Lump sum payments – capital gain or income?

By Ben Lethborg - November 28, 2017

The Australian Taxation Office (‘ATO’) has announced their view on the taxation of lump sum payments made by third party healthcare operators to medical practitioners.

Lump Sum Arrangements

In the Healthcare industry it is common practice for a medical practitioner to operate from a healthcare centre that is established and operated by a third party in return for a percentage of the medical practitioner’s patients’ fees.

In addition, the operator of the healthcare centre often offers a lump sum payment to the medical practitioner in consideration for one or more restraints imposed on the practitioner, or for goodwill.

The taxation issue that arises is whether the amount is a capital gain or ordinary income in the hands of the medical practitioner. If treated as a capital gain, the assessable amount may potentially be reduced, eliminated or deferred by the small business capital gains tax (‘CGT’) concessions.

ATO Guidelines

The ATO’s view that a lump sum payment made in these circumstances, irrespective of how it is described, is generally ordinary income and not a capital receipt.

As such, the ATO requires the medical practitioner to include the full amount of the lump sum payment in their assessable income, with no potential to reduce this via the small business CGT concessions.

Summary

These types of arrangements are currently on the ATO’s radar.

The taxation impact of a medical practitioner treating these receipts as capital rather than revenue may be substantial, and may open a practitioner up to interest and penalties should the ATO review. It is therefore crucial that you are receiving appropriate advice in regards to these receipts, including both prior and future treatment.

For assistance in determining the correct taxation treatment on these lump sum payments or with any ATO activity or review that is occurring, contact Christopher Spanos, Private Clients Manager or your Pitcher Partners expert. 


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