Here’s why a plan to turn private hospital giant Healthscope into a charity is stirring debate

Back in May, the parent companies of private hospital operator Healthscope fell into receivership^[1], 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^[2].

This would allow the new entity to access a number of tax benefits – including tax exemptions on “fringe benefits^[3]” provided to employees.

On its own, this might not appear all that controversial. However, Healthscope reportedly wants to access^[4] a substantial proportion of the tax break that would normally accrue to the employee. Employees have been asked to vote on the proposal^[5].

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^[6], 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^[7], 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^[8] 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%^[9] in certain circumstances.

The Healthscope “fee” seems too high to just recoup the employer’s administrative costs for the salary packaging.