look at the entirety of the relationship between the entity and the individual. The treatment of the relationship for tax purposes is generally not determined by a single factor but rather by a combination of factors including legal rights, contractual obligations, and the actual implementation.
There are two common methods generally employed under which a contracting arrangement is put in place.
Option 1 – Associateship Model
Under this model, which is commonly used currently. the service arrangement between the practice and the doctor is drafted in such a way that the doctor appoints the practice service entity as their agent for the collection of their patient fees, provision of facilities and administrative services.
The practice service entity charges the doctor a fee for this service and adds Goods and Services Tax (GST) to the service fee charged. The fee can take the form of a percentage of fees or a flat rate such as a rental charge.
Historically from a cash flow perspective, the patient fees were collected by the medical centre on behalf of the practitioner and then disbursed to them, after deducting the service fee amount.
With recent changes to payroll tax rulings in some states, to mitigate risk of payments made from the practice to the doctor being subject to payroll tax, clinics are moving the flow of funds to go directly to the practitioner.
This needs to be done in consultation with a lawyer to ensure the contracts in place correctly reflect the arrangements.
Option 2 – Contractor/Locum Model
This model has been popular historically l because it was easy to understand and slightly easier to document when it came to the service agreement. In this model, the medical centre contracts the doctor’s services for an agreed rate or percentage of patient fees generated.
Since the doctor is contracting with an entity, and not the end patient for their services, they are required to charge GST for this service. In this option, the practice is engaging the practitioner and instructing them when and where to work.
From a cash flow perspective, the medical centre collects all patient fees and then determines the payment due to the doctor, adds 10% GST and then makes the payment to the practitioner.
There are a number of issues with regards to the Contractor/Locum Model, making it increasingly unpopular. Where the doctor is contracting as an individual, the payments under this model will most likely be subject to:
- Inclusion in any Workers Compensation premium assessments
- Subject to the superannuation guarantee
- Leave entitlements, and
- Where the practice is large enough, state Payroll Tax.
This can be the case even if the contractor is operating through a company or trust.
Recent Developments
Since 2021, the issue of whether doctors are contractors or not has been highlighted because of the decision in the Thomas and Naaz case in NSW. The main development from this case is that the Court decided the contracts were ‘relevant contracts’ for payroll tax purposes and the practice was subject to significant payroll tax as a result. For more information on the case and the payroll tax exposure you can read our article on taking your payroll tax exposure seriously.
The ATO have also recently released updated rulings on how to determine an employee v contractor relationship.
It is now even more likely that Locum Contracting arrangements will be subject to:
- Payroll tax
- Workers Compensation
- Superannuation guarantee and
- Statutory leave entitlements
Required Action
If you are currently utilising a contractor arrangement, you should consider what the intention of the relationship between the practice and doctor and your associated risk of payroll tax and other tax consequences. In most cases, you should consider a full process review including but not limited to your service agreements, bookkeeping, invoicing, website and recording of income and service fees. With the increase in data matching by most governing agencies, if the reporting for payroll tax, income tax, superannuation and WorkCover do not align then, you may be selected for an audit.
If you are concerned about your contractor arrangements and the impact on your practice, contact your local William Buck advisor.
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation. This information is current as at 15th March 2024
