The Australian Taxation Office (ATO) is reviewing certain arrangements in the healthcare services industry where a lump sum is paid that the recipient might think is a capital gain, but is more likely income.
Treating the payment as a capital gain may result in underpayment of tax and expose the practitioner to later tax adjustments by the ATO.
These arrangements involve a healthcare centre operator paying an amount, typically in the form of a lump sum to a practitioner, when they commence or continue to provide healthcare services at that centre.
The ATO recognises that the majority of healthcare practitioners try to do the right thing and pay the correct amount of tax. However, there are some that may have inadvertently treated these payments incorrectly. The ATO wants to help by providing guidance on ‘what to look out for’ and ‘where to go for help’.
What are the concerns?
The concern is that recipients may treat the payments incorrectly for tax purposes and expose themselves to a review or audit by the ATO.
The ATO considers these payments are primarily an inducement for the practitioner to enter into an agreement to provide healthcare services from the healthcare centre. The payments are connected to the provision of the services by the practitioner.
The mere fact the payment is a lump sum does not mean it is necessarily a capital payment. These payments may be described in a number of ways such as consideration for the restraint imposed, for goodwill or for other terms or conditions. The ATO considers these payments to be income of the practitioner.
The ATO has also observed other arrangements used by healthcare centre operators, which might also cause a practitioner to believe that they have received a capital gain rather than income.
Practitioners considering any arrangements where a lump sum payment will be made to them to commence or provide ongoing healthcare services should note the ATO has concerns with those payments being treated as capital gains, and are looking closely at them.
What is the ATO doing?
The ATO is trying to ensure practitioners correctly include these payments in their tax returns and avoid a later tax adjustment.
Since 2013, the ATO has consistently issued private rulings on these or similar arrangements treating the whole of the lump sum payment as assessable income.
For practitioners who have already treated the payments as something other than income, the ATO are offering to assist practitioners to correct their tax position with reduced penalties if they contact the ATO and make a voluntary disclosure.
The ATO will continue to engage with healthcare centre operators to identify, examine and understand payments made to practitioners, including obtaining details of those practitioners who have received a payment from the healthcare centre operators. Targeted compliance activities and examinations of healthcare practitioners have already commenced with a number of practitioners having had their tax returns adjusted.
For more information
The ATO is committed to helping health practitioners get it right. They’ve set up a dedicated webpage where you can access information and resources on these arrangements.
Visit www.ato.gov.au/healthytax to learn more and ensure you are not at risk of being caught up in these types of arrangements.
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