Are you an ATO target? Lump sum payments received by health practitioners

In the past 15 years it has not been uncommon for health professionals (mostly GP’s) to be induced into medium term contracts (typically 1-5 years) by payment of an up-front “signing-on” fee.  The ATO is targeting these payments as part of its Audit activity.

The ATO website says

             “If you are a health professional (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”

The ATO appears to be relying on 2 main aspects

  1. Firstly, it’s decision to act may be motivated by an outcome in a recent court case Healius v Commissioner of Taxation (“Healius”) which had formerly traded as “”Primary Health Care”.
  2. Secondly, the fact that the healthcare centre operators have (almost certainly) been claiming deductions for these payments to health practitioner… which questions the fact as to what the payments are for.

The Court Case

In Healius a medical centre operator made significant “up-front” payments to doctors.  It entered into arrangements with 505 health professionals.  425 were general practitioners whilst the balance were dentists and specialists.

The payments by the medical centre operator were made supposedly under a “sale agreement” which appeared to be for the medical centre operator purchasing the doctors’ practices.  Unfortunately, the Court did not accept that the payments were principally for the doctors selling their practices.  Rather, the Court agreed that these payments were generally for the purpose of securing:

  • the doctors’ services for typically 5 years (but varying between 6 months and 10 years)
  • a commitment to a minimum number of hours to be worked within the medical centre

In effect, the lump sum payments (regardless of what the contract purported) were really to lock doctors into working for the medical centre.

In effect, the medical centre operators (Healius) had to admit that one of the purposes of the “sales agreement” was not primarily for the purchase of the doctors’ businesses but rather so that it could secure the services of the doctors.

Why you should be worried!

The frequency of these agreements seems to have diminished in Perth over the last year or so, however (from my limited observation) they were prolific during 2003 – 2015.

If you, as a taxpayer, receive such a payment the starting point to work out the tax consequences would be asking “what was the payment truly for”?

If, on one hand, you had your own client base, you leased premises and had staff and your own equipment, you could feel slightly comfortable that it could be argued that the amount you received was correctly treated as a capital gain and subject to low (or no) tax.

Alternatively, if you received a payment but you had no employees, very few of your own patients and you had not leased your own premises, then you have significant problems with the ATO.  This could particularly be the case if, for instance:

  • you had only recently commenced practice
  • you were an overseas doctor or health professional who had been induced to commit to medical centre operator with this type of lump-sum incentive

The main causes for worry are

  • the large amounts of tax involved in the ATO treating as income, amounts that you may have shown as capital payments
  • the relative ease for the ATO to get the information
  • how far back the ATO can go to amend tax returns.  The ATO will encourage taxpayers to voluntarily disclose any effected tax assessments.  Without a voluntary disclosure they ATO may seek to go back indefinitely.

If I was “guessing” person, I would guess that the ATO will go after the low hanging fruit.

  • Firstly, they will contact all medium to large medical centre operators and ask for details for all “sign-on” payments over the last 5-6 years
  • Secondly, the ATO will use their data matching capacity to follow up payment recipients with detailed questionnaires.

If you have received an “up-front” payment for signing on to a healthcare operator over the last 5 years, you should be very concerned if the payment was treated in your tax return as a “capital” payment.

There are also non-income tax issues to consider with these agreements including stamp duty and the correct legal interpretation and enforceability generally.

If you would like to have a without-obligation chat about your situation in relation to this specific issue or any other matter, then do contact Bernard Hoey on 0419 045 908.

Foot Note

Bernard Hoey and his firm Burswood Partners has acted as Accountant and Tax Agent for many health professionals over a 20-year period.  In his earlier professional life, he was a tax investigator with the ATO.