Here’s why a plan to turn private hospital giant Healthscope into a charity is stirring debate
- Written by Dale Boccabella, Associate Professor of Taxation Law, UNSW Sydney
Back in May, the parent companies of private hospital operator Healthscope fell into receivership, burdened by A$1.6 billion in debt.
Since then, Healthscope’s hospitals have been kept open while receivers have worked to find buyers for the business. But now, the groundwork has also been laid for a potential restructuring of Healthscope as a charity.
This would allow the new entity to access a number of tax benefits – including tax exemptions on “fringe benefits” provided to employees.
On its own, this might not appear all that controversial. However, Healthscope reportedly wants to access a substantial proportion of the tax break that would normally accrue to the employee. Employees have been asked to vote on the proposal.
What are fringe benefits?
A fringe benefit is a form of compensation provided to an employee by an employer, in addition to salary or wages.
Salary packaging is essentially breaking the employee compensation into salary and fringe benefits. For example, an employer pays certain costs for an employee – such as rent and mortgage payments, or their children’s school fees – and in return the employee agrees to have their salary reduced.
Any employer can provide fringe benefits to employees. But some organisations, including not-for-profit hospitals, are eligible for exemptions from the fringe benefits tax, up to a cap.
For not-for-profit and public hospitals, the tax-free benefit to each employee is capped at a “grossed-up” value of the benefit of $17,000, which works out to be roughly $9,000 in value of benefits per year.
For current purposes, the thinking behind the grossed-up value of a benefit need not be explored; our focus should be on the $9,000 figure, the economic value of a benefit.
The main justification for this tax exemption is that not-for-profit hospitals cannot pay the same sort of salaries as the for-profit sector to attract staff. This concession helps balance things out a bit.
An example of salary packaging
Let’s illustrate salary packaging with an example relevant to the Healthscope proposed scenario.
Say an employee is on a taxable income of $80,000 (wages). The top part of this (every dollar over $45,000) attracts the 30% marginal tax rate. For simplicity, ignore the 2% Medicare levy.
A not-for-profit hospital employer could ask this employee to “give up” the top $10,000 of their pre-tax wages. In return, the hospital could agree to pay $9,000 of the worker’s private expenses, such as rent or mortgage payments.
The employee is not taxed on receipt of this $9,000 in benefits. And because of the concession, the not-for-profit hospital wouldn’t have to pay employer fringe benefits tax on it either.
The employee is better off by $2,000 ($9,000 compared to the $7,000 of after-tax income where cash salary is paid). The employer (a charity) has also reduced its costs from $10,000 (wages) to $9,000 (benefit). The only “loser” would be the public purse.
Administration fee
An administration fee for a salary packaging arrangement is standard, either a fixed fee or small percentage of the tax saving made and accruing to the employee.
However, the Healthscope proposal would reportedly require the employee to “hand over” a large portion of the tax saving – as much as 90% in certain circumstances.
The Healthscope “fee” seems too high to just recoup the employer’s administrative costs for the salary packaging.
Legal considerations
Would the proposed compensation switch be legally effective? The answer is unclear.
The Australian Taxation Office (ATO) may be concerned with this. That’s because the salary packaging would be done in a different environment to the ordinary type of packaging, because the employer changed from a taxable entity into an tax-exempt entity.
This is unusual, especially when the taxable entity is in financial distress, like Healthscope.
The counterargument is that Healthscope would be accessing a specific concession – provided to a not-for-profit hospital in the fringe benefits tax legislation – for the “benefit” of employees in a certain sector.
What about ethics?
Whether Healthscope’s proposal is ethical is another question and brings in subjective considerations. It is fair to say that Healthscope’s charity option is drawing on the tax system to help implement a lower cost structure to its operations.
It could reignite the long-standing debate about the appropriateness of allowing tax-exempt charities and other not-for-profits to operate large businesses (and obtain/retain tax exemption) in competition with taxable, for-profit companies.
Many other tax concessions could also become available on the switch to a charity, such as exemption from company income tax and exemption from state taxes, including payroll tax – a state tax on wages paid by employers.
The potential for lost income tax revenue is not clear-cut because Healthscope may not have paid much income tax lately anyway. Given the number of employees (around 19,000), the loss of payroll tax to the states could be significant on the switch to a registered charity.
The business is still for sale
It’s important to note that Healthscope’s receivers are still inviting offers for the sale of its hospital businesses. The charity option is just one option the receivers want to lay the groundwork for.
It is highly advisable for employees of Healthscope to obtain independent advice on the proposal’s possible financial impacts – such as whether employer superannuation contributions are required on fringe benefits – before voting on what appears to be an amendment to the enterprise agreement.
Authors: Dale Boccabella, Associate Professor of Taxation Law, UNSW Sydney
Daily Bulletin