The ATO are concerned about healthcare practitioners receiving lump sums and treating them as capital payments and have released a detailed fact sheet setting out what they expect to see in such situations.
If a healthcare practitioner (such as a doctor, dentist, physical therapist, radiologist or pharmacist) gets a lump sum payment from a healthcare centre operator, according to the ATO “it’s probably not a capital gain. It’s more likely to be ordinary income”.
Specifically, the lump sum will typically be ordinary income of the practitioner for providing services to their patients from the healthcare centre. Importantly, 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.
Lump sum arrangements
In the healthcare services industry, it is now common for some practitioners to operate from healthcare centres run by third parties. This frequently occurs without any stated partnership or employment relationship between the third party and the practitioner.
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 and there is nothing wrong with that. Our concerns relate to the tax treatment of the lump sum payments by the practitioner.
The ATO’s concerns may affect you if your arrangements have most or all of 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 into 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
- it is described as being 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.
Whilst these are common features, any other arrangements that relate to a lump sum payment for your ongoing provision of healthcare services from a medical centre may still be of concern to the ATO.
If you are considering any arrangements that relate to a lump sum payment for commencing or providing ongoing healthcare services, you should note that the ATO:
- have concerns with those payments being mistakenly treated as capital gains
- are looking closely at these arrangements to determine if they are compliant with income tax laws and whether the anti-avoidance provisions may apply.
The ATO are aware that some practitioners are using a private ruling that was issued to another taxpayer:
- You can only rely on a private ruling if you applied for it.
- From 2013, 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 think this may affect you, we can help you work out what you need to do.
Call Stellar Accounts on 0428 887 104.