Important Medical Practice Payroll Tax Decision

25 October 2021

Thomas and Naaz – the latest court case and what medical practices need to know.

Authors: Antony Harrison and Sabrina Austin

The recent NSW court decision of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue (Thomas and Naaz),[1] is a poignant reminder of the pay roll tax risks for medical practices that practice under a shared services model with doctors.

In Thomas and Naaz, the Tribunal upheld the Commissioner’s assessment of nearly $800,000 in payroll tax together with interest and penalties (being 30% of the assessed tax). The full case can be read here.

The Tribunal referred to one of the leading cases, Optical Superstore,[2] which adopted a similar line of reasoning, however, Thomas and Naaz involved facts that are more common for medical practices and therefore may have a wider application nationwide.

Mahoney’s article on the Optical Superstore case can be read here.

Thomas and Naaz Case

The medical centre owner, Thomas and Naaz Pty Ltd (Medical Centre Owner) operated 3 medical centres and engaged various doctors (there were a total of 40 doctors across 5 financial years) to provide medical services to patients from the medical centres.

Each doctor (or an entity controlled by the doctor) entered into an agreement with the Medical Centre Owner (Agreement).

Under each Agreement, the Medical Centre Owner provided consult rooms to the doctors as well as shared administrative and medical support services (nurses, reception staff, and administrative staff).

The flow of funds relating to patient billings were as follows:

  • The doctors would bulk bill patients who would assign their Medicare benefits to the doctors;
  • The Medical Centre Owner (as directed by, and on behalf of, the doctors) would make claims to Medicare and receive funds into one separate bank account set up for the medical centre;
  • The Medical Centre Owner would then remit 70% of the Medicare claims (without any deductions for tax or superannuation or otherwise) to the doctors (Payments); and
  • The remaining 30% was retained by the Medical Centre Owner as a service fee. Interestingly, the case did not stipulate exactly how the GST on the 30% service fee was paid, however, it is assumed that GST was charged by the Medical Centre Owner at the end of each month and recovered separately from each doctor.

Although it was not discussed at length in the case, in the 2015 and 2016 financial years the Medical Centre Owner was reporting all patient fees as income and the payments to the doctors were reported as contractor expenses. The notices of assessments related to the period from 1 July 2013 to 31 March 2018, so presumably the reporting of income and expenses was different in the remaining financial years.

Ultimately, the key issues in the case were:

  1. whether the Agreement is a ‘relevant contract’ under the Act, and if so;
  2. whether any of the exemptions under the Payroll Tax 2007 (NSW) (Act) applied, and if not;
  3. whether the Payments were ‘in relation to the performance of work relating to the Agreements’.

If the above applied (and an exemption did not apply) the Payments would be subject to pay roll tax.

In coming to the decision that: the Agreement was a ‘relevant contract’; no exemptions applied; and the Payments were in relation to services performed by the doctors relating to the Agreements, the Tribunal noted that it was the terms of the Agreement, the flow of funds and interdependence of the businesses that were the most significant factors.

It is that last point that is of greatest concern moving forward as the Tribunal took a very broad view of how the Payment ‘related to’ the medical services provided by the doctors pursuant to the Agreement, unlike the earlier decision of Homefront Nursing[3].  In Homefront Nursing, the Tribunal found favourably for the medical centre operator (and refused to uphold the Commissioner’s decision to impose pay roll tax) on the basis the relationship between the doctor’s medical services and the payment to the doctors was too remote. In Thomas and Naaz, the Tribunal refused to adopt the same line of reasoning.

Please be aware that pay roll tax decisions are very technical, based on a statutory interpretation of the wording of the Payroll Tax Act in the relevant State.  Also, even though the cases are in different States (and hence different applying legislation), the legislation in each State is very similar.

Relevant contract

The first consideration to decide whether the Payments are subject to payroll tax is whether the Agreement is a ‘relevant contract’.

The Tribunal decided that the Medical Centre Owner operated a medical centre; the main business activity was a general medical practice; and the Medical Centre Owner could not carry on its business without the services of the doctors. As such, the doctors were providing services to the patients as well as the medical centre.

A ‘relevant contract’ therefore existed.

The Tribunal, in reaching this decision, considered the contents of the Agreement, namely:

  • imposing hours of work and set rosters;
  • placing obligations on doctors to comply with protocols and promote the medical centre;
  • dealing with the retention of ownership of records;
  • providing for a restrain covenant (2 year restraint within a 5km radius);
  • implementing a leave policy including maximum leave per year and a requirement to submit a written request for leave for approval; and
  • providing for payment of hourly rates in certain circumstances.

The next question was whether any of the exemptions applied.  There are 4 main exemptions, and the exemption sought to be relied upon by the Medical Centre Owner was the fourth exemption which requires two limbs to be satisfied:[4]

  • Firstly, that the first 3 exemptions did not apply – which is satisfied if you can show that ‘an ongoing and regular supply of [medical services] required by the [Medical Centre Operator] which can, but not need to, require the [doctor] carrying on the business of supplying those [medical services];[5] and
  • Secondly, those medical services are performed by the doctor who also performed medical services to the public generally in that financial year;

Although the Tribunal ruled that the exemption did not apply because the Medical Centre Owner failed to submit evidence that the first limb was satisfied, the Tribunal took the opportunity to consider (and provide guidance on) the second limb.

The Medical Centre Owner submitted letters from two of the doctors stating that they practised elsewhere, so:

  • that was sufficient evidence that those two doctors ordinarily performed medical services to the public generally; and
  • it should be inferred that each of the other doctors obtained income elsewhere so the remaining doctors performed medical services to the public generally.

Not surprisingly the Tribunal refused to infer from the evidence of two doctors that the remaining doctors earned income elsewhere. What it shows is the importance of practices maintaining appropriate records of its doctor’s activities outside of the practice if the practice wishes to rely on this exemption.  Failure to do so may be fatal to the exemption applying.

Paid or payable

The final consideration was whether the Payments were ‘for or in relation to the performance of work relating to’ the Agreements.

In finding that the Payments were for work relating to the Agreements, the Tribunal adopted the line of reasoning in the Optical Superstore case.  That is, the Act does not require consideration of whether the flow of money is beneficially owned by the recipient, and rather, the words ‘for or in relation to the performance of work’ specify it is a connection between the amount provided and the performance of work which provides the criterion of whether that amount is, or is not, taken to be wages.

This is significant, as it means that the source of payment did not preclude the Payments being taxable wages. The 70% paid to the doctors was subject to payroll tax under the Act.


This case reaffirms the current view that the following factors will heighten the risk of pay roll tax liability:

The greater the level of control exerted on the doctors by the medical practice such as:

  • restraint clauses;
  • minimum hours and rosters required;
  • leave restrictions and approval processes;
  • positive obligations on doctors; and
  • having Medicare pay the amount directly into the medical practice’s account.

Medical practices that use or wish to use the shared services model should:

  • consider whether the model is appropriate and implemented properly;
  • review the updated Mahoneys ‘Service Agreements – “Serviced Office” Indicators’ – when engaged to prepare or review a shared service agreement we will provide a guide explaining the Do’s and Don’ts when operating under the shared services model;
  • consider whether an exemption applies, and if so make sure appropriate records are kept in case of an audit;
  • remember substance will always prevail over form – that is, having an agreement that regulates the position as a shared service arrangement is very important – but practising as a medical centre that engages the services of doctors contrary to the terms of that agreement will often lead to payroll tax being payable;
  • understand that as there is no ‘silver bullet’ which will prevent payroll tax from applying – the legislation is open to interpretation (as we have seen from conflicting decisions) so the only way we will see certainty is with legislative change; and
  • understand and seek advice about when the model may still attract payroll tax liability including independent legal and accounting advice.

The commercial team at Mahoneys is experienced in payroll tax legislation within the medical practice industry. If you would like to engage us to prepare or review your shared service agreement (including obtaining a copy of our guide ‘Service Agreements – “Serviced Office” Indicators’), or have any queries about the implications of this ruling, please contact Mahoneys commercial Partner, Antony Harrison, or lawyer Sabrina Austin on (07) 3007 3777 or or

We will continue to monitor the position in this area and publish any further updates, decisions and recommendations on our website.

[1] Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259.

[2] Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197.

[3] Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue [2019] NSWCATAD 145.

[4] S32(2)(b)(iv) of Payroll Tax Act 2007 (NSW).

[5] Paraphrasing Justice Croft in Nationwide Towing & Transport Pty Ltd v Commissioner of State Revenue [2018] VSC 609 when referring to the Victorian Pay Roll Tax Act.