Why Volunteering Can Be a Risky Business for Medical Practitioners
Doctors spend a lot of their time helping people due to the nature of their chosen profession. Some choose to further embrace this cause and donate their time and skills by volunteering both locally and abroad.
Donating time and skills can be a very rewarding experience for medical professionals however substantial costs are often involved, particularly when traveling overseas.
Where are the risks?
In this year’s Federal Budget, the government has proposed a 55% increase in audit funding over the next four years. Its goal is to generate $3.7 billion in gross revenue. The proposed tax audit activity will make up nearly 25% of the major new sources of revenue for the federal government.
To meet this expectation The Australian Taxation Office (ATO) will focus its attention on “high risk” taxpayers which includes high net worth individuals.
For this reason in the current environment, where the risk of taxation audit is increasing for medical professionals, it is important to be aware of the tax treatment of expenses incurred in voluntary work.
Australia’s current income tax law
The income tax law in Australia does not specifically allow for deductions incurred in relation to voluntary work. The 1997 Income Tax Assessment Act states you can deduct expenses from your assessable income to the extent that they are:
- incurred in gaining or producing your assessable income; or
- necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
This section of the Act goes on to exclude deductions for expenses that are of a capital, private or domestic nature.
Businesses and volunteer-related expenses
The deductibility of business expenses provides the most scope for the potential to claim any volunteer-related expenses. The interpretation of what is ‘necessarily’ incurred in carrying on a business is quite broad. Generally, where a connection to the production of assessable income can be established the expense will be deductible.
For example, many businesses will sponsor a local organisation and receive some form of advertising in return. This would include sponsoring the local football team and providing promotional material such as uniforms and signage displaying the business name and logo. It is widely accepted that expenses incurred in such arrangements are deductible business expenses.
In the case of a medical professional volunteering, a link between the activity and promotion of the business can be more difficult to demonstrate. If a doctor volunteers at a local sporting event, it can be argued that this acts to increase the goodwill of the medical business. Therefore supporting the claim for a tax deduction of associated expenses. However, where the volunteer work is performed in a remote location or overseas the link to promotion of the business is less clear.
The motive of the taxpayer can also be a relevant factor. Expenses that are incurred pursuant to a moral, social or religious obligation can be considered to be private. If this is the case, they are excluded from the definition of deductible expenses.
If a medical professional operates a business and incur substantial costs associated with volunteering, it may be worth considering whether steps can be taken to improve the ability to demonstrate a link between the expenses and the business. For instance, communicating your volunteering efforts to patients, customers and referring practitioners via newsletters or Facebook posts clearly indicates the activity is related to promoting the business.
Implementing an employment policy requiring all staff to commit to providing a certain number of volunteer hours per year also demonstrates a link to the business. The staff wages and other volunteering expenses could be paid, and potentially claimed as a tax deduction by the business. Such a policy can be used to promote that business as well as potentially improving staff work satisfaction and performance.
While many may seek to downplay the time and resources they donate to charitable causes, promoting these activities can encourage others to participate or support charities. The promotion will also establish a link to business activities thereby supporting the claim for a tax deduction for associated expenses.
Employees and Voluntary Work
The circumstances of medical professionals that are employees and not operating a business is a little different. For such employees claiming a deduction for volunteer-related expenses is much more restricted. The definition of allowable deductions requires that the expenses must relate to the assessable income. As voluntary work is usually unpaid, it means that related expenses are not tax deductible (as stated in the Act above).
If some form of payment is received in relation to volunteer work it will not necessarily be treated as assessable income. The treatment will depend on the nature of the payment and the volunteer’s circumstances.
The ATO provides the following guidance in determining the treatment of such payments. It suggests a payment that is not assessable will have many of the following characteristics:
- The payment is to meet incurred or anticipated expenses
- The payment has no connection to the volunteer’s income-producing activities or services
- The payment is not relied upon or expected for the volunteer’s day-to-day living
- The payment is not legally required or expected
- There is no obligation on the part of your organisation to make the payment
- The payment is a token amount compared to the services provided or expenses incurred.
While the provision of medical services will generally be connected with a medical practitioner’s income-producing activities, all characteristics need to be taken into account. A payment for voluntary work would often meet the other criteria. In the case of a doctor volunteering overseas where it is agreed the doctor will fund the associated travel and accommodation expenses, any payment that is received that does not cover the costs would likely be considered a token amount and not assessable. Accordingly, with or without payment, the expenses are only likely to be considered deductible in limited circumstances.
Deductible Gift Recipients
Tax deductions for charitable causes in Australia are similarly limited to donations to Deductible Gift Recipients (DGRs). The establishment of a not-for-profit-entity to be registered as a DGR is one option that may be considered by medical professionals seeking to support charitable causes and receive a tax deduction for associated expenses.
We should express the administrative requirements for a DGR are particularly onerous. The cost and effort required to establish and maintain a DGR to enable pursuit of your preferred charitable causes would generally be considered to be prohibitive.
In addition, the Federal government has proposed legislation limiting the activities of DGRs to Australia unless further requirements are met. This would further limit the ability to use this option where a medical professional is seeking to volunteer overseas.
Gifts and donations to DGRs are tax deductible under specific rules in Australian income tax legislation. DGRs include a number of organisations that facilitate volunteering by health professionals. Donations made to these organisations are tax deductible. Any expenses associated with volunteering are generally paid by these organisations. However, it should be noted that a conditional gift is not deductible. Accordingly, an individual cannot claim a deduction where funds are paid to a DGR on the condition that the organisation pays the travel and accommodation expenses of the individual.
While this option may reduce the flexibility of volunteer work options, providing assistance to an established charitable organisation has many advantages. These organisations will generally ensure the required resources, training, information and logistics are provided. They will also generally have established relationships within the communities they operate and have a long-term presence. These factors can act to improve the effectiveness of the volunteer services provided by medical professionals.
What should we expect from the Australian government?
Medical professionals willing to volunteer their time should be supported. The Australian taxation system imposes high levels of tax on medical professionals due to high personal income tax rates and restrictions limiting the ability to access company tax rates. Where a doctor pays the expenses associated with volunteering it would only seem just for these expenses to be offset against assessable income as is the case with donations to DGRs.
Medical professionals involved in a business may be able to incorporate the provision of volunteer services into their business model, as discussed above. By doing so it helps to establish a link between the carrying on of the business and the expenses associated with volunteering. However, we again note that the individual circumstances of each case would need to be considered.
In order to remove this uncertainty a change to the Australian taxation law would be required. The law would need to change to specifically allow for deductions for volunteer expenses.
This is the case in the United States (US). The US tax system recognises out-of-pocket expenses incurred while volunteering as charitable contributions. It allows deductions for costs, such as travel and car expenses, with the treatment being the same as it is for donations. Like donations, the costs must be associated with volunteering for a qualified organisation that is registered with the IRS. So while volunteering is seemingly encouraged by the US tax system tax deductibility is dependent upon the charity registering with the IRS which in turn supports US-based charities.
The Sustainable Development Goals (SDGs) agreed at the United Nations (UN) in September 2015 include “ensure healthy lives and promote well-being for all at all ages”. This goal includes specific targets, many of which require significant improvements in access to medical services. As a member state of the UN, the Australian government agreed to adopt these goals. An index comparing countries performance on the SDGs recently released by the UN ranks Australia at 20th in the world. Government policy encouraging individuals and business to support charitable causes is vital if Australia is to improve its ranking. The introduction of legislation similar to the US would be one way of achieving this.
Unfortunately, given the current Australian political environment with continued focus on budgetary pressures it would seem unlikely that legislative changes to increase access to deductible expenses will occur. As a result, the ability to claim a tax deduction for expenses associated with volunteering will depend on the particular circumstances. Particular care should be exercised where the expenses incurred are substantial and a direct link with the business is not easily demonstrated. Accordingly, the advice of an experienced tax professional is advisable to ensure peace of mind given the increasing risk of tax audits for medical professionals.
At Pilot we have experience working with a wide range of medical practitioners and are committed to providing specialised services to the medical community. Should you wish to learn more related to your own unique set of circumstances please contact Angela Stavropoulos or Kristy Baxter on (07) 3023 1300.