Communiqué from Department of Human Services - 8 June 2005

Rights of private practice within the Victorian public health system

As you are aware, significant time and effort has been invested to clarify taxation issues and minimise the taxation burden associated with income derived in the exercise of Rights of Private Practice (ROPP) on behalf of medical practitioners in public hospitals. This communiqué updates and finalises the advice from the Department of Human Services (DHS) on ROPP within the Victorian public health system.

Finalised ATO tax rulings: 100% payment over model

The Australian Taxation Office (ATO) issued a Class ruling CR 2005/26 in April 2005 for income tax purposes (http://law.ato.gov.au/pdf/cr2005-026.pdf), and subsequently GST and PAYG administrative binding advice in relation to the 100% payment over model.

The ATO ruling and administrative advice are consistent with the original in-principle agreement reached, advised in the communiqué of 11 March 2004, with one major additional concession gained by DHS.

The additional concession agreed to by the ATO involves tax reporting dates for ROPP income that have been deferred; viz:

• by 12 months for income tax reporting-i.e. income tax reporting will now commence from the 2004-05 year of income; and
• by 12 months for GST and PAYG Instalments reporting-i.e. GST registration and amendments to PAYG Instalment compliance (where necessary) will now commence from 1 July 2005.

The extensions to the tax reporting dates were negotiated with the ATO based on the amount of work necessary by Health Services and practitioners to implement the new tax reporting arrangements and the uncertainty caused by the delay in issuing ATO rulings.

Non 100% payment over models

With respect to all the other ROPP models, it is not possible to obtain ATO formal tax sign-off due to the plethora of model variations across the sector. It was intended that the ATO would issue a tax concepts paper, but unfortunately the ATO advised that it would not issue such a paper. However, PwC provided detailed tax information packs for various non-100% models as part of the tax information workshop sessions conducted.

Tax Workshops Sessions

Tax information workshop sessions were conducted by PwC between April-June 2004 on site at each major Metropolitan Health Service and selected rural hospitals. Tax information guides developed by PwC are attached; note the change to these guides arising from the extension to tax reporting dates referred to above.

Implications for individual practitioners and health services

100% Payment Over Model

The ATO rulings are highly specific and only apply to the 100% payment over model as described in the rulings. Only compliant ROPP arrangements will be covered by the rulings.

If the ATO subsequently determines that a particular ROPP arrangement is non-compliant, the ATO will treat it as being outside the scope of the rulings. This may have significant taxation consequences for the practitioner or practitioners affected. Therefore each Health Service in consultation with their practitioners should ensure that all of its ROPP arrangements are examined in order to correctly identify, in each case, whether or not a practitioner is participating in the 100% payment over model as described in the rulings. Where medical practitioners are considered to be participating in the 100% payment over model, their individual ROPP arrangements should also be checked to ensure that they are compliant with the ATO rulings. Expert advice should be sought to clarify this matter if there is any doubt.

Other Models

In relation to non-100% payment over models, the tax implications will vary depending on the practitioner’s individual circumstances. The tax information guides prepared by PwC in relation to various non 100% payment over models have been designed to assist practitioners and Health Services to understand the tax concepts applicable to these models. However, where any of the circumstances of individual ROPP arrangements differ from those described in the tax information guides, practitioners and Health Services will need to ensure that all tax risks are managed prudently, including by seeking expert advice as needed.

Section 19(2) Health Insurance Act 1973

The AMA Victoria was concerned whether the 100% donation model breaches section 19(2) of the Health Insurance Act 1973. The AMA Victoria has obtained advice from the Health Insurance Commission (HIC) regarding the 100% donation model based upon the documentation provided in the PwC information pack. Of importance the HIC has stated;

" To the extent that the agreements recognise the practitioners rights to private practice and do not purport to require the practitioners to render professional services in particular circumstances HIC would not view the agreements as breaching section 19(2) of the Health Insurance Act 1973."

Attachments - 100% payment over model

ATO GST Administrative Advice (PDF File 1.75MB)

ATO PAYG Administrative Advice (PDF File 355KB)

Communiqué from Department of Human Services - 11 March 2004

Rights of private practice within the Victorian public health system

In response to the Australian Taxation Office (ATO) initiating taxation compliance audits of some Metropolitan Health Services (MHSs), the department reached an agreement with the ATO to defer its audit activities in relation to rights of private practice (ROPP), and engaged taxation specialists PricewaterhouseCoopers to work with the ATO to clarify taxation issues surrounding certain models of ROPP.

A working group comprising staff from the department, Health Service representatives, supported by PricewaterhouseCoopers have spent much time and effort in discussion with the ATO.

The working group, has been fully committed to developing solutions that clarify tax issues on particular ROPP models, provide outcomes that are applied as prospectively as possible, as well as minimising any tax compliance reporting burdens for medical practitioners. Overall, our efforts and patience have been rewarded. Key benefits of discussions with the ATO are outlined below.

Tax Workshop Sessions

The department will conduct information workshop sessions on-site at each major MHS and selected rural hospitals, which will be delivered by PricewaterhouseCoopers. These will be supplemented by tax information packs, which will aid in the completion of individual tax returns by the medical practitioners and their accountants (where relevant). These sessions will begin early in April 2004.

100% donation model

The working group focused initially on this model, where 100% of ROPP billings are donated across to the health service, as this is where much of the uncertainty relating to tax laws exists, particularly in respect of reporting requirements. An in principle agreement with the ATO has been reached, the tax implications and reporting may vary depending on individual circumstances, however, key features of the in principle agreement are:

Nil net income tax effect: While private practice income will need to be reported by medical practitioners in their annual income tax returns, any ROPP income derived is fully offset by a deduction for the transfer of the income to the hospital resulting in a nil income tax effect. Accordingly, a simple annual reporting exercise using information that could be provided by the hospital is all that is required.

No additional pay as you go (PAYG) instalment tax: There will be no PAYG instalment tax obligations with respect to rights of private practice income formedical practitioners who do not currently have PAYG instalment obligations. For medical practitioners who currently have PAYG instalment obligations because of other income they derive, there will be a requirement to report the income and potentially some adjustment to the tax calculation, depending upon which tax payment method is used. However, the net result will be no additional PAYG instalment payments.

Business Activity Statements (BAS): Only those medical practitioners who have ROPP billings exceeding $50,000 or other income subject to the goods and services tax (GST) registration threshold rules which, when combined with ROPP billings exceeds $50,000 or more a year, will need to register for GST and lodge BASs.

No GST in respect of private practice arrangements between medical practitioners and health services: Medical practitioners and hospitals will have no GST obligations in respect of the income transferred to the hospitals under the model known presently as the ‘100% donation model’.

Income tax and PAYG instalment reporting: Reporting of income tax will commence from the 2003-04 year of income and PAYG Instalment reporting will commence from 1 July 2004 (in respect of 2004-05 income).

GST registration, reporting and payment: GST registration and reporting of ROPP and other income where applicable, for those specialists who were required to be registered (or in fact were registered), will only apply from 1 July 2004, providing all relevant income relates to GST-free or input taxed supplies. Where taxable supplies have been made, retrospective registration, reporting and payment requirements will be considered by the ATO on a caseby-case basis.

Changes to agreements: The ATO requires some clarification/amendment of existing Agreements to support the ongoing tax reporting rulings the ATO will make. A generic employment and ROPP agreement is currently being drafted and will be presented to the industry for implementation. Adoption of these generic agreements will ensure compliance with the tax requirements.

The ATO will shortly issue draft and then formal ruling(s) in respect of income tax, GST and PAYG.

Non 100% donation models

With respect to all the other ROPP models, it is not possible to obtain specific ATO formal tax sign-off due to the plethora of model variations across the sector. For this reason, the ATO has agreed to issue a tax concepts paper, which covers the general tax concepts applicable to 3 models developed by PricewaterhouseCoopers. These have been drawn from the numerous non 100% donation models in existence. One of these models includes the circumstances where an independent Trust is involved.

It will then be up to health services and practitioners to examine the tax concepts paper, determine which models are relevant to their individual circumstances and apply the tax concepts as appropriate. Where any of the facts are different from the tax concepts paper, health services and practitioners will need to ensure that all tax risks are managed prudently. It will be up to the health services and practitioners to determine whether it is appropriate to seek expert advice or possibly approach the ATO for a specific binding ruling.