In brief

The decision in the recent payroll tax case Optical Superstores has potential implications for common healthcare and allied health practice structures and commercial arrangements in healthcare and allied health which involve any kind of fee-split, revenue share or ‘facility fee’. Those arrangements need to be considered carefully in light of the decision.

Background

In September last year, the Court of Appeal in Victoria handed down a decision in Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197. The decision involved the assessment of payroll tax on payments flowing through a service entity to optometrists in a retail optometry practice and optical dispensary business. An application for special leave to appeal to the High Court was refused in March.

It is tempting to try to confine Optical Superstores to its particular facts and commercial context. However, in practice, the case is likely to have a broader relevance to many common commercial arrangements in healthcare and allied health.

The commercial structure considered in Optical Superstores is reasonably straight forward. Leaving aside some particular language and quirks, most elements of the structure would be recognised by anyone with a passing familiarity with common healthcare and allied health practice structures.

The arrangements between Optical Superstores and the optometrists were structured as a tenancy arrangement with the relevant service entities as ‘landlord’ and the optometrist as ‘tenant’.

The optometrists bulk-billed Medicare and charged private fees to patients. Medicare rebates from bulk-billing were paid to Optical Superstores by way of Medicare Group Pay Link and all other patient fees were paid to Optical Superstores by payment direction. Those amounts together were considered ‘Gross Consultation Fees’.

At the end of every month, the optometrists submitted a time sheet for the number of hours worked each day. The optometrists were remitted an amount comprising the ‘Reimbursement Rate’ multiplied by the number of hours worked.

The ‘Gross Consultation Fees’ less the ‘Reimbursement Rate’, was kept by Optical Superstores as a ‘Premises Fee’. In the scenario where the ‘Reimbursement Rate’ exceeded the ‘Gross Consultation Fees’, Optical Superstores paid the difference to the optometrist as a ‘Location Attendance Premium’.

The provisions of the Payroll Tax Act 2007 (Vic) in issue in Optical Superstores are those which relate to ‘deemed’ wages. Those provisions are similar in other jurisdictions, and identical to New South Wales as a result of the harmonisation of the Victorian and New South Wales payroll tax legislation in 2007. This article is not intended to be a comprehensive tax case note, but the core issue is whether the amounts remitted by Optical Superstores to the optometrists as reimbursement were ‘amounts paid or payable for or in relation to the performance of work’.

At first instance, VCAT determined that the amounts remitted to the optometrists as ‘reimbursement’ were not payments for, or in relation to, the performance of work. On appeal, the trial judge agreed with the revenue authority that if the amounts remitted were in fact ‘payments’, then they were ‘for or in relation to the performance of work’. However, the trial judge ultimately found in favour of Optical Superstores, anchoring the decision in the concept that the amounts remitted to the optometrists were not ‘payments’ because they were amounts to which the optometrists were beneficially entitled. That is, the remittance to the optometrists was not actually a ‘payment’; rather it was simply returning to the optometrists their own money.

The Court of Appeal came to the opposite conclusion. The Court found [at 65]:

The words ‘for or in relation to the performance of work’ specify that it is a connection between the amount provided and the performance of work which provides the criterion by which the provision of that amount is, or is not, taken to be wages. No other test is posited. In that context, there is no reason why ‘paid or payable’ does not mean simply the provision of money. The definition in s 3 expressly states that ‘paid’, in relation to wages, includes their provision. That reading is consistent with the ordinary meaning of the word. To read the word as being subject to a requirement that what is provided does not belong to the recipient is to assume a legislative intention which is not anchored in the statutory text or any identified context.

Given the trial judge found that the amounts remitted to the optometrists were ‘for or in relation to the performance of work’, the Court of Appeal’s conclusion was fatal to Optical Superstores’ case. Those amounts paid to the optometrists by way of ‘reimbursement’ were in fact no different to the ‘Location Attendance Premium’, which VCAT had determined were payments for or in relation to the performance of work. That particular determination was unchallenged through the course of the appeal proceedings.

On one reading, Optical Superstores is a decision confined to its particular facts and commercial context. It is certainly true that there are distinguishing features of the arrangements considered in the case that are not present in other healthcare and allied health contexts. In particular, it is central to the determination that the work undertaken by the optometrists was performed in an optical dispensary business. In that sense, the optometrists were providing services to both Optical Superstores (the store owner) and to the patients (who saw the optometrists in the store). Optical Superstores benefited from the work undertaken by the optometrists through the sales of frames, lenses and optical supplies. That element will not necessarily be present in other healthcare and allied health contexts.

However, on closer consideration, it is important to recognise that many of the key elements of the arrangement considered in Optical Superstores are present in many common healthcare and allied health practice structures. That is:

• health practitioners working in private practice; and
• a service entity providing physical space and administrative services, in exchange for a ‘facility fee’ (variously described).

It is exceptionally common for the service entity to collect fees from patients, which are remitted to the practitioner net of the facility fee charged by the service entity. Fundamentally, that is the payment flow considered in Optical Superstores. The Court of Appeal found explicitly that the payroll tax legislation ‘operates on flows of money’ [at 61].

The relevant enquiry post-Optical Superstores is not ‘is this a remittance of the practitioner’s own money?’ Rather, the enquiry is ‘is this remittance a payment for or in relation to the performance of work?’ That is a much more nuanced question which requires careful consideration.

It’s in the fine print

The decision in Optical Superstores involves finely nuanced legal reasoning about complex deeming provisions in payroll tax legislation. However, it also illustrates a broader commercial principle which is often overlooked in designing legal and commercial structures in a healthcare context. That principle is probably best articulated as ‘consider the substance; don’t get lost in the form’.

Stepping back from the legal detail, there is an intuitiveness to the Court of Appeal’s determination in Optical Superstores. Although structured as a purported ‘tenancy’ arrangement – one has to admit, the economic substance of the arrangement between the optometrist and Optical Superstores looks an awful lot like wages. The optometrist completes a timesheet and receives a payment per hour worked (albeit notionally paid out of his or her ‘own’ private billings). If his or her private billings are not sufficient to cover his or her hourly rate, the ‘landlord’ pays him or her an obscurely-named ‘Location Attendance Premium’ to make up the difference. Although it is important to acknowledge that Optical Superstores was not decided on merely ‘substance over form’ reasoning, looking to the economic substance of the arrangement probably illustrates why the revenue authority was interested in pursuing this particular case.

The net result of Optical Superstores is that any practice structure or commercial arrangement in healthcare or allied health which involves any kind of fee-split, revenue share or ‘facility fee’ (however it might be described) should be considered carefully from a payroll tax perspective. In many cases, there will be basic structuring steps which can be implemented to eliminate or substantially reduce the risk of payroll tax being levied. In other cases, it may be appropriate or prudent to seek a private ruling from the applicable revenue authority.

This article was published in Edition 2 of The Prescription.