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Tax guidance for the healthcare industry

The Australian Taxation Office (ATO) is currently reviewing lump sum payments in the healthcare industry. Key points from the ATO are below.

The ATO is trying to protect health practitioners from treating these payments incorrectly and facing a later tax adjustment.

The ATO are reviewing certain arrangements in the healthcare services industry where a lump sum is paid which the recipient might think is a capital gain, but which is more likely ordinary income. These payments may be made to healthcare practitioners, including doctors, dentists, physical therapists, radiologists and pharmacists. Treating the payment as a capital gain may result in an underpayment of tax and expose the practitioner to later tax adjustments by the ATO.

These arrangements involve a healthcare centre operator paying an amount, typically in the form of a lump sum to a practitioner when they commence or continue to provide healthcare services from the healthcare centre. The payment is described to be consideration for a restraint, for goodwill or for other terms or conditions. However, these lump sums are connected to an agreement where the practitioner accepts obligations to provide these healthcare services.

The ATO recognises that the majority of healthcare practitioners try to do the right thing and pay the correct amount of tax. However, there are some practitioners that may have inadvertently treated these payments incorrectly. The ATO wants to help by providing guidance on what to look out for and where to go for help.

Many practitioners in receipt of these lump sums have treated the payments as giving rise to a capital gain and then applied the small business CGT concessions to reduce the capital gain, in many instances reducing it to nil.

The ATO concern is not that the payment is in the form of a lump sum but rather, how the practitioner treats the payment for tax purposes. The ATO view is that generally, these lump sums are not capital receipts. They will typically be ordinary income of the practitioner for providing services to their patients from the healthcare centre.

Practitioners considering any arrangements that relate a lump sum payment to their commencement or ongoing provision of healthcare services should note the ATO have concerns with those payments being treated as capital gains and are looking closely at the arrangements to determine if they are compliant with income tax laws.

If you have entered, or are planning to enter, into this type of arrangement, the ATO encourages you to review your income tax treatment of any payments you have received. If you consider that the ATO concerns apply, you may want to:

  • Seek independent professional advice;
  • Ask the ATO for a view in relation to your specific circumstances through a private ruling;
  • Make a voluntary disclosure to reduce penalties that may apply.

ATO are committed to helping healthcare practitioners get it right. They’ve set up a dedicated webpage where you can access information and resources on these arrangements.

Visit www.ato.gov.au/healthytax to learn more and ensure you are not at risk of being caught up in these types of arrangements.

This editorial has been prepared with the assistance of the Australian Taxation Office (ATO).