The most recent story out of Healthscope’s financial difficulties (with receivers appointed to two parent entities back in May 2025) is the proposed change of the operating entity into a registered charity.

This would allow the new entity to access some tax advantages, including the provision of tax-free fringe benefits to employees, up to a cap. On its own, this might not look that controversial, but Healthscope wants to access a substantial proportion of the tax break that would normally accrue to the employee by making the salary sacrifice switch to fringe benefits.

What options are on the table for Healthscope?

Before focusing on the tax issues confronting employees and Healthscope around the proposal, some background facts are required. First, as presently advised by Healthscope, the receivers are still inviting offers for the sale of Healthscope’s hospitals. The charity option is just an option that the receivers (and the major creditors, lenders) want to lay the groundwork for, should it emerge as the preferred option for keeping the hospitals in operation. Although, 33 new companies have been formed and registered with the Australian Charities and Not-for profit Commission (badged as HS Purpose Top Co Ltd).

Secondly, if Healthscope were to stay a for-profit entity (not a charity), the tax concessions attracting attention on fringe benefits would not be available. If Healthscope were to transfer the hospital operations to the new charitable entity (HS Purpose Top Co Ltd), many other tax concessions would also be available, for example, exemption from income tax and exemption from state taxes, including payroll tax. Payroll tax will be the most significant for Healthscope, given the significant number of employees in its hospitals. These tax concessions will provide a lower cost structure for its hospitals compared to the current for-profit structure.

Fringe benefit tax considerations and controversy

To the tax concession in focus. Access to fringe benefit tax concessions is available to employees of a not-for-profit (NFP) hospital. The hospital can provide fringe benefits (e.g. payment of housing rent, mortgage payments, children’s school fees) up to a certain level to employees without attracting fringe benefits tax (FBT). The value of the tax-free benefit to each employee is capped at a grossed-up value of $17,000, which is roughly $9000 by value of benefits per year: sections 5B(1E) and 57A of the Fringe Benefits Tax Assessment Act 1986.

The policy underlying this NFP hospital’s FBT exemption is said to be a recognition that NFP hospitals cannot pay the sort of salaries payable by the for-profit sector to attract staff, and that this FBT concession helps balance things out a bit.

Let us work through an example of how the Healthscope proposals on FBT might be intended to work. Say an employee is on a taxable income of $80,000 (wages). The top part of this attracts the 30% marginal income tax rate and therefore $10,000 of salary leaves the employee with $7,000 after tax ($10,000 x 30% is $3000). Ignore Medicare.

Healthscope’s proposal would say to the employee: "Give up $10,000 of your wages and we will pay or reimburse $9000 of (or part of) your private expenses." The employee is not taxed on receipt of the $9000 in benefits, and there is no employer FBT payable on the $9000 because of the NFP hospitals concession.

Limiting the focus to just the above “switch”, the employee is better off by $2000 ($9000 compared to $7000, after tax income). Further, the NFP employer (as a NFP hospital) has reduced its employee remuneration costs from $10,000 (payment of wages) to $9000 (provision of benefit). The only “loser” is the public revenue.

This is the issue that seems to have aroused a lot of anger; the Healthscope proposal would seem to require the employee to “hand over” some of the $2000 gain made by the employee, with some commentary saying as much as 90% in certain circumstances. The charging of an administration fee by the employer for salary packaging is standard practice, but one senses that this is kept at around 10% of the savings made by the employee. The Healthscope “fee” seems too high to be just a recoupment of administrative costs. It raises the spectre that Healthscope is using the salary packaging event as an opportunity for partial rescue from its financial situation.

Legal considerations for Healthscope and employees

Healthscope employees should, if possible, get tax and financial advice before voting on what appears to be a change to the enterprise agreement. It is likely a yes vote now, but it does not necessarily mean an employee must take up the remuneration switch; that is likely to be a decision for later.

Is (or would) the tax switch be legally effective? The answer is unclear. True, the ATO would be concerned with this because the salary packaging is being done in a different environment from the ordinary type of packaging undertaken; it is not an ordinary situation because part of the background is a change from a taxable entity into a tax-exempt entity. Putting that aside, Healthscope is accessing an express concession provided to a not-for-profit hospital in the FBT legislation for the “benefit” of employees in a certain sector.

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Having said the above, it would give employees more comfort if the situation had an ATO “comfort letter”. A comfort letter could take the form of an ATO ruling that the situation will not be subject to an anti-avoidance rule in the Tax Act. The Tax Act does have a general anti-avoidance rule (GAAR) and one could argue that the switch in remuneration is being done for the purpose of minimising the income tax of employees.

A similar issue arises for Healthscope's exemption from income tax (switch from taxable to non-taxable entity), but it is unlikely that the GAAR will apply to defeat this transaction.

Whether what is proposed here is ethical is another question and necessarily brings in subjective considerations. However, the Healthscope proposal could re-ignite the long-standing debate about tax exempt charities and other NFPs operating large businesses in competition with taxable entities. This is an unresolved tax policy issue, but it also touches other policy areas such as competition law.

Superannuation and other financial implications

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 (reported to be around 19,000), the loss of payroll tax to the states would be significant on the switch to a registered charity.

One key thing an employee needs to consider is whether the salary sacrificed for the fringe benefit (or the benefit itself) would attract superannuation contributions from the charity (employer). If not, this can have a significant effect on the retirement savings of the employee. The answer appears to be no (see section 11(3) and the meaning of “ordinary time earnings” in section 6(1) of the Superannuation Guarantee (Administration) Act 1992 and the Superannuation Guarantee Ruling SGR 2009/2 and its discussion that the term “earnings” is roughly equivalent to salary or wages). Again, though, advice on superannuation and other financial implications should be obtained, if possible, before voting on the question at hand.

Learn more: Large companies pay zero or low Australian income tax: Why?

It is fair to say that Healthscope’s charity option draws on the tax system to help implement a lower cost structure for its operations and perhaps make the hospitals viable over the longer term.

Healthscope not-for-profit charity tax FAQ

Q. What is Healthscope proposing with its charity conversion?
A. Healthscope is considering transferring hospital operations to a not-for-profit entity to access charity-related tax exemptions and cost efficiencies.

Q. How does fringe benefits tax apply to not-for-profit hospitals?
A. Employees of NFP hospitals can receive certain non-cash benefits tax-free up to a capped amount under the Fringe Benefits Tax Assessment Act 1986.

Q. Why is the ATO’s role significant in this proposal?
A. An ATO ruling or comfort letter would clarify whether Healthscope’s salary packaging arrangements comply with anti-avoidance provisions in the Tax Act.

Q. What are the potential financial implications for employees?
A. While employees may gain from tax-free benefits, they could lose superannuation contributions on the salary-sacrificed portion of their income.

Q. Could this proposal affect competition and public revenue?
A. Yes, the charity conversion could reduce payroll and income tax revenue while raising policy questions about charities competing with taxable entities.