Edited version of your written advice

Authorisation Number: 1051470384965

Date of advice: 11 January 2019

Ruling

Subject: Lump Sum payment - Medical Practitioner

Question

Can the lump sum payment you received from Company be declared over the five year period of the agreement?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a General Practitioner.

You entered into a “Provision of services to Medical Practitioner agreement” with Company.

The practitioner agreement states on the commencement date a lump sum of $ will be paid to you.

You received the lump sum payment in the financial year.

The duration of the agreement is 5 years from the commencement date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5(1)

Income Tax Assessment Act 1997 section 8-1(1)

Income Tax Assessment Act 1997 section 8-1(2)

Income Tax Assessment Act 1997 section 59-30

Income Tax Assessment Act 1936 section 170(10AA)

Reasons for decision

Summary

The lump sum payment of $ is assessable as ordinary income under section 6-5 of the ITAA 1997. The amount is wholly assessable in the income year received and no part of it can be apportioned over subsequent income years.

Detailed reasoning

The Commissioner considers that the lump sum payment is derived and therefore assessable for income tax purposes at the time of receipt. The lump sum payment is not to be apportioned but rather is fully assessable in the income year it is received.

It is the Commissioner’s view that the lump sum payment is an inducement for the medical practitioner to provide their medical services at a designated medical centre and is assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The ITAA 1997 further provides that in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

The legislation does not elaborate on when a particular amount of income is derived. However tax rulings and case law have thoroughly canvassed when income is derived for income tax purposes.

In CT v. Executor & Trustee Agency Co of South Australia (1938) 63 CLR 108 (Carden’s case), Dixon J stated: ‘Speaking generally, in the assessment of income the object is to discover what gains have, during the period of account, come home to the taxpayer in a realised or immediately realisable form.’

Taxation Ruling TR 98/1 gives guidance in determining when income is derived for income tax purposes. It provides that the two commonly used methods of tax accounting for items of income are the receipts and earnings methods. When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income.

In relation to non-trading income, paragraphs 40 and 41 of TR 98/1 state that the general rule is that there must be a receipt, that is, it is when the amounts are received that they have ‘come home’ to the taxpayer.

In similar cases, submissions have been to the Commissioner that the lump sum incentive/inducement payment should be assessed over the period of the agreement. These submissions have relied on the decision in Arthur Murray (NSW) PTY Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314 (Arthur Murray). However, unlike in Arthur Murray, the lump sum payment in this situation is not a pre-payment for services to be rendered, rather it is an inducement to enter into the agreement.

Therefore, we consider that Arthur Murray is clearly distinguishable. As such, the lump sum payment you received is assessable as ordinary income when it is derived and it was derived when it was received. As the payment was received in the 20XX-XX income year it is wholly assessable in that income year.

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