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Holiday Homes and the Claiming of Rental Property Deductions

As most tax practitioners would be aware, the Australian Taxation Office (“ATO”) long standing position has been that an unpaid present entitlement (“UPE”) of a corporate beneficiary from a trust is regarded as a loan for the purposes of Division 7A of the Income Tax Assessment Act 1937 (Cth) (“the 1936 Act”).  However, many tax practitioners have privately held that this application of Division 7A is incorrect and, for the first time, it appears that there may be some movement in their favour.

On 28 September 2023, the Administrative Appeals Tribunal (“AAT”) in the case of Bendel & FCT [2023] AATA 3074 determined that a UPE arrangement did not constitute the giving of a ‘loan’ and therefore, did not fall under Division 7A. This case came as a surprise to the ATO and many commentators and tax practitioners in this area and is a much-needed opportunity to correct a long running error in the administration of taxation in Australia. In this bulletin, we give this case a detailed examination.

The Case

The case concerned the Bendel Group which consisted of the following three entities: Gleewin (“Gleewin 1”), Gleewin Investments (“Gleewin 2”) and a Mr B. Gleewin 1 was the trustee of a trust called the ‘2005 Trust’ (“the Trust”) in which Gleewin 2 and Mr B were beneficiaries. Mr B controlled the Trust, Gleewin 1 and Gleewin 2.

The trustee of the Trust made distributions to Mr B and Gleewin 2 as a UPE. The UPE to Mr B was offset against loans he owed the Trust and therefore, was not in issue. However, the UPE to Gleewin 2 was treated by the ATO as loan for the purposed of Division 7A from Gleewin 2 to the Trust and was taxed accordingly.

Gleewin 2 appealed the ATO’s decisions to the AAT and the matter was heard before O’Loughlin DP. Both parties asserted that the UPE created a separate trust arrangement between the Trust and the Gleewin 2 which involved the Trust having a fiduciary duty to pay Gleewin 2 the amount of the UPE at some point in the future. As the UPE had not been made paid, the separate trust was still continuing and had not come to an end. Where the parties disagreed was whether the fact that that separate trust had not come to an end meant it was a loan for the purposes of Division 7A of the 1936 Act. Gleewin 2 stated that it was not, whilst the ATO said that it was.

However, O’Loughlin DP disagreed with both parties and stated that the UPE did not create a separate trust at all. Rather, the UPE created an equitable obligation to an amount of income and not a separate asset in itself. As such, the separate trust could not be created as there was no asset for that separate trust to hold.

O’Loughlin DP then went on to say that if the equitable obligation created by the UPE was taxable, then this would mean that the amount of income promised by the UPE would be taxed twice: once under Division 6 and then again under Division 7A. He then examined the wording and intention behind Division 7A in detail and stated the following: 

  • The section does not expressly state that it could allow for multiple taxable dividends to arise from the same UPE;
  • The section does not contain a ‘tie-breaker provision’ which dictated how an amount is to be taxed if it is found that it can be taxed in more than one way; and
  • Based on the wording of the section, the intention of the section was to clearly create a pathway towards the UPE being taxed in one particular way over another if prescribed circumstances have been met.

On this basis, O’Loughlin DP concluded that the definition of “loan” in Division 7A does not reach so far as to include an equitable obligation that had not been fulfilled as doing so would result in double-taxation.  Further, the wording and intention behind Division 7A indicated that this was not the desired outcome of the section.

ATO to Appeal

Unsurprisingly, the ATO has appealed the AAT’s decision. In the interim, the ATO has released an interim Decision Impact Statement (“DIS”) stating that it will continue to apply its current position until the appeals process is completed. The DIS also contains a word of warning to practitioners in this area that the ATO will continue to assess taxpayers under Section 100A of the 1936 Act and that all objections in relation to Division 7A will be decided using the legislative interpretation accepted at the time of lodgement.

Possible Legislative Changes

Another possibility that has not been discussed as much yet is that should the ATO’s appeal be unsuccessful, then the ATO may decide to advise the government to amend Division 7A to suit its purposes including varying the definition of “loan” to specifically include UPEs.

Next Steps for Practitioners

As can be seen, the case of Bendel has triggered a re-examination of Division 7A the outcome of which we will not know for some time. The appeals process itself will take some years to be completed and, even once that is complete, the ATO may still decide to advise government to amend the legislation if it is unhappy with the outcome of the appeal.

In the meantime, practitioners should keep up-to-date with changes to Division 7A and carefully discuss with their clients how they wish to proceed with UPE arrangements and when they should be lodging objections to Division 7A decisions. It may that many clients may decide to err on the side of caution and apply the ATO’s current position until at least the outcome of the appeal is known.

We will keep an eye on this space and keep our clients and readers informed of any further updates on the ATO’s appeal.

If you have any questions or require any further information or assistance about Division 7A, please do not hesitate to contact our office on (02) 9687 3755.

Insurancebypanosadmin

Company Power of Attorney

What is a company power of attorney?

A company power of attorney is an important legal document made by a company that authorises a person (“the attorney”) to act on its behalf as well as to sign certain documents on its behalf.

Can your company lawfully appoint an attorney?

Section 124 of the Corporations Act 2001 gives all companies registered in Australia the legal capacity and powers of an individual both in and outside of Australia.  As a consequence, a company can appoint agents and attorneys to act on its behalf.

What is the difference between a general power of attorney and a company power of attorney?

A general power of attorney allows an attorney to act on behalf of an individual in relation to the individual’s assets and financial affairs, whereas a company power of attorney allows an attorney to act on behalf of the company in relation to the company’s financial affairs.

Can a general power of attorney be used for company matters?

If you have granted a power of attorney over your personal financial affairs, it will not extend to your company’s financial affairs and as such, a general power of attorney can not be considered as a substitute to a company power of attorney.

Who can be appointed as an attorney?

Any person can be appointed as an attorney (this can be an individual or another company). In the case of an individual, they will be required to be over the age of 18 years.

What are the reasons for having a company power of attorney?

  1. The most common reason for a company to have a company power of attorney is to avoid the company being effectively ‘frozen’ in the event that one of the directors (or the sole director) is temporarily unavailable to act on behalf of the company. For example, the director may travel overseas and be difficult to contact, or they may lose capacity due to illness or accident. Accordingly, the company may suffer issues with cash flow and be powerless to act in the case of unexpected situations without a director available.
  1. A company power of attorney can also be used to ensure the company continues to operate smoothly for the period following the death of a director and before the executor is lawfully able to act, which can take up to several months. In many cases, a company power of attorney is a critical document for business succession and estate planning purposes.

Whilst it is clear that the above-mentioned situations affect a company with a sole director, it will also affect companies with two directors as, generally speaking, the Corporations Act requires two directors to execute documents.

Who should you appoint as your company’s attorney?

You should take great care when deciding who you should appoint as the company’s attorney as well as the period and circumstances of their appointment. In the case of appointing an individual as the company’s attorney, it is common to appoint your spouse or your accountant.

How can a company power of attorney be structured?

A company power of attorney can be structured in a number of different ways to suit your particular needs. Some of the available options when deciding the scope of the power of the attorney include:

  1. General powers;
  2. Limited in its operation; or
  3. for a specific purpose.

Preparing a company power of attorney

We can assist you with preparing a company power of attorney for your company. 

If you have any questions or require any other information in relation to a company power of attorney, please do not hesitate to contact our office on (02) 9687 3755.

Tax Lawbypanosadmin

Amendment of Discretionary Trust Deeds to Exclude Foreign Persons as Beneficiaries

From 21 June 2016 a stamp duty and land tax surcharge applies to the acquisition and ownership of NSW residential property by foreign persons including foreign individuals, corporations and trusts. Surcharge stamp duty of 8% and surcharge land tax of 2% is payable on residential land by foreign persons.

The State Revenue Legislation Further Amendment Act 2020 (NSW) received Royal Assent on 24 June, 2020 and clarifies that a trustee of a discretionary trust is a foreign person if the terms of the trust do not prevent foreign persons being beneficiaries. The Chief Commissioner of State Revenue has also clarified the operation of these amendments in a recent Practice Statement, which have a broader operation than initially thought.

This means that discretionary trust deeds will need to be reviewed and amended to exclude foreign persons as beneficiaries, otherwise the discretionary trust will be up for surcharge stamp duty and surcharge land tax.

Direct and Indirect Interests

Surcharge purchaser duty and surcharge land tax applies not only where a discretionary trust holds property in NSW, but also where a trust holds an interest in a company which holds residential property in NSW (i.e. where there is indirect ownership) the tracing process will apply to deem a foreign interest in property in NSW.

Contemplate the following scenarios:

SCENARIO 1

  1.  The residential landholding discretionary trust (“Trust 1”) amends its trust deed to exclude foreign beneficiaries, as defined in Duties Act 1997 (NSW).
  2.  Trust 1 distributed trust income to another discretionary trust (“Trust 2”), which did not amend its trust deed to exclude foreign beneficiaries, and is considered as a foreign trust under   s104JA of the Duties Act 1997.

This would mean the distribution from Trust 1 to Trust 2 is ineffective under the trust deed of Trust 1, and would instead be distributed to either the default beneficiary, or if there is none, taxed to the trustee of Trust 1 at the top marginal rate as there is no beneficiary presently entitled to the trust income.

SCENARIO 2

ABC Pty Ltd enters into a contract for the purchase of residential property in NSW. All the shares in ABC Pty Ltd are owned by a discretionary trust. ABC Pty Ltd will be liable to surcharge purchaser duty if the trust does not contain a provision to exclude foreign beneficiaries.

Corporations are foreign persons if a shareholder who is a foreign person has a substantial interest in the corporation. For a discretionary trust, each beneficiary that the trustee has discretion to distribute the income or property to is deemed to have the maximum percentage interest in the income or property that the trustee may exercise a discretion to distribute to them. It follows that as the discretionary trust is the shareholder of the company, then the company is a foreign person. However, if the trust deed is amended to exclude foreign beneficiaries and the terms of the trust are incapable of being amended to allow a foreign person to become a potential beneficiary, then no surcharge purchaser duty is payable.

Similar rules apply to a unit trust where the units in the trust are held by a trustee of a discretionary trust.

When do discretionary trust deeds need to be amended?

Accordingly, a trust deed will need to be amended to exclude foreign persons as beneficiaries if any of the following situations apply:

  1. Where a trust is a beneficiary of another trust which owns (or will own) residential property;
  2. Where a trust holds a substantial shareholding in a company which owns (or will own) residential property;
  3. Where a trust holds units in a unit trust which owns (or will own) residential property;
  4. Where a trust does not hold any property, but may purchase residential property in the future;
  5. Where a trust has already purchased residential property and has not yet had their deed amended (despite all beneficiaries being Australian citizens); and
  6. Certain testamentary trusts created under a Will.

Foreign Persons

Should a trust deed contain named beneficiaries who are foreign persons, such beneficiaries must be removed from the trust deed as beneficiaries, otherwise the trust will be liable to surcharge purchaser duty and/or surcharge land tax. Further, such an amendment must be irrevocable.

Even if none of the beneficiaries are foreign persons, the trust deed will still need to be amended.

How to amend your discretionary trust deeds

Discretionary trust deeds need to be amended prior to 31 December, 2020 to avoid inadvertently attracting liability for surcharge duties.

If you require your discretionary trust deed to be amended by us to exclude foreign person as beneficiaries, please click here to access our Information Schedule. Our Information Schedule should be completed and returned to us.

If you have any questions or require any other information in relation to the amendment of discretionary trust deeds to exclude foreign persons as beneficiaries, please do not hesitate to contact our office on (02) 9687 3755 or via email at panos@panos.com.au.

Please note that our blog post is of a general nature and is not intended to be a substitute for legal advice.

Criminalbypanosadmin

Grant of Probate

What is probate?

Probate is a court order made by the Supreme Court of NSW which confirms that the Will of the deceased person is valid and gives permission to the Executor to distribute the estate in accordance with the deceased person’s Will.

Who can make an application for probate and when must an application be made?

The Executor named in the Will can make an application for probate. An application for probate should be made within 6 months of the death of the deceased. If an application is made outside of this time, the Executor will need to explain the reason for the delay to the Court.

What if the Executor renounces probate or no Executor is appointed?

If the Executor renounces probate, the substitute Executor named in the Will is able to take on the role. If no substitute Executor is named in the Will or the substitute Executor is not able to act, the Court is able to instead appoint an administrator of the estate.

Is an Executor legally required to make an application for probate?

The Executor is not legally required to apply for probate, however there are a number of circumstances in which probate will be required, such as:

  • If the deceased owned real estate in either their own name or as tenants in common
  • If asset holders require a grant of probate before they will release or transfer the assets of the estate (this is common in the case of banks, share registries and Government departments or agencies)

There are also a number of legal and practical considerations that an Executor should consider when deciding whether or not they should apply for probate.

What are the reasons for applying for probate?

There are two main reasons to apply for probate:

  1. Probate provides the Executor with the legal authority to administer the assets of the deceased. As such, if the Executor administers the assets of the estate without Probate, they may be held personally liable on the basis that they were not legally authorised to deal with the assets of the estate; and
  2. Probate provides the Executor with protection from any claims which may be brought by a creditor or beneficiary of the estate.

When is probate not required?

There are a number of circumstances where an application for probate is not required, namely:

  • If the deceased only had a minor number of personal possessions/ assets and the value of those assets are small
  • The deceased only owned assets (for example, real estate) as a joint tenant (this is because the asset will pass to the surviving joint tenant)

How much does a grant of probate cost?

The filing fee payable to the Supreme Court of NSW will be dependent on the value of the estate and is only applicable if the estate has a value greater than $100,000.

What documents/ Information is required to apply for probate?

The Supreme Court of NSW will require the following documents in order to grant probate:

  • The original Will of the deceased and any Codicils to the Will
  • The deceased’s original death certificate

The information we will require to in order to prepare the application for a grant of Probate includes:

  • A statement of the value of the deceased’s assets and liabilities as at the date of their death
  • The details of the beneficiaries under the Will

If you or your clients would like our assistance to obtain a Grant of Probate, please complete our information schedule and email same to panos@panos.com.au. To access our information schedule, please click here.

If you require more information, or have any further questions in relation to the Grant of Probate, please do not hesitate to contact Shannon Nand of our office on (02) 9687 3755 or via email on shannon@panos.com.au.

Please note that our blog is of a general nature and is not intended to be a substitute for legal advice.

Internationalbypanosadmin

Enduring Power of Attorney

What is an Enduring Power of Attorney?

An Enduring Power of Attorney is a legal document that allows a nominated person to make decisions on your behalf when you no longer have capacity to make those decisions.

Capacity refers to having the ability to understand the significance of the action or decision you are making – for example, you may lose capacity if you were to suffer a serious illness, injury or disability and become unable to make decisions on your own. This may occur if you were to suffer a stroke and become unable to communicate, or if you were to develop dementia.

An Enduring Power of Attorney allows you to nominate a trusted person or persons to make decisions that relate to your property, legal and financial affairs – these may include buying and selling property, signing legal documents and paying bills.

You have the ability to limit your attorney’s powers to certain circumstances – for example, you may wish for your attorney to only deal with your real property, or you may require them to consult with your family members before making a decision.

Who should I appoint as my Attorney?

It is very important that your nominated attorney is an adult person that you trust to manage your affairs responsibly.

It is possible for you to appoint multiple attorneys to manage your affairs, and you have the ability to decide how each attorney will work together. For example, your attorneys may be appointed:

  • jointly – your attorneys must act together when making decisions;
  • severally – your attorneys may make decisions individually without consulting the other attorneys; or
  • jointly and severally – your attorneys may make decisions together or independently.

It is often beneficial to also appoint a substitute attorney who will be able to take over the management of your affairs in the event that your nominated attorney is unwilling or unable to fulfil their role.

Why should I have an Enduring Power of Attorney?

An Enduring Power of Attorney is an extremely important document, as it allows for your financial affairs to be managed by a trusted person in the event that you lose capacity.

Having an Enduring Power of Attorney in place allows you to have the peace of mind of knowing that your affairs will be dealt with by someone you trust and that decisions will be made in a way that you would like them to be made.

Preparing an Enduring Power of Attorney

We can assist you with preparing an enduring power of attorney as part of your estate planning.

If you have any questions or require any other information in relation to an enduring power of attorney, please do not hesitate to contact our office on (02) 9687 3755.

Businessbypanosadmin

Enduring Guardianship

What Is An Enduring Guardianship?

Similar to an Enduring Power of Attorney, an Enduring Guardianship is a legal document that allows you to nominate a trusted person to make decisions about your health and lifestyle in the event that you no longer have capacity to make those decisions.

Your Enduring Guardian cannot make decisions relating to your finances, property or legal matters.

Your Enduring Guardian may make decisions relating to:

  • where you live;
  • what kinds of personal services you may receive; and
  • any healthcare and medical services you may receive.

Who should I appoint as my Enduring Guardian?

Much like the person appointed under your Enduring Power of Attorney, your Enduring Guardian should be an adult person whom you trust. You may choose to appoint your attorney as your Enduring Guardian.

As your Enduring Guardian will be dealing with more personal affairs, it is recommended that you appoint a person who understands your values and beliefs and is able to make difficult, often emotional decisions. You should have a clear discussion with your Enduring Guardian about your wishes and ensure that you keep them updated of any changes.

As with your Enduring Power of Attorney, you have the ability to appoint multiple Enduring Guardians and may also appoint a substitute Enduring Guardian.

It is also important to note that your enduring guardianship will be automatically revoked when you get married, unless you marry the person you appointed as your Enduring Guardian.

Preparing an Enduring Guardianship

We can assist you with preparing an enduring guardianship as part of your estate planning.

If you have any questions or require any other information in relation to an enduring guardianship, please do not hesitate to contact our office on (02) 9687 3755.

Criminalbypanosadmin

High Court Rules on Employee vs Independent Contractor Distinction

The distinction between whether a worker is an employee or an independent contractor for the purposes of PAYG withholding, payroll tax, workers compensation, superannuation and other employee entitlements is one that has come under increased scrutiny in recent times. However, the High Court has recently handed down two key decisions that provide much greater guidance and certainty as to how the distinction may be determined.

In short, the cases of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (“CFMMEU”) and ZG Operations Australia Pty Ltd v Jamsek (“ZG Operations”) clarify the High Court’s position that where there is a contractual agreement in place, the legal rights and obligations under the contract should be given primary consideration in determining whether a worker is an employee or a contractor. This position departs from the previous multi-factorial test that was confirmed by the High Court in the 2001 case of Hollis v Vabu, wherein a number of indicia of employment would be weighed against how the relationship between the parties operates in practice. Previously, the courts operated in a way that looked at the substance of the working relationship as opposed to the written form of any agreement that was in place; however, these two key High Court decisions have conclusively stated that the written contract will prevail over the substance of the working relationship and how it plays out in practice.  

The case of CFMMEU concerned a young labourer who had entered into an Administrative Services Agreement with a labour hire company, wherein he was described as a “self-employed contractor”. He worked on building sites run by builders who were clients of the labour hire company, but there was no contractual relationship between himself and the builder. The High Court considered that the terms of the contract between the labourer and the labour hire company lent to the conclusion that he was working as an employee, due to terms in the agreement that provided the labour hire company:

  • determined the labourer’s amount of pay, and paid the labourer directly;
  • retained a degree of control over the labourer that was fundamental to its business as a company providing workers to hosts; and
  • was able to terminate the agreement if the labourer failed to follow its directions, or the directions of the client builder.

Importantly, the High Court made it unambiguously clear that the label that the parties choose to place on their working relationship is entirely irrelevant. Instead, focus is to be given to the rights and obligations contained within the contract, rather than the nature of the relationship as it operates day by day.

Additionally, the case of ZG Operations provides similar clarification in relation to contractor arrangements. In this case, two truck drivers entered into partnership agreements with their respective wives and entered into contracts for delivery services with the company, ZG Operations. The truck drivers purchased and maintained their own trucks from which they carried out the deliveries. The High Court found that the terms of the contract were indicative of a principal and independent contractor arrangement, due to the fact that:

  • the contracts effectively required each of the partnerships to purchase, operate and maintain their own truck for the delivery of ZG Operations’ goods;
  • ZG Operations had little opportunity to exercise control over the provision of the delivery services; and
  • while the truck drivers did have set working hours under the contract, an element of flexibility was incorporated into its terms to allow for extra remuneration to be provided in the case of extra work.

Therefore, these recent decisions handed down by the High Court can allow for a degree of extra certainty for parties who have their working arrangements set down in writing. Provided that the relevant contract is properly drafted, the fact that the contract terms will be given primary consideration should provide that the working relationship between the relevant parties does not attract any adverse consequences in relation to PAYG withholding, payroll tax, workers compensation, superannuation and other employee entitlements.  

We can assist you with the preparation of appropriate contract documents for a variety of working arrangements.

If you have any questions or require any further information about working arrangements or payroll tax, please do not hesitate to contact our office on (02) 9687 3755.

Insurancebypanosadmin

Payroll Tax and Medical Centres

The New South Wales Civil and Administrative Tribunal (“NCAT”) has recently ordered a company that owns a chain of medical centres to pay nearly $800,000.00 worth of payroll tax over a five year period.

Generally, employers are liable to pay payroll tax on all taxable wages under the Payroll Tax Act 2007 (NSW) (“the Act”). However, where the workers are employed as contractors under service agreements, as many medical practitioners are, their earnings are usually exempt from payroll tax because they are not classified as “working for” their employer. Rather, they are taken to be providing services to the public generally.

However, the recent case of Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue has found that medical centre operators employing medical practitioners under service agreements may still be subject to payroll tax, as the medical practitioners may be considered to be supplying services to the medical centre under their contracts.

Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue (“Thomas and Naaz”)

In this particular case, Naaz Pty Ltd (“Naaz”) entered into written service agreements with various doctors, whereby Naaz would provide them with rooms at its medical centres in exchange for the doctors seeing patients. The doctors would be paid an amount equal to 70% of the claims paid by Medicare under their name, and the remaining 30% would be retained by Naaz as a service fee. Naaz argued that the doctors were providing services to patients, as opposed to services to Naaz, and therefore they should not be liable for payroll tax. However, the Chief Commissioner successfully argued that the services being provided by the doctors were necessary for Naaz to carry on its business, and therefore the services formed part of the conduct of the business.

One of the determinative factors in this decision was the nature of the service agreements. The agreements contained a number of clauses that ultimately led to the conclusion that the doctors were providing services to Naaz under “relevant contracts” under the Act, including:

  • the doctors were provided with work rosters;
  • in some circumstances there were payments of hourly rates;
  • there was a leave policy in place;
  • the doctors were obligated to comply with protocols and promote the medical centre business; and
  • there was a restrictive covenant that imposed a five kilometre “exclusion zone” around the medical centre that would stay in place for two years after the doctors leave the practice.

NCAT also had to consider whether the doctors were performing services that they would ordinarily perform to the public in general, or if they were performing services for Naaz. This issue turned on whether the doctors were also providing their services at other medical centres unconnected to Naaz. In this case, Naaz provided a spreadsheet of over 40 doctors who also worked at other medical centres, along with two letters relating to two separate doctors evidencing that they supplied their services elsewhere. NCAT found that the letters were sufficient evidence to find that those two doctors were performing services to the public in general, but it could not be inferred from a simple spreadsheet that the rest of the doctors practising at the medical centres were earning income outside of Naaz’s medical centres.

Overall, the NCAT found that the services provided by the doctors in the medical centres were the performance of work for Naaz, and that their payments were sufficiently connected to that performance of work to form part of a relevant contract for the purposes of payroll tax. Therefore, the NCAT found that Naaz was liable to pay their payroll tax liability.

Revenue NSW

In light of this recent development, Revenue NSW is currently in the process of developing a practice note or ruling in relation to the application of payroll tax to service agreements. It is expected that the guidance to be published by Revenue NSW will confirm the approach taken in Thomas and Naaz and provide guidelines as to when arrangements between medical centres and their practitioners will be classified as “relevant contracts” for the purposes of payroll tax.

What does this mean for my medical practice and centre?

As these kinds of service agreements are quite common in the conduct of medical practices and centres, it is important to take note of the NCAT’s findings and look closely at the agreements that are being entered into. It is vital to make sure that these agreements are properly drafted, in order to ensure that the medical practice and centre is not faced with an unwanted payroll tax liability.

We can assist you with preparing appropriate practitioner service agreements.

If you have any questions or require any further information about payroll tax or practitioner service agreements, please do not hesitate to contact our office on (02) 9687 3755.

UPDATE: TAXPAYER APPEAL TO NSW COURT OF APPEAL DISMISSED

In a disappointing turn of events, the appeal by Naaz to the NSW Court of Appeal against the NCAT’s finding that the payments made by the medical centre to the doctors were taxable wages has been dismissed.

On 14 March 2023, the NSW Court of Appeal refused to grant Naaz leave to appeal against the decision of NCAT and the later decision of the NCAT Appeals Panel (which upheld the original decision of NCAT). The NSW Court of Appeal declined to hear Naaz’s appeal against the decision, on the grounds that the challenges raised did not relate to questions of law. Rather, the appeal by Naaz was based on the substantive facts of the case. However, as no questions of law were identified, the case could not be heard in the NSW Court of Appeal.

Unfortunately, the refusal of the NSW Court of Appeal to hear the appeal case means that many of the substantive points of contention were not properly addressed. This leaves many medical centre operators in the dark in respect of how they should treat the payments they make to medical practitioners who utilise their facilities to see patients.

For the moment, we would recommend reviewing the practitioner service agreements used by medical centre operators in light of this new development, as we await published guidance from Revenue NSW.

Payroll Tax and Medical Centres

Internationalbypanosadmin

Payroll Tax: Recent Developments

The ongoing saga of the application of payroll tax to medical centres has taken another turn.  On 11 August 2023, Revenue NSW released its payroll tax ruling on the application of the contractor provisions to medical centres in NSW.

The new ruling has solidified the position taken by the NSW Court of Appeal in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue, where the Court found that the “relevant contract” provisions of the Payroll Tax Act applied to arrangements between a series of medical centres and the general practitioners who worked from those centres. This meant that payments made by the medical centres to the practitioners were deemed to be taxable wages under the Payroll Tax Act and therefore subject to payroll tax in NSW. The ruling also incorporates the decision of the Victorian Supreme Court of Appeal in Commissioner of State Revenue (Vic) v The Optical Superstore, which dealt with the application of the contractor provisions as they related to arrangements between medical and optometry centres and their practitioners.

In Thomas and Naaz, one of the key determinative factors that the Court took into account was that the medical centres were collecting the practitioner’s fees and holding them in an account in the name of the medical centre. The medical centre would then deduct a 30% service fee from each individual practitioner’s billings before paying the practitioner the fees that he or she had earned. All but three practitioners chose to follow this service model, and it was these payments that the Court found were subject to payroll tax. It is notable that where the doctors elected to collect their own fees and then remit a service fee to the medical centre, no payroll tax liability arose. The ruling issued by Revenue NSW does not address this kind of arrangement.

Another key element of the Thomas and Naaz and Optical Superstore cases was the degree of control that the medical practice is able to exercise over its practitioners. In its payroll tax ruling, Revenue NSW makes it clear that where the medical centre is able to exercise a higher level of administrative control over its practitioners under its service agreements, it is more likely that the service agreements will be classified as “relevant contracts” for the purposes of the payroll tax law. 

Notably, the new payroll tax ruling does not incorporate any kind of payroll tax amnesty similar to those which were announced in Queensland and South Australia. However, the NSW Parliament has recently passed a new Bill which provides general practitioner practices with a 12-month amnesty from the payroll tax provisions. The aim of this amnesty is to allow further consultation between the government and the Royal Australian College of General Practitioners.

So what does this mean for medical centres in NSW?

Essentially, the amnesty puts a pause on all payroll tax audits for a period of 12 months, starting from the time the new Bill commences. This means that Revenue NSW will not be permitted to conduct an audit of a medical centre’s arrangements with a general practitioner, and no interest or penalty tax can be imposed on any tax shortfalls for the 12-month amnesty period.

Interestingly, the 12-month amnesty is not limited to the application of the “relevant contract” provisions – rather, it will apply to all general practitioner arrangements, even where the practitioner is an employee under the law (and not a contractor). The amnesty therefore provides a welcome relief to general practitioner medical centres as they grapple with the potential impact of the new payroll tax ruling on their practice.

However, it must be noted that this amnesty only applies to general practitioners. This means that all other healthcare practitioners – such as dentists, physiotherapists, psychologists and specialists – will immediately be subject to the new payroll tax ruling.

We would advise that all healthcare professionals should review their existing practitioner agreements and their practice structure in light of the new payroll tax ruling issued by Revenue NSW. It is important to note that Revenue NSW generally has the power to go back up to five years to assess or reassess your practice for payroll tax. As the new payroll tax ruling has retrospective effect from 1 July 2018, it is important that all practices review their agreements with utmost priority.

We can assist your practice in reviewing and amending any practitioner agreements and assessing your practice structure. If you have any questions or require advice about your existing arrangements or structure, please do not hesitate to contact our office on (02) 9687 3755.

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Bendel’s Case and Potential Changes to Division 7A

On 12 November 2025, the ATO released new draft guidelines in connection with the tax treatment of rental property expenses, including strict rules for holiday homes that are also used to earn rental income during an income year.

The new draft guidelines comprise of Draft TR 2025/D1, Draft PCG 2025/D6 and Draft PCG 2025/D7 (“the Draft Guidelines”). Under the Draft Guidelines, the ATO is of the view that most rental property expenses relating to holiday homes are in fact non-deductible.

What properties are being targeted?

For the avoidance of doubt, a ‘holiday home’ is defined as a property that is used (or held for use) for one’s holidays or recreation (or the holidays or recreation of one’s family members and friends for no rent, or at a reduced rate). A ‘property’ refers to land, a building, or part of a building or other structure that you own or lease.

The Draft Guidelines consider that where personal use of a property is prioritised over income production (i.e. rent), particularly during peak holiday periods such as school holidays, Christmas and New Years breaks, the property will be considered a ‘leisure facility’.

Section 26-50 of the Income Tax Assessment Act 1997 (“the 1997 Act”) defines a ‘leisure facility’ as “land, a building, or part of a building or structure used (or held for use) for holidays or recreation”. Examples can include a home on the coast or even an apartment in the CBD or capital city in which the owners only reside in during peak holiday periods.

Who is affected by the Draft Guidelines?

The Draft Guidelines appear to only apply to owners who are individuals. However, it may be that the ATO forms the view that they should also apply to companies and trusts.

For instance, a holiday home held by a trust may be considered a leisure facility under section 26-50 of the 1997 Act if it is mainly used for holidays and recreation by the beneficiaries or controllers of that particular trust.

It is therefore important that owners of holiday homes still consider the effect of the Draft Guidelines even if the holiday home is owned by a related company or trust.

What deductions cannot be claimed?

Section 26-50 of the 1997 Act denies deductions for losses or outgoings incurred by owners of a leisure facility, unless an exception applies. These include deductions for mortgage interest payments, council rates, land tax and maintenance fees to the extent that they relate to the use or ownership of a leisure facility. Such expenditure may form part of the owner’s cost base of the asset for CGT purposes.

However, in the Draft Guidelines, the ATO regards rental property expenses incurred in generating rental income for a leisure facility to be allowable deductions. This can include advertising fees paid as well as commissions and fees paid in connection with cleaning and maintaining a leisure facility for guest stays.

What exceptions are available under section 26-50 of the 1997 Act?

Section 26-50 of the 1997 Act also outlines the available exceptions with owning a leisure facility. This includes if at all times in the relevant income year, a leisure facility is held for sale in the ordinary course of your business of selling leisure facilities, or a leisure facility is used or held mainly to provide any of the following:

(a) in the ordinary course of your business of providing leisure facilities for payment; or

(b) to produce your assessable income in the nature of rents, lease premiums, licence fees or similar charges; or

(c) for your employees to use; or

(d) for the care of your employees’ children.

Points c) and d) above do not apply to employees who are members or directors of the company.

Under section 26-50(4) of the 1997 Act, a part year exception applies in the event that a leisure facility is used or held in any of the above circumstances during part of the relevant income year. This requires a permanent change to the way in which a leisure facility is being used or held, rather than a mere seasonal change of its use.

What does this mean for my clients?

As the ATO will now be cracking down on taxpayers who own holiday homes and continue to claim rental property deductions, it is important to take note of the Draft Guidelines, as the ATO will begin applying the above view from 12 November 2025, with a transitional start date of 1 July 2026 for any pre-existing arrangements in place.

In other words, the ATO has indicated that it will not take action to review rental property expenses incurred and deductions claimed before 1 July 2026, provided that they were incurred and claimed under an existing arrangement prior to 12 November 2025. Any new properties or new arrangements (e.g. new loans) entered into after this date will therefore not benefit from the Draft Guidelines.

It is therefore vital to ensure that clients are only claiming the allowable deductions pursuant to section 26-50 of the 1997 Act.

In the event of an ATO review or audit in relation to this issue, we can assist clients throughout this process and provide clients with tailored advice based on their circumstances.

Public commentary on the Draft Guidelines closed on 30 January 2026.

If you have any questions or require any further information about this article, please do not hesitate to contact our office on (02) 9687 3755.