Contractor or employee

An arrangement can be a genuine contracting relationship for PAYG withholding and superannuation and still produce taxable wages for payroll tax. The two questions are decided by different tests. The ATO asks whether the person is an employee at common law. Payroll tax asks whether the contract is a relevant contract, which deems a services contract to create employment unless an exemption applies. A practice can therefore answer the contractor question correctly and still receive an assessment.

Two questions, not one

Whether someone is a contractor or an employee is not one question with one answer. Four regimes ask it, and they do not all ask it the same way.

The first two rows agree with each other, because superannuation builds on the same common-law question. The third does not follow them, and that is the whole difficulty.

The common-law test

For PAYG withholding and superannuation, the question is whether the person is an employee at common law. That is decided by weighing the whole relationship rather than reading the label on the contract. The factors are the ones this site already lists for Western Australia, the one jurisdiction that assesses medical practices on this basis:

• Control. Does the practice direct how, when and where the practitioner works?
• Integration. Is the practitioner integrated into the practice's operations and presented as part of it?
• Delegation. Can the practitioner delegate the work to others, or must they perform it personally?
• Equipment. Does the practice provide the equipment, rooms and materials used?
• Financial risk. Does the practitioner bear their own commercial risk, or does the practice bear it?
• Ability to work for others. Is the practitioner free to work for other practices, or do they work exclusively for this one?

No single factor decides it. A practitioner who works only at one practice, in its rooms, on its equipment, at hours it sets, and who cannot send anyone else, looks like an employee on most of them. One who runs their own practice, sees their own patients and can decline work looks like a contractor.

Superannuation then widens the net further. A contract that is wholly or principally for a person's labour is treated as employment for superannuation purposes even where the person is a contractor at common law, so the superannuation question is broader than the PAYG one.

The payroll tax test

Payroll tax does not start from the common-law question at all. Under the relevant contract provisions, a contract under which a person supplies services to a business is deemed to create an employment relationship unless one of the harmonised exemptions applies, which makes the amounts paid under it taxable wages. That is a statutory deeming rule, and it reaches arrangements the common-law test would comfortably call contracting.

The five exemptions, and the Service Facility Agreement point that follows from Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, are set out in the contractors and relevant contracts guide. The medical side of the same question, including why an ABN changes nothing, is in the contractor doctors and payroll tax guide.

Western Australia is the exception. It does not apply the relevant contract provisions to medical practices, so assessment there turns on the common-law test above. See the WA medical jurisdiction page.

Why the answers diverge

Take a practitioner who runs their own practice, sees their own patients and bills in their own right, and who also works two days a week in another practice's rooms. At common law they are very likely a contractor, so the second practice does not withhold PAYG on their behalf and the superannuation position is the same.

For payroll tax the question is different: is the contract with the second practice a relevant contract, and if so does an exemption apply? The exemption that most often does the work in that situation is services to the public generally, because the practitioner ordinarily provides services of that kind to others in the same financial year. Nothing about the common-law answer carries across to that analysis, and a practice that reasoned only from the first question never sees the second one coming.

What a wrong answer costs

• Payroll tax. An assessment covering the periods the practice should have been registered, plus interest and penalty. Every medical amnesty window has now closed, so there is no longer a period to correct without exposure. See the amnesties and audit pauses guide.
• PAYG withholding. A failure to withhold can leave the practice liable for the amount that should have been withheld, in addition to penalty.
• Superannuation. The superannuation guarantee charge is not deductible, and carries interest and an administration fee on top of the shortfall.
• Workers compensation. A separate state-based exposure, assessed on a test that is different again from both of the above.

Documenting the arrangement

The substance governs. A contract that calls a person a contractor does not make them one, and careful drafting does not cure an arrangement that operates as employment. What helps is evidence of the factors that actually decide the question:

• Who sets the hours, the location and the clinical method.
• Who provides the rooms, the equipment and the materials.
• Whether the practitioner may delegate the work or must attend personally.
• Whether they work for other practices, and how much of their week that is.
• How they are paid, and by whom: the practice, or the patient and Medicare.
• Who carries the commercial risk when the work is defective or the patient does not pay.
• Whether the arrangement has changed since it was documented, and whether the paperwork changed with it.

Review it when the arrangement changes rather than only when it starts, because the facts that decide the question are the facts as they are now.

Work through it for your practice

The medical practice worksheet steps through the tests for your jurisdiction and financial year. If the practitioners are not general practitioners, the position differs by discipline: see the non-GP practitioner comparison. If they are GPs, the relief provisions are scoped to GPs alone, so see GP payroll tax relief across Australia.

To put a figure on the exposure once the classification question is settled, use the multi-state payroll tax calculator.