The third parties that run these centres generally encourage practitioners to start work or continue to work from their centres. They may offer lump sum payments for this purpose. The Australian Taxation Office (ATO) are concerned that some healthcare practitioners may be incorrectly treating these payments as proceeds from the disposal of a capital asset when it’s more likely to be ordinary income. They have then applied the small business CGT concessions to reduce the capital gain, in many instances reducing it to nil. This may result in underpayment of tax and expose them to later tax adjustments and penalties.
The ATO concerns may affect you if your arrangements have most or all the following features:
- A healthcare centre operator provides you with fully equipped consulting rooms, administrative services, clerical staff and facilities as necessary for you to provide healthcare services. The agreements entered typically state that there is no employment relationship between you and the operator.
- In return for these facilities and services, you are required to pay the operator an agreed percentage of the receipts for the healthcare services you provide.
- You are required to provide healthcare services from the healthcare centre for an agreed minimum period of time, minimum weekly working hours and working patterns.
- You are required to use your best endeavours to grow and promote the interests of the healthcare centre.
- The operator pays you a lump sum and it is described as consideration for a restraint imposed, for goodwill, for other terms or conditions, or for a combination of the three.
- The payment is ordinarily made when you enter into the agreement or start to provide healthcare services to patients from the healthcare centre (whichever is the later) or whenever the agreements relating to the provision of healthcare services are renewed.
The ATO is of the view that generally these lump sum payments are not capital receipts but are income. The lump sum will typically be ordinary income of the practitioner for providing services to their patients from the healthcare centre. The result is that practitioners are required to include the full amount of the lump sum payment in their assessable income. This is in accordance with section 6-5 of the Income Tax Assessment Act 1997.
The ATO have formed this view because:
- the lump sum payment is an inducement for the practitioner to enter into the agreements to provide healthcare services from the healthcare centre;
- the lump sum is fundamentally connected to the practitioner's provision of those services;
- in the alternative, the lump sum payment represents a profit or gain from an isolated transaction in the course of the practitioner providing healthcare services;
- the mere fact the payment is a one-off lump sum, or expressed to be principally consideration for the restraint imposed, for the goodwill or for the other terms or conditions, does not define it as having the character of a capital receipt;
- there is no transfer of goodwill as the third party operating the healthcare centre does not acquire the right to provide healthcare services from the practitioner; and
- the practitioner does not cease to provide healthcare services.
Example: A new doctor joins the practice
Dr Smith has recently been approached by San Souci Medical Centre, a medical centre operator, with an offer to join a well-established healthcare centre. San Souci Medical Centre’s offer includes the payment of a lump sum connected to an agreement where Dr Smith is required to work 40 hours a week, Monday to Friday, providing healthcare services to patients attending the medical centre.
The medical centre provides Dr Smith with the use of their facilities and all the support services needed to run the practice so he can focus solely on what he loves best, working with patients. For the use of these facilities and services, the medical centre takes a percentage of his billable receipts.
Dr Smith is unsure how this payment will be treated for tax purposes. A friend suggests that the payment is a capital gain and he would be able to apply for CGT concessions. This doesn't seem quite right to him so he decides to talk to his accountant about the payment.
His accountant confirms his thoughts; the payment is not a capital gain as it is essentially made for him agreeing to provide his healthcare services at the medical centre. Dr Smith needs to treat the payment as ordinary income and report it and pay tax on it accordingly. His accountant advises him that had he tried to include the payment as a capital gain he would have underpaid his tax and been exposed to tax adjustments and potential penalties.
The ATO have consistently issued private rulings on these or similar arrangements treating the whole of the lump sum payment as assessable ordinary income. If you have already treated these lump sum payments as something other than ordinary income, the ATO are offering to help you ensure you are in, or that that you get into, the correct tax position. The ATO have started targeted activities and examinations of healthcare practitioners who may have incorrectly treated these lump sum payments as capital gains.