Income tax: 100% payment private practice arrangements of full-time medical practitioners of a Victorian Health Service

This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates.

This class ruling does not address the tax consequences of work related payments and benefits provided from the Special Purpose Fund.

The tax laws dealt with in this Ruling are: • section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); • section 8-1 of the ITAA 1997; and • Division 35 of the ITAA 1997.

The class of persons to which this Ruling applies is the full time medical practitioners ('Specialists') of a Victorian Health Service ('The Health Service') who elect to participate in a 100% payment private practice arrangement offered in the Letter of Appointment for Medical Specialist.

The Commissioner makes this Ruling based on the precise arrangement identified in the Ruling.

The class of persons defined in this Ruling may rely on its contents provided the arrangement actually carried out is carried out in accordance with the arrangement described in paragraphs 10 to 15.

If the arrangement actually carried out is materially different from the arrangement that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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This Ruling applies for the income year ended 30 June 2005 and subsequent income years. However, the Ruling only applies to the extent that: • there is no material change in the arrangement or in the class of persons involved in the arrangement; • it is not later withdrawn by notice in the Gazette ; • it is not taken to be withdrawn by an inconsistent later public ruling; or • the relevant tax laws are not amended.

The arrangement that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of the arrangement and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are: • application for Class Ruling dated 7 July 2004 lodged by the Department of Human Services; • sample Letter of Appointment for Medical Specialist attached to Class Ruling application; • sample Private Practice Agreement attached to Class Ruling application; and • sample Special Purpose Fund Agreement attached to Class Ruling application. Copies of the following documents are attached to this ruling: • the sample Letter of Appointment (Attachment A); • the sample Private Practice Agreement (Attachment B); and • the sample Special Purpose Fund Agreement (Attachment C).

The Specialists are employees of The Health Service. Their employment conditions are contained in the Letter of Appointment for Medical Specialist and The Health Service's Certified Agreement, which contains clauses relating to rights of private practice and rates of pay. Each Specialist has the right under the Letter of Appointment for Medical Specialist to elect to participate in a private practice arrangement.

On accepting appointment the Specialist may participate in the private practice arrangement. If they do so they are required to sign a copy of the Private Practice Agreement and the craft group Special Purpose Fund Agreement to formalise their participation in the arrangement.

As part of their remuneration package the Specialist receives a private practice component.

Under Clause 7 of the Private Practice Agreement, the medical practitioner appoints The Health Service as agent to render accounts and collect payments. All fees in respect of a private practice conducted under the Private Practice Agreement are required to be paid over to The Health Service under the terms of the Letter of Appointment for Medical Specialist.

Under the terms of the Private Practice Agreement the Specialist uses The Health Service's infrastructure and resources but is not required to pay an infrastructure charge.

The remuneration including the private practice component paid to the Specialist under the contract of employment is assessable income to the Specialist under section 6-5 of the ITAA 1997. The private practice component paid to the Specialist by The Health Service under the terms of the Specialist's appointment is remuneration related to the Specialist's employment.

The gross fees of the Specialist, billed under the 100% payment private practice arrangement, are derived as ordinary income and are assessable income of the Specialist under section 6-5 of the ITAA 1997.

A deduction is allowable under section 8-1 of the ITAA 1997 to the Specialist for an amount equal to the gross fees paid over to The Health Service as part of the terms of appointment.

The remuneration including the private practice component paid to the Specialist under the contract of employment is assessable income of the Specialist under section 6-5 of the ITAA 1997.

The private practice component is paid to the Specialist under the terms of the Specialist's employment as set out in the Letter of Appointment. It is unrelated to the amount (if any) of fees generated by the Specialist from the 100% payment private practice arrangement. It is considered that the private practice component represents a payment related to the Specialist's employment as it is a condition of their employment.

Under the private practice arrangement, the Specialist attends to private patients in the hospital utilising the hospital's infrastructure and resources. However, the Specialist is providing a direct medical service to their private patients in the Specialist's private practice and not in their capacity as an employee of The Health Service. The gross fees of the Specialist are derived as ordinary income and are assessable income of the Specialist under section 6-5 of the ITAA 1997. The Health Service acts as the Specialist's agent in billing and collecting the amounts due by the patient (Clause 7 of the Private Practice Agreement).

The decision in a Board of Review case reported as Case T44 86 ATC 366 supports the assessability of the fees. In that case it was held that funds received by a hospital as a result of accounts issued by it to the private patients of a doctor employed by a hospital, were assessable to the individual as ordinary income.

Under subsection 8-1(1) of the ITAA 1997, a Specialist in a 100% payment private practice arrangement is entitled to claim a deduction for an amount equal to the gross fees paid over to The Health Service.

The Specialist is required, as a condition of employment, to pay over all fees charged or to be charged from the private practice under the 100% payment arrangement. In these circumstances, the payment over to The Health Service of the fees derived from private practice is an expense that the Specialist incurs in gaining assessable income. This view is supported by the decision in the Full Federal Court case of Service v. FC of T (2000) 97 FCR 265; 2000 ATC 4176; (2000) 44 ATR 71.

The fees are paid over as a condition of employment and this creates the connection with the activities which more directly gain or produce the assessable income. Therefore, the deduction for the amount paid over is a 'work related expense'.

Depending on the particular circumstances of a Specialist conducting a private practice under the 100% payment arrangement, Division 35 of the ITAA 1997 - Deferral of losses from non-commercial business activities - may have application. If the Specialist makes a 'loss' from this business activity and does not meet one of the tests set out in sections 35-30, 35-35, 35-40, or 35-45 of the ITAA 1997, or the Commissioner has not exercised the discretion set out in section 35-55 of the ITAA 1997, then the loss deferral rule in subsection 35-10(2) of the ITAA 1997 will apply.

Below is a detailed contents list for this Class Ruling: Paragraph What this Class Ruling is about 1 Tax law(s) 3 Class of persons 4 Qualifications 5 Date of effect 9 Arrangement 10 Ruling 16 Remuneration and private practice component 16 Private practice income 17 Deductibility of amounts paid over to The Health Service 18 Explanation 19 Remuneration and private practice component 19 Private practice income 21 Deductibility of amounts paid over to The Health Service 23 Non-commercial loss provisions 26 Detailed contents list 27