Services and Facility Agreements (SFAs) can be complex and costly if implemented incorrectly. Recently, a large health corporate was issued with a determination letter from Revenue NSW regarding the structure of its SFA. The letter carried potential penalties in the multi-millions.
The team at Credabl sat down with Julian Whitehead of Whitehead Legal to understand more about this tax law and how you can reduce complications.
What are SFAs?
An SFA is an agreement between a business with physical space (for example, an optometry practice) and the professional practitioner who operates out of that space (for example, an optometrist).
In this example, the optometry practice provides the space for the optometrist to practise and provides support services to the optometrist, i.e. everything they need to operate, such as billing and administrative services and equipment. For providing these items, the optometry practice takes a percentage of the fee charged by the optometrist to the patient – this is the services fee.
For most optometry practices, the flow of funds would work as follows:
• The patient pays the optometrist’s fee to the optometry practice,
• The fee goes into the optometry practice’s centralised account, and
• The optometry practice pays the optometrist their fee (generally 40%) and retains the balance as its services fee.
What’s Changed?
If you are an optometry practice owner with optometrists practising under an SFA within your business, you may need to review the terms of your SFAs.
Specifically, you may need to review how your practice is implementing the flow of funds to ensure that tax is being managed in accordance with the relevant tax law.
The ramifications of not doing so can be seen in the case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue. In this case, the defendant (a private medical centre operator) was found to be in breach of the Payroll Tax Act 2007 and ordered to pay almost AU$800,000 in payroll tax retrospectively.
It was found that the payments being made to the doctors under the SFA, qualified as wages and had to be taxed as such. The reaffirmation of the current flow of funds ‘problem’ was then highlighted in the 2023 Thomas and Naaz appeal.
Intriguingly, the appeal provided potential alternatives for the flow of funds.
What Does this Mean for Your Practice?
The findings of this ruling mean that as soon as a business makes any payments to a practitioner practising out of that business, those payments potentially become wages under the Payroll Tax Act 2007 and can be subject to payroll tax. If the correct payroll tax is not applied, that business is exposed to the risk of the tax being applied retrospectively.
According to Mr Whitehead, if you are above the payroll tax threshold for your individual state, consider your flow of funds – one alternative (and there are multiple alternatives) is to change the flow of payment so that the optometrist receives 100% of the patient fees and remits the agreed service fee (let’s say 60%) of those patient fees (potentially via direct debit) back to the practice.
What Should You Do?
These complex tax, accounting and legal issues are subject to interpretation and require high level advice.
However, there are ways you can protect yourself against potential prosecution due to a poorly set up SFA including:
• Review your existing SFA to ensure that it is up to date (anything pre-2023 may need revisiting)
• Ensure that your lawyer is up to date with the importance of the SFA drafting.
Remember, your SFAs can also act as a shield for potential employee entitlement claims against your optometry practice.
Need to Ask More?
If you are above the payroll tax threshold within your state, talk with your accountant about the flow of funds, the recent court cases and rulings, and whether any alternatives can be implemented.
Credabl partners with a network of lawyers and accountants that specialise in SFAs in the medical community. For a streamlined introduction, reach out to the team on (AUS)1300 273 322.
