The ATO has been targeting lump sum payments received by medical practitioners. A recent decision of the Federal Court means that ATO audit activity is likely to continue in certain cases.
The ATO audit activity
In its website article, Lump sum payments received by healthcare practitioners, the ATO states:
If you are a healthcare practitioner (such as a doctor, dentist, physical therapist, radiologist or pharmacist) and you get a lump sum payment from a healthcare centre operator, it’s probably not a capital gain. It’s more likely to be ordinary income.
This is an odd statement, because determining the correct tax treatment – particularly whether a payment is on capital account or revenue account – requires a proper understanding of what the payment is for. It is difficult to answer that question with only the fact that a medical practitioner has received a lump sum payment from a healthcare centre operator.
However, the ATO statement does make it clear that the ATO’s starting position is that the payment is ‘more likely to be ordinary income’. Taxpayers have been put on notice.
What happened in Healius v Commissioner of Taxation?
Healius concerned a medical centre that made payments to doctors, mostly general practitioners.
The Court identified the following relevant facts:
- The medical centre carried on a business of providing services to doctors. It did not provide services to patients. The medical centre’s customers were the doctors that carried on their businesses from the medical centre.
- The more doctors (i.e. customers) that the medical centre had working from its premises, the more profitable the medical centre. This was because the medical centre’s service fee was 50% of the doctor’s billings. More doctors equalled more billings and, therefore, more revenue for the medical centre.
- The medical centre paid an amount to a doctor under a ‘sale agreement’. However, contrary to the wording in the agreement, the Court concluded that the doctor did not actually sell their practice to the medical centre.
- What the medical centre actually purchased was the benefits of having the doctor carry on their practice from the medical centre for a (mostly) five year period for a minimum number of hours – basically the medical centre purchased an income stream by locking in the doctors as its customers for the term of the agreement.
Healius claimed the payments it made to the doctors were deductible. The payments would be deductible provided they were not capital in nature.
The Court noted that the correct question was ‘what was the payment truly for?’
In this particular case, the medical centre’s payments were for a five year income stream from its customers – the doctors. The payments were not capital in nature, and the medical centre was entitled to its deductions.
What does this mean for practitioners receiving lump sum payments?
Well, it depends.
The starting position is that each case depends on its own facts. Once the facts are established, the tax question is what is the payment truly for?
Trying to deal with lump sum payments received by healthcare practitioners as one category is not helpful and runs the risk of getting the tax treatment wrong for at least some of those practitioners. For example, contrast:
- a general practitioner who has no employees, minimal equipment and most of their goodwill as a result of their personal profile; with
- a radiologist with many employees, very expensive equipment and who paid cash to acquire their interest in the business.
Assuming no facts to the contrary, if the radiologist sells their practice’s assets, it is difficult to see how a lump sum they receive is ‘more likely to be ordinary income’.
On the other hand, a general practitioner who immigrates to Australia and receives a lump sum payment to practice from a medical centre is more likely to be receiving ordinary income.
The difference in the tax involved may be substantial. If you are unsure, seek advice before proceeding with a transaction. If your transaction has already occurred, make sure you account for the tax correctly, and, if on capital account, be prepared to substantiate your position with relevant evidence.
Please contact a member of our team if you would like to discuss.