Have any of your clients received a lump sum payment from a healthcare centre?

If the answer is yes, be on notice that the ATO is increasing audit activity in this area following the decision of the Federal Court in Healius Ltd v FCT [2019] FCA 2011.

Healius involved the question of the deductibility of lump sum payments made to doctors.  The doctors who received the payment had engaged Healius under a service arrangement whereby the doctor would pay Healius 50% of the doctor’s billings.

Although the lump sum payments were made to the doctors under a Sale Agreement for the acquisition of the doctor’s practice, the Court looked through the Agreement and found that the payments were in fact for the retention of the doctor for 5 years, not to compete and the resultant “income stream” arising from them practising at the premises.  The Court held that the relevant test to be applied for lump sum payments is therefore “what was the payment truly for”.

Accordingly, the doctor did not actually sell their “medical practice” but rather sold the “income stream” associated with the doctor’s regular practice and so the court held that the payments were deductible to Healius and not capital in nature.

This outcome is consistent with the Commissioner’s approach, but in the hands of the recipient.  It is well established that the Commissioner’s starting position is that payments to practitioners are on revenue account:

“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.” [QC 51513]

As each case turns on its facts, it is critically important to ask the question of your client’s situation “what is the payment truly for” in order to determine whether a payment is received on income or capital account.  Factors such as the number of employees, amount of equipment and amount of goodwill will be very relevant. For example, a specialist radiologist with significant equipment is more likely to receive a lump sum on capital account than a GP with few employees and minimal equipment.

The Commissioner has appealed to the Full Federal Court against this decision.

If you are unsure or concerned about how a past or future lump sum payment is to be treated from a tax perspective, we would be happy to assist you.

We’re here to help.

Ann-Maree Ventura  Special Counsel