Missing, expired or poorly drafted facilities and services agreements derail GP practice sales. Buyers cannot assume agreements without novation or assignment clauses, and unresolved payroll tax exposure transfers with the business. Buyers who identify these gaps during due diligence reprice the deal, demand indemnities or withdraw. A pre-sale contract audit is standard practice.
A facilities and services agreement is the contract between a practice entity and each independent GP who consults from the practice. It documents the terms under which the practice provides rooms, staff, reception, billing infrastructure, equipment and administrative support, and the GP pays a service fee in return. If these agreements are missing, expired, unsigned or poorly drafted, the buyer has no enforceable basis for revenue continuity after settlement.
What the agreement covers
Avant, Australia's largest medical defence organisation, distinguishes between two contract structures: 'service agreements' under which the practitioner runs their own business and engages the practice to provide management services, and 'contractor agreements' under which the practice engages the practitioner. In the dominant Australian model, the GP operates independently and pays the practice a service fee, typically a percentage of billings. The practice provides facilities and administrative support to the GP, not the other way around. This distinction has direct consequences for payroll tax classification.
The agreement should specify the service fee structure and calculation method, the scope of services the practice provides, notice periods, termination provisions, obligations on exit, including patient record handover, dispute resolution and the mechanics of how Medicare billings are collected and disbursed.
Contracting entity
A GP may sign a facilities and services agreement in their own name as a sole trader, through a company or through a trust. The contracting entity affects tax treatment, superannuation obligations and the mechanics of transferring agreements on sale. MDA National advises that both the practice corporate entity and any GP service entity should be clearly identified in the written agreement, with ABNs noted. If the practice owner does not know the actual counterparty for each GP, due diligence will expose the gap.
Novation and assignment on sale
When a practice sells, the new owner must assume its existing facilities and service agreements. Novation replaces one party to a contract with another, transferring both rights and obligations. The original agreement terminates, and a new agreement on the same terms takes effect between the GP (or their entity) and the buyer. Assignment transfers rights only, without necessarily releasing the original party from obligations.
Novation requires the consent of all three parties: the seller, the buyer and the GP or their contracting entity. Assignment may not require the GP's consent if the original agreement permits it, but many agreements either restrict assignment or are silent on the point.
If existing agreements contain neither mechanism, the buyer cannot assume them without each GP individually agreeing to novate. The buyer's revenue model then depends on every GP choosing to sign a new agreement. Any GP who declines or uses the ownership change to renegotiate terms opens a gap in the revenue base.
If the buyer cannot transfer the agreements on sale, they must negotiate individually with each GP. Buyers who discover this during due diligence will reprice the deal or withdraw.
Payroll tax exposure
The classification of GP working arrangements has been under sustained regulatory scrutiny since Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Victorian Court of Appeal) and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (NCAT). In Thomas and Naaz, the operator of three medical centres in western Sydney was ordered to pay $795,292 in payroll tax after the Tribunal found that payments to contracted GPs constituted 'taxable wages' under the NSW Payroll Tax Act 2007. The NCAT Appeal Panel upheld the decision in 2022, and the NSW Court of Appeal dismissed the final appeal in March 2023.
Hall & Wilcox noted that, while the case concerned NSW legislation, the relevant contract provisions are largely mirrored across most states and territories. Revenue offices outside NSW are expected to apply the ruling to comparable arrangements.
Jurisdictional responses have varied and continue to change. Practices should discuss their specific exposure with an accountant or legal adviser familiar with current state and territory positions.
For practice sales, unresolved payroll tax exposure transfers with the business. Buyers either discount the price to account for the liability, require indemnities from the seller or decline to proceed.
Due diligence questions
Buyers' legal advisers check whether:
- All agreements are current and signed
- The contracting entity on each agreement matches the entity billing Medicare
- The agreements contain novation or assignment clauses permitting transfer on sale
- Service fee structures are documented and commercially reasonable
- Notice and termination provisions give the buyer adequate transition runway
- The written terms align with actual working arrangements on payroll tax and classification-sensitive points
Revenue NSW audits regularly uncover a specific mistake called a 'grouping error.' This happens when a practice operates through multiple related entities, for example, a separate company for the building, another for the staff and individual GP contractor entities, but fails to recognise that these entities should be treated as a single employer for payroll tax purposes. When entities share the same owner or controlling person, or share staff between them, state revenue law groups them as a single employer and applies the payroll tax threshold to their combined wage bill. Practices that have not accounted for this can face substantial back payments of unpaid tax, sometimes covering several years.
Common failures
Many practices operate with no formal agreements, relying on verbal understandings that have persisted for years. Others have agreements signed at the start of the relationship that are never updated, even though working arrangements, fee structures, or GP entities have since changed.
Expired agreements create ambiguity. If a GP's agreement expired three years ago and they continued consulting, the buyer cannot rely on the expired terms and must assume the GP could leave at any time without contractual constraint. Unsigned agreements are treated as non-existent: a contract drafted but never executed provides no legal protection and no basis for novation.
Agreements that do not identify the correct contracting entity are defective. If a GP signed in their personal name but now bills through a company or trust, the agreement does not reflect the current legal relationship. Agreements that are silent on assignment or novation force the buyer into individual renegotiations with each GP at the point of sale.
Pre-sale contract audit
Practices planning to sell within three years should audit all GP agreements. The audit confirms that:
- Every practising GP has a current, signed facilities and services agreement
- The contracting entity on each agreement matches the entity currently billing Medicare
- Each agreement contains a workable novation or assignment clause
- Service fee structures are documented and reflect actual arrangements
- Notice and termination provisions are adequate
- The payment flow for Medicare billings is specified and consistent with the practice's payroll tax position
Well-drafted service agreements reduce friction during transitions. Agreements updated pre-sale, with GP consent obtained before any sale process begins, avoid the cost and disruption of renegotiations during due diligence.
A pre-sale payroll tax review by an accountant or tax adviser familiar with current state-by-state positions should assess exposure based on actual working arrangements and contracting structures, not just agreement wording.