Payroll Tax, Contractor Arrangements and Medical Practice Value

Why payroll tax became a valuation question

Most Australian medical practices do not employ their doctors. The doctors practise from the premises under a service agreement, the practice supplies rooms, staff, systems and billing, and it retains a percentage of each doctor's billings as a service fee. Payroll tax is a state and territory tax on wages paid above a threshold, and for many years those accounts carried none of it on the amounts flowing to the doctors. What changed was not how practices operate but how the contractor provisions were applied to them.

The valuation consequence is specific. Future maintainable earnings, the level of profit a business can reasonably be expected to sustain, must carry every cost the business ought to bear on an ordinary, arm's length basis, so a real cost absent from the accounts means the reported profit overstates what a buyer would earn. Separately, a liability that may crystallise for past years sits between the value of the business and the money a shareholder receives. See what is maintainable earnings and how to value a medical practice in Australia.

What the relevant contract provisions do

The contractor rules are largely harmonised. Revenue NSW states that if practitioners are not engaged as employees, payments made to them may still be subject to payroll tax under relevant contract laws, and points to Division 7 of Part 3 of the Payroll Tax Act 2007. Queensland Revenue Office notes that its contractor provisions have, since 2008, been substantially aligned with those of New South Wales and Victoria.

The mechanism is a deeming rule. As Queensland Revenue Office puts it, where the contract is a relevant contract the principal is a deemed employer, the contractor a deemed employee, and payments for the performance of work deemed wages unless an exemption applies. What surprises owners is the finding that the doctor supplies a service to the practice at all. Revenue NSW states that several court cases have confirmed that the practitioners provide their services to the principal, the centre or clinic, as well as to patients.

Exemptions matter. Revenue NSW states there are seven exemptions under section 32(2) of that Act, three of them most likely to apply between a medical services business and a practitioner: services provided for less than 90 days, services provided by two or more people, and a contractor who ordinarily provides services to the public. Each turns on evidence, so the practical question is whether the records support the position taken. Grouping is a quieter risk: Revenue NSW notes that audits often find practices have not declared that they are part of a group through common control or the use of common employees, so a practice entity and its service entity can share a single threshold.

What Thomas and Naaz decided

Revenue NSW records that the applicant operated three medical centres at which doctors were engaged under written agreements to treat patients, with the applicant providing rooms and shared administrative and support services, and that 30 per cent of the Medicare benefits payable to each doctor was to be paid to the applicant.

The detail that carried the case was administrative. Most of the doctors directed Medicare to pay their benefits into a bank account in the applicant's name, whose staff reconciled the receipts and paid the balance to the doctor. The Tribunal confirmed the assessments, finding the agreements were relevant contracts and the payments made for or in relation to the performance of work, and the Appeal Panel dismissed the appeal.

In the Court of Appeal, on 14 March 2023, the summons seeking leave to appeal was dismissed with costs. Revenue NSW records that the argument that a payment of wages required a quid pro quo was rejected, following the Victorian Court of Appeal in Commissioner of State Revenue (Vic) v The Optical Superstore Pty Ltd [2019] VSCA 197 that "payable" or "paid" does not exclude payments to which the payee is contractually or beneficially entitled.

Revenue NSW also records that payments relating to the three practitioners who processed their own Medicare claims were not assessed, and that Leeming JA noted a ready mechanism was available to avoid the deeming provisions being engaged. How the money moves, and in whose name, is not a formality.

Where the states and territories stand at the time of writing

Payroll tax is imposed separately in each jurisdiction and the responses have diverged. Every setting below can change, so the position is checked as at the valuation date and jurisdictions not listed confirmed separately.

New South Wales

Revenue NSW paused payroll tax audits of medical practices engaging general practitioners from 4 September 2023 for 12 months, and states audits recommenced on 4 September 2024 with the Bulk Billing Support Initiative, under which medical centres paying relevant general practitioner contractors receive relief as a rebate if conditions are met. It gives the bulk billing thresholds as at least 80 per cent of the centre's general practitioner services in metropolitan Sydney and at least 70 per cent elsewhere, and states the rebate applies only to contractor payments to general practitioners, not to those engaged as employees, nor to pathology or allied health services.

Victoria

The State Revenue Office states that changes announced on 22 May 2024 gave relief, through the Treasurer's ex gratia powers, on payments to contractor general practitioners for unpaid or future assessments up to 30 June 2024, and to 30 June 2025 for businesses that had not received advice. From 1 July 2025, it states that wages paid by a general practice medical business to employee and contractor general practitioners are exempt where they relate to fully funded items of general practitioner work, and that the exemption does not apply to non-medical general practice businesses, meaning allied health professionals and dentists.

Queensland

Queensland Revenue Office's Public Ruling PTAQ000.6.5, issued on 3 March 2025 and effective from 1 December 2024, states that wages are exempt from payroll tax and the mental health levy if paid by a medical practice to a general practitioner. A medical practice means an entity carrying on a business at which services of the kind ordinarily provided by a practitioner registered in the specialty of general practice are provided, other than a hospital. The exemption does not extend to other medical centre businesses, the ruling giving a dental clinic or physiotherapy practice as examples, nor to payments to a dentist or physiotherapist.

South Australia

RevenueSA states that on 22 June 2023 the Treasurer approved a payroll tax amnesty for payments to contracted general practitioners up until 30 June 2024, and that changes to the Payroll Tax Act 2009 and the Payroll Tax Regulations 2025 prescribe a bulk billing exemption on wages paid by medical practices to employee and contractor general practitioners for bulk billed services from 1 July 2024. The exemption is proportional: the exempt percentage is the number of bulk billed services provided by general practitioners engaged by the designated medical practice, divided by the total number of medical services they provided, so a valuer asks for those service counts. RevenueSA also describes retrospective exemptions between 1 July 2019 and 30 June 2024 for undeclared wages of contracted medical practitioners at practices registered for the amnesty, and of contracted medical specialists and dentists where the practice was registered as an employer before 1 July 2024.

Australian Capital Territory

The ACT Revenue Office states that from 1 July 2025, designated medical practices are exempt from payroll tax on wages paid to a general practitioner, employee or contractor, for medical services that are bulk billed or delivered under Part V of the Veterans' Entitlements Act 1986 (Cth) or the Workers Compensation Act 1951. The exemption replaces the temporary amnesty, which applied up to 30 June 2025, and removes the minimum 65 per cent bulk billing requirement, applying instead to wages paid for an exempt medical service.

Western Australia

Western Australia sits outside the harmonised position. Its payroll tax employer guide states that Western Australia is not harmonised with the other jurisdictions on the treatment of contractors, that the totality of the relationship decides whether a worker is an employee or a contractor, and that all payments are taxable where the relationship is akin to employment. A practice operating across states can face different questions about the same agreement.

Allied health and dental practices are not outside this

The deeming rules were never confined to doctors. Queensland Revenue Office's ruling applies to entities conducting a medical centre business, expressly including dental clinics, physiotherapy practices and radiology centres, and Revenue NSW describes the medical services industry as including dental clinics, pathology and radiology centres.

It is the relief that differs, not the rule. Several of the measures above are confined to general practitioners, so a dental practice or an allied health practice on the same contractor model may carry a cost the general practice next door does not, and that difference belongs in the earnings.

How a valuer treats the recurring cost

The starting point is normalisation, the restatement of results so they show ordinary, ongoing, arm's length operation rather than the current owner's arrangements. If the practice should bear payroll tax on practitioner payments and does not, that cost is added, reducing EBITDA, earnings before interest, tax, depreciation and amortisation. The effect exceeds the annual amount, because the multiple applied to sustainable earnings carries that reduction through to value. See EBITDA multiples for healthcare businesses.

Three refinements matter. The cost is rarely all or nothing: where a jurisdiction exempts bulk billed or fully funded work, the exempt proportion follows the practice's billing mix, which can move. A practice below the threshold may have no liability of its own while a buyer already over it bears the cost immediately, and because market value assumes a willing but not anxious buyer and seller, neither compelled, a saving open only to one particular buyer is usually a matter for negotiation rather than for the concluded value. Where the practice has lifted its service fee or passed the cost to the practitioners, the valuer tests whether that is durable: a variation the doctors have signed is different from one imposed on doctors who can move elsewhere.

Which method, and which comparables

Practices of this kind are commonly valued by capitalisation of future maintainable earnings, which applies a multiple reflecting risk and growth prospects to a sustainable earnings figure, so the adjustment lands squarely in that figure. Where the cost is still phasing in, because an exemption turns on a bulk billing rate the practice is changing or a restructure took effect part way through a year, a discounted cash flow, which brings projected cash flows back to a present value, holds that profile better than a single capitalised year. Market evidence needs the same care: transactions agreed before the contractor provisions were applied to medical centres were priced on earnings that did not carry the cost, and evidence from another state may reflect a different exemption entirely. See what reduces the value of a medical practice.

How exposure for past periods is treated

A cost that may be assessed for earlier years belongs somewhere else entirely. It is a contingent liability, an obligation that depends on events not yet resolved, and it sits in the equity bridge: the step from enterprise value, the value of the business operations independent of how they are funded, to equity value, what the shareholders receive.

Where the amount is probable and can be estimated, including interest and penalty tax, it is treated as debt-like and deducted in that bridge. Where it cannot, it is disclosed as a range and the transaction usually deals with it through an indemnity, a retention or a price adjustment rather than through the valuation figure. The look-back is not open-ended but nor is it short: Revenue NSW states that an unregistered business must register if its taxable wages exceeded the monthly threshold in the current financial year or the last four financial years.

Two mechanics are better stated than assumed. The first is whether the deduction is the gross assessed amount or its cost after any income tax effect, an assumption the valuation records for the practice's accountant to confirm. The second is that a practice already remitting payroll tax carries an accrual, and that accrual belongs in normalised working capital, the short term operating funding a buyer expects to be left in the business, not deducted again as debt.

Two errors are common. The first is counting the same money twice, once by reducing maintainable earnings for the ongoing cost and again by deducting a liability that includes future periods; the deduction covers past periods only. The second is ignoring relief that has already closed the past, as the South Australian and Victorian measures above may have done. See valuing a healthcare business for a shareholder exit.

Restructured arrangements: what a valuation tests

Many practices have restructured so that the doctor bills the patient in the doctor's own name, Medicare benefits are assigned to the doctor, and the practice invoices a service fee. A valuer does not opine on whether that achieves its tax purpose, but does examine what it has done to the business.

The first change is presentational but large. The revenue line falls, often sharply, because the accounts record a service fee rather than gross patient billings, while earnings may barely move. The history has to be restated consistently before any trend is read from it.

The second is to goodwill, the value of the business above its identifiable net assets, and to the split between transferable or commercial goodwill, which passes to a buyer with the business, and personal goodwill, which attaches to the practitioner and does not. If the patients are now unambiguously the doctors' patients and the doctors can leave on short notice, a buyer acquires something closer to a serviced rooms and administration business than a patient base. That can be a sound business, but it is valued on the durability of the practitioner agreements rather than patient loyalty, and where little transferable goodwill survives the net asset value of the fitout, equipment and receivables becomes the practical reference point. See does a medical practice have transferable goodwill.

The third is documentary. The valuer asks how long the arrangement has operated, whether the signed agreements match the actual flow of money, whether bank accounts and Medicare assignments changed when the paperwork did, and whether the practitioners accepted the terms in writing. A deed contradicted by the bank statements is a risk a buyer prices. See preparing a healthcare business for sale.

Where this sits in a valuation

None of the above is tax advice, and a valuation is not the place to resolve whether a particular service agreement is a relevant contract. That belongs with your accountant or lawyer, and the answer can differ by jurisdiction and by the wording of the agreement.

The purpose changes the emphasis. A valuation for a sale or a shareholder exit works from the arrangements a buyer would inherit. One for a tax or restructure matter is fixed to a valuation date and to what was known then. In a family law matter or a shareholder dispute both sides will test the same assumption, so it is stated openly rather than buried in a rate. See tax and restructure valuations and family law business valuations.

What a valuation can do is stop the question being invisible: it states the assumption about the ongoing cost, shows the effect on maintainable earnings, identifies any exposure for past periods separately, and explains which item sits where. See medical practice valuations or request a valuation.