• Lump sum payments received by healthcare practitioners

    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.

    Most healthcare practitioners try to do the right thing and pay the correct amount of tax. We want to help you by providing guidance on what to look out for and where to go for help.

    On this page:

    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.

    Our 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 us.

    Our concerns

    We are concerned that you may treat this lump sum payment incorrectly for tax purposes.

    We have seen some practitioners who have received these lump sums mistakenly treating the payments as a capital gain. They have then applied the small business CGT concessions to reduce the capital gain, in many instances reducing it to nil.

    We are 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.

    We formed our 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
      • the practitioner does not cease to provide healthcare services.

    The whole of the lump sum payment is assessable as ordinary income in the hands of the practitioner.

    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, you should note that we:

    • 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.

    We 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, we have consistently issued private rulings on these or similar arrangements treating the whole of the lump sum payment as assessable ordinary income.

    What we are doing

    We are working to protect practitioners from treating these payments incorrectly and facing a later tax adjustment.

    If you have already treated these lump sum payments as something other than ordinary income, we are offering to help you ensure you are in, or that that you get into, the correct tax position.

    We will continue to identify, examine and understand the types of payment arrangements being used in the industry by further engaging with healthcare centre operators. This may include obtaining details of which practitioners have received payment from the healthcare centre operators.

    We have started targeted activities and examinations of healthcare practitioners who may have incorrectly treated these lump sum payments as capital gains.

    We are working to provide further advice and guidance to health practitioners to help them either self-identify these and emerging arrangements that concern us, or as early warning for those who may be considering them.

    Example: A new doctor joins the practice

    Dr Lee has recently been approached by Medical Centre Z, a medical centre operator, with an offer to join a well-established healthcare centre.

    Medical Centre Z's offer includes the payment of a lump sum connected to an agreement where Dr Lee 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 Lee with the use of their facilities and all the support services needed to run the practice so she can focus solely on what she loves best, working with patients. For the use of these facilities and services, the medical centre takes a percentage of her billable receipts.

    Dr Lee is unsure how this payment will be treated for tax purposes. A friend suggests that the payment is a capital gain and she would be able to apply for CGT concessions. This doesn't seem quite right to her so she decides to talk to her accountant about the payment.

    Her accountant confirms her thoughts; the payment is not a capital gain as it is essentially made for her agreeing to provide her healthcare services at the medical centre. Dr Lee needs to treat the payment as ordinary income and report it and pay tax on it accordingly. Her accountant advises her that had she tried to include the payment as a capital gain she would have underpaid her tax and been exposed to tax adjustments and potential penalties.

    End of example

    Where to go for help

    If you have entered, or are planning to enter, into an arrangement of this type we encourage you to:

    • seek independent professional advice
    • ask us for a private ruling about your specific circumstances
    • make a voluntary disclosure if you believe our concerns apply to you, which may reduce any penalties.

    Alternatively, if you have questions about the tax consequences of these arrangements, you can email us at healthytax@ato.gov.au

      Last modified: 15 Mar 2017QC 51513