Generally, a business that runs a healthcare centre operation will entice practitioners to operate in their centre with incentives such as entry payments. Typically, these lump sum payments are classified by the healthcare centre as being consideration for a restraint imposed, for goodwill, or for other terms or conditions. They can be a combination of all three.
These payments can be made to practitioners in the following industries. The list is not exhaustive but consists of the most common occupations found in these centres:
- Doctors
- Dentists
- Physical therapists
- Radiologists, or
- Pharmacists.
The ATO has announced via their website that these payments are not to be considered a capital receipt but are ordinary income under ITAA 1997 s 6-5. Therefore, the receipt is on income account and capital gains tax would not apply. This treatment would remove access to the CGT small business concessions for the practitioner.
The ATO formed this 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, and
- 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.
Risk mitigation steps
If you are a healthcare practitioner who has identified a payment like this as a capital gain, it is considered best practice to begin proceedings for amendment to that tax return.
If the ATO has been in contact with you in regards to this situation, it is best practice to either apply for a Private Binding Ruling or to make a voluntary disclosure.
