The HIC's IBNR contribution notices
The AMA has opposed the imposition of the IBNR levy on medical practitioners. Nevertheless, the levy has been implemented as a tax by Federal Government legislation.
Relevant Medical Practitioners have now received an IBNR contribution invoice from the HIC.
Some are expressing shock and surprise at the total amount and are asking the AMA what they can do about it. We urge that doctors read the documentation provided and the invoice carefully in order to consider the options open to them. They may also wish to access the HIC's website at http://www.hic.gov.au/providers/programs_services/indemnity_contributions.htm
There are some points that should be highlighted:
- The back page of the invoice explains how the lump sum amount levied on a practitioner as been calculated. The figures given there are by way of example only. Turn to the first page of the invoice for the figures that apply to you.
- The contribution due by 1 November for the 2004 contribution year is set out in Option 1. Options 2 and 3 set out the amounts required and dates due if the 2004 contribution is to be paid in instalments through out that year.
- Option 4 sets out the discounted lump sum that can be paid by 1 November 2003 to acquit the practitioner of all future contribution obligations. It is about this option that a few further points should be considered.
The discounted lump sum (Option 4)
First - the lump sum payment has been calculated on the assumption that the level of the 2004 contribution will remain for each contribution year for 10 years, and on the assumption that the practitioner will be liable to pay the levy for each of those years.
The calculation is based on the current assessment of the IBNR liability. This could later be reassessed upwards, or downwards. The legislation does not permit the contribution in any subsequent year to exceed that of the previous year, and nor for the annual contribution to exceed 50% of the practitioner's indemnity premium in the year 2000. However, there is no limit in the legislation as to the number of years over which the levy will be payable. The HIC has assumed that the levy will be required for ten years.
In that light, and without any mechanism for refunds to individual practitioners of over-payments, the discounted lump sum amount has been calculated with regard to what is this year reasonably expected to be the maximum contribution the medical practitioner will be required to make.
However, that is not to say that the IBNR liability could be revised upward, and the number of contribution years could be extended beyond ten.
Second - from an example provided to us, the discounted lump sum has been calculated with a discount rate of 4.92% (assuming the levy applies for 10 years). This rate is well below the 10 year bond rate (currently about 5.6%). On the face of it, the Government is not offering an incentive for practitioners to pay the lump sum as opposed to yearly payments.
The AMA is not able to give generic advice as to whether it is better for a practitioner to pay the lump sum or to pay the annual contributions. The issues to be considered are whether:
- the annual contributions might continue beyond 10 years (were the IBNR reassessed at a higher amount) or finish within that period (were the IBNR reassessed at a lower amount);
- the annual contribution rate might be reduced, depending on the revised assessments of the IBNR over time;
- the practitioner might become exempt from paying the contribution in future years, eg turn 65 and earn less than $5000 from medical practice;
- the practitioner might become exempt from paying the contribution from events of which they are not now aware, for example in the future the government may make regulations establishing more equitable exemption provisions, such as for females leaving the workforce to raise children, giving the practitioner cause to 'wait and see';
- there is an advantage for a practitioner in obtaining a full tax deduction now for the lump sum; and/or
- the practitioner may be able to earn a higher rate of interest on funds currently held than the 4.92% discount rate implicit in the HIC's calculations.
In summary there are quite a few unknown factors which make it difficult for a practitioner to assess whether or not there is an advantage in paying the upfront lump sum. There do, however, appear to be a number of risk factors which could result in the levy being payable for less than 10 years.
Each practitioner should take their own financial advice on what Option is best for their particular situation.
A word about deferral
- The legislation provides for an IBNR contributor to apply for deferral of one year's contribution. Only one contribution year can be deferred. The amount due in that year will be payable the year following the last contribution year. Thus, if the person contributes for three years, and then becomes exempt by reason of meeting the age, retirement and income levels requirements, the deferred levy will still be due and payable irrespective of the practitioner's means to pay.
- The practitioner should consider the impact of deferring a years' contribution, to a period where they may not be able to obtain full benefit of the tax-deductible status of the contribution.
- While no additional interest on the deferred payment will be required of a practitioner, it should be borne in mind that the overall IBNR liability will be increased by the amount of interest lost to government from the totality of deferred payments - adding to the overall IBNR debt to be paid by relevant practitioners.
Practitioners may call the HIC's help line on 1800 813 167