The serviced office model and payroll tax exposure: What medical practices need to know

26 November 2019

A recent court decision in Victoria is a timely reminder for medical and allied health practices operating under a shared services model to review agreements with doctors and other health professionals for any exposure to a payroll tax liability. Here we explain the ruling and what medical service providers need to be aware of.

The Victorian Court of Appeal (CoA) [1] has overturned a previous ruling that payroll tax would not be payable by medical and allied health serviced office entities in certain circumstances. This has important implications for medical and allied health practices using, or wanting to put in place, a shared services model. Mahoneys believes the decision broadens the circumstances in which these medical practices may be liable to pay payroll tax.

The full Court of Appeal decision can be viewed here.

What was the structure?

Optical Superstores (Service Provider) sold glasses and frames to the public from various stores. It also entered into separate agreements with optometrists (Optom Agreements). Under the Optom Agreement:

(a)   The optometrist was permitted to occupy the Service Provider’s consulting rooms (at the Service Provider’s stores), to supply   optometric services.

(b)  All fees paid for the optometric services (by patients/Medicare), were paid into the Service Provider’s bank account, and held on trust for the optometrist.

(c)  The optometrist submitted the number of hours it worked in a given store to the Service Provider. Hourly rates (depending on the optometric service) were applied to the number of hours worked, and that amount was paid to the optometrist by the Service Provider (Reimbursement Amount).

(d)  The Reimbursement Amount was not affected by either the number of patients actually seen or the consultation fees earned by the optometrist.

(e)  The Service Provider retained all other moneys received as payment for the optometric services.

Was payroll tax payable?

This matter was first heard in the Victorian Civil and Administrative Tribunal (VCAT), [2] and again in the Victorian Supreme Court. [3] In both instances, the Service Provider was held to not be liable for payroll tax.

However, the Victorian Court of Appeal has since found the Service Provider was liable to pay payroll tax to the Commissioner of State Revenue Victoria.

The critical question for the Court of Appeal was whether the Reimbursement Amounts were “taken to be wages” (and thus subject to payroll tax) for the purposes of the contractor provisions in the Victorian payroll tax legislation.

Those provisions, like other provisions concerning the meaning of ‘wages’, applied to amounts:

(a) which have been ‘paid’, or which are ‘payable’ by an employer; and

(b) for or in relation to work.

Paid or payable

The Supreme Court decision had found that payroll tax wasn’t payable if the optometrist was entitled to the money held by the Service Provider. The Court of Appeal rejected that reasoning.

The Court of Appeal instead found that:

(a)  wages should be defined broadly (‘attributable to labour’, ‘by way of remuneration’ or ‘by way of commission’). It is sufficient if there is a connection between the amount provided and the performance of work;

(b) ‘paid or payable’ means simply the provision of money;

(c)  the ordinary meaning of payment easily includes payment of money to a person entitled to that money; and

(d)  payment of the Reimbursement Amount, was a payment that attracted payroll tax.

‘For or in relation to work’

The Court of Appeal did not unsettle findings of the Victorian Civil and Administrative Tribunal and Supreme Court that if the Reimbursement Amount was a payment to optometrists, it would have been for or in relation to work.

The Court of Appeal held that ‘for or in relation to work’ means a connection between the amount provided and the performance of work. The service for which the optometrists were paid were services provided to the patients (and the Service Provider). Neither party challenged that finding in the Supreme Court, or CoA proceedings.

When is there a relevant contract?

The test in the Victorian Civil and Administrative Tribunal was whether the contracts were “contracts under which the [Service Provider]…had supplied to it the ‘services of persons [the optometrist] for or in relation to the performance of work [by the optometrist]’.

In finding there was a relevant contract, it was relevant to the Tribunal:

(a)  that the Service Provider ensured the attendance of optometrists at locations and times agreed;

(b)  that the optometrists would provide optometry services to actual or anticipated customers of the Service Provider; and

(c)  the arrangements were put in place to benefit the Service Provider (because the provision of optometry services in its stores would lead to increased sales of frames, lenses and other optometry products).


Mahoneys has reviewed the implications of this ruling by the Victorian Court of Appeal. Medical and allied health practices that use or wish to use the shared services model should:

(a)  carefully consider whether the model is appropriate or implemented properly in their current circumstances;

(b)  review Mahoneys ‘Service Agreements – “Serviced Office” Indicators’ – our free guide explaining the Do’s and Don’ts when operating under the shared services model; and

(c)  understand and seek advice about when the model may still attract payroll tax liability.

When engaged to prepare or review a shared service agreement we will provide our guide “Service Agreements – “Serviced Office” Indicators’. If you have any queries about the implications of this ruling, please contact Mahoneys commercial Partner, Antony Harrison, on (07) 3007 3777 or

[1] Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (12 September 2019).
[2] The Optical Superstore Pty Ltd & Ors v Commissioner of State (Review and Regulation) (Corrected) [2018] VCAT 169 (9 March 2018).
[3] Commissioner of State Revenue v The Optical Superstore Pty Ltd [2018] VSC 524 (21 September 2018).