MedCo arrangements • Small business • Tax agent insights
At a Glance
- Payroll tax now captures many contractor arrangements
- GST agency models do not protect against payroll tax
- Practitioner companies & trusts create PSI and payroll-tax risks
- Direct billing reduces exposure but is harder to implement
- Poor inter-entity service fees trigger ATO & OSR scrutiny
- Unit trusts remain the most flexible ownership structure for clinics
Understanding these rules is essential for any medical practice operating in 2025 and beyond.
Understanding the MedCo Model
A MedCo refers to the service-entity/service-fee model used by Medical centres, dental practices, physiotherapists, and allied health centres in Queensland, where practitioners run their own businesses and pay the Clinic for administration and rooms.
Medco’s are under significant compliance scrutiny in 2025. The combination of Payroll Tax (Ruling PTAQ000.6.2), GST agency rules, GST-free/Taxable supplies, and Personal Services Income, combined with poorly designed MedCo structures, is creating significant risk for practices of all sizes.
Here’s what every Medco practice owner, practice manager and practitioner needs to understand.
Payroll Tax : How are Medical Practices at Risk?
QLD Payroll Tax Ruling Number PTAQ000.6.2
The Queensland Revenue Office now applies payroll tax to payments made to or on behalf of practitioners. Regardless of their employment or contracting status, they may be considered as ‘Deemed Wages’ for payroll tax purposes. Under the new rules, you may be viewed as the “employer”, with up to 4.75% payroll tax on the total practitioner payments. Payroll tax assess factors such as:
- Who controls the patient workflow
- Who handles bookings, billing and reception
- Who receives the patient’s money
- How practitioners are advertised
- How closely integrated practitioners work with the Clinic
- Branding and Advertising Matters Too
Even with a watertight Contractor/Service Fee agreement, you may still have a “relevant contract” for payroll tax purposes.
GST vs Payroll Tax: Why They Don’t Match
GST and Payroll tax do not work in sync, and what works for one won’t necessarily work for the other. It makes complete sense, right?!
Many Medical Centres operate under a GST Agency Model (GST Act Section 153-A) to obtain GST relief on patient fees. Effectively, the Practice collects patient fees as an Agent on behalf of the practitioner. Under the GST law, this works well:
- The Practitioner remains the “supplier” and Healthcare services remain GST-free (section 38 of the GST Act)
- The Practice is only providing admin/services
However, payroll tax doesn’t look at the legal form – it looks at the substance. It is a very real possibility that you have a valid GST Agency relationship outlined in your Practitioner/Service agreement; however, the Medical Practice is still liable for Payroll Tax.
When Is Payroll Tax Likely to Apply?
Your Practice is at a higher risk where:
Medicare Assignment or Bulk-Billing routed through the Practice account rather than directly to the practitioner
Patient or Medicare fees are paid to the Practice first
Fees flow through a clearing account
Practitioners work via a company or trust
The Practice controls bookings, rosters or workflow
The Practice markets the practitioner as part of “our team”
The Clinic manages billing, pricing and workflows
These scenarios often create a ‘relevant contract’, exposing the Clinic to payroll tax on practitioner payments.
Note: Although this article primarily focuses on Queensland’s ruling, similar payroll tax provisions are now applicable in NSW, Victoria, and other states.
The Direct-Billing Model: Lower-Risk but Harder to Implement
The QLD Office of State Revenue clearly wants its share. They have, however, provided a clear path to circumventing payroll tax under the direct-billing model. The direct billing model aligns well with both GST and payroll tax legislation.
Individual Practitioners operate as sole traders
Patient fees go directly to the practitioner (not via the Clinic or a clearing account)
The practitioner pays the Practice a service/room fee, not a % of fees
The practitioner remains genuinely independent
The Clinic doesn’t control patient allocation or billing
Branding and website wording should reflect that practitioners operate independently, not as part of the larger Clinic.
While this model may reduce payroll tax exposure, it requires robust systems, well-defined contracts, and brand alignment, which is often difficult to achieve in the real world.
Quick Example:
High-Risk: Patients pay the Practice, which deducts a 30% service fee and remits the balance to the practitioner.
Low-Risk: Patients pay the practitioner directly, and the practitioner pays the Practice a fixed weekly room fee independent of billings.
Individual Medical Practitioner Structuring: Sole Trader Vs Company Vs Trust
Practitioners often utilise companies or trusts for asset protection and tax planning purposes. However:
- Companies and trusts commonly fail the Personal Service Income test for Medical Practitioners
- They increase payroll tax risk for the Practice
- They complicate the service fee and GST effectiveness
Most importantly, PSI can be applied to any practitioner operating through a company or trust, regardless of their specialty or whether they see private or bulk-billed patients. If PSI applies, income must generally be attributed back to the individual, limiting both tax planning and distribution flexibility.
These days, a sole trader model with strong insurance and a well-designed service agreement is the cleanest option for most practitioners.
Practice Structuring: Why the Unit Trust Model is Best?
Many older medical centres still operate under the following structures:
Partnerships – Increased liability for partners and low asset protection.
Companies – More difficult to bring in or remove partners, potential stamp duty issues, and no access to the general CGT discounts on the sale of assets.
Hybrid service entities: Can have unclear fee flows, making them overly complicated. Additionally, the ATO and Office of State Revenue often look through them for regulatory purposes.
At TaxDigital, we are finding that Medical Practices are increasingly adopting a Unit Trust with a Corporate Trustee as their entity structure. This structure offers several advantages, including:
- Easy entry and exit for partners through unit transfers
- Clear separation between ownership and operations
- Flexibility in allocating profits
- Better alignment with Medical Company (MedCo) models
- Allows the 50% CGT discount on goodwill and the sale of assets
- Resilience during ownership changes
Service Fees, Management Fees & Common Mistakes
Incorrect service-fee agreements and payment flows create costly issues, including GST liability, concerns about Personal Services Income, increased scrutiny from the ATO, and payroll tax risks. Common errors include:
- Percentage-based service fees with no commercial foundation are risky, as they support the Revenue Office’s ‘relevant contract’ argument
- Management Fees are unsupported and used to ‘shift’ profits
- Undocumented inter-entity transactions
- GST is not applied in line with the legislation
- Fees & Billing practices inconsistent with MedCo arrangements
It is crucial to establish clear service-fee agreements, conduct commercial benchmarking, and create well-structured inter-entity documentation.
The ATO’s service-entity guidance (ATO’s06/2) also requires that fees charged between related entities be commercially justifiable. Non-commercial or artificial fees can attract ATO review, particularly where they appear to shift profit or disguise remuneration.
Why this matters now: Payroll tax reviews and audits of medical centres have sharply increased in Queensland. Practices should review their arrangements well in advance of the 2026 compliance cycle, as it is expected to become even tighter.
The good news is that most risks can be managed—and often significantly reduced—with the proper structure, agreements and payment-flow design.
How Can TaxDigital Help Your MedCo Business?
TaxDigital works with medical centres, allied-health professionals and medical practitioners across Australia to:
- Review your practitioner contracts and service-fee models – analyse if your current structure creates a payroll-tax or other compliance risk.
- Map your payment flows – identify whether money flows could trigger ‘deemed wages’
- Design low-risk billing practices, including compliant direct-billing models and service-fee arrangements that comply with relevant regulations.
- Support with restructuring and implementation – Clear practical advice on how to implement and maintain.
- Provide ongoing tax and accounting support – Bookkeeping, wage, practitioner Fee Statements, Year-end and Financial Statements and Tax returns tailored for medical professionals.
If you’re unsure whether you’re at risk of payroll tax or your systems and agreements are compliant, book a discovery call today on 0407 438 849 or email [email protected].
Let’s ensure your compliance and reduce your risks as much as possible for 2026 and beyond.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek personalised tax advice from us at TaxDigital. Information is current as of the date of issue and may be subject to change.