If you are a healthcare practitioner and you receive a lump sum payment from a healthcare centre operator, the lump sum payment will most likely be treated by the ATO as ordinary income rather than a capital gain.
Lump Sum Arrangements
In the healthcare services industry, it is now common for some healthcare practitioners (such as a doctors, dentists, physical therapists, radiologists or pharmacists) to operate from healthcare centres run by third parties. The third parties generally encourage practitioners to start work or continue to work from their centres. They may offer lump sum payments for this purpose and the tax treatment of these lump sum payments will depend on the features of the specific arrangement.
Capital Gains or Ordinary Income?
The Australian Taxation Office (“ATO”) has recently observed arrangements where healthcare practitioners receive a lump sum payment from healthcare centre operators when they commence or continue to provide healthcare services at that centre. In most cases the ATO have noted that the practitioner would continue to operate as a medical practitioner as they have done so before but now they operate from the medical centre after the lump sum payment is made.
The ATO is concerned that healthcare practitioners are treating this lump sum payment as a capital gain for tax purposes and in some instances, have then applied the small business CGT concessions to reduce the capital gain, in many instances reducing it to nil. The argument for the capital treatment is that the practitioner has disposed of the goodwill of their medical practice. The ATO as formed the view that in most cases no goodwill is being transferred to the medical centre and is in fact retained by the practitioner.
As such, the ATO have recently released commentary confirming their view, that in most cases, these lump sum payments should be treated as ordinary income. The lump sum should 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.
Treating the lump sum payment as a capital gain may result in underpayment of tax and will expose the healthcare practitioner to tax adjustments and potential penalties.
What you need to do
If you are considering any arrangements that relate to a lump sum payment for commencing or providing ongoing healthcare services, please note that the ATO have concerns with those payments being mistakenly treated as capital gains and they are looking closely to determine if they are compliant with income tax laws and whether the anti-avoidance provisions may apply.
If you believe you may have already treated a lump sum payment incorrectly, the ATO suggest that you make a voluntary disclosure which may reduce any penalties.
To ensure you receive the correct advice regarding the tax treatment of a lump sum payment either you expect to receive or have already received, please contact our office for independent, professional advice.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.