Pathology rent, allied health sub-leases, imaging tenancies and pharmacy arrangements generate income that does not depend on GP clinical labour. That makes them attractive to buyers. They are generally included in goodwill calculations during a sale, provided the income is documented, transferable and compliant under regulatory requirements.
Informal or poorly documented arrangements create the opposite effect. If a buyer cannot verify that the income will continue post-settlement, they will discount it or exclude it from EBITDA. The gap between what the seller thinks the income is worth and what the buyer will pay for it is almost always a documentation problem.
What makes secondary income valuable
Industry estimates put the number of GP practices in Australia with co-located pathology services at more than 5,000, though no verified government count has been publicly published (Medical Republic, April 2025). Rental income from pathology collection centres is often the third-largest revenue source for a practice. Industry estimates put the figure at approximately $30,000 per full-time equivalent (FTE) GP per annum at market rates, though this varies with location, practice size and patient volume. This is a widely cited rule of thumb, not a measured figure, and should not be used in place of an independent valuation. A collection room serving multiple GPs may generate multiples of this amount.
The Department of Health recommends independent commercial valuations to ensure compliance with the 20% market value threshold.
The $30,000 figure should not be confused with the court-assessed market values in the Healius Federal Court case, which related to specific collection rooms measured by floor area. In that case, Medicare’s expert evidence assessed the market value of the collection rooms in question at between $30,000 and $82,500 per annum (site-specific figures for two dermatology practices in NSW), while the rents actually charged ranged from $150,000 to $204,000. Those figures are not general-market benchmarks; they reflect the assessed value of specific rooms at specific practices at the time the relevant leases were entered.
This income is passive. Unlike GP billings, which require a clinician in a chair, pathology rent arrives monthly with minimal operational input. It smooths cash flow and reduces dependence on consultation volumes. Buyers prefer practices where not all earnings rely on GP activity, because diversified income is lower risk and more predictable.
The same logic applies to allied health tenancies, imaging providers, pharmacy co-locations and visiting specialist arrangements. Each adds a revenue line independent of GP labour, improving the practice’s risk profile and supporting a higher EBITDA multiple. But only if the income is documented and transferable.
Pathology rent risk
Pathology rental arrangements have become more contentious over the past five years. During the COVID-19 pandemic in 2020, major pathology providers sought rent reductions of around 50% from GP practices, citing declining test volumes (RACGP newsGP, 17 April 2020). The larger risk is structural. Major pathology companies, in particular Healius, are reducing their co-located footprint and shifting toward standalone collection centres. If this trend continues, rent reductions of 50% or more become a realistic scenario for practices that lose their competitive advantage as collection sites.
On 18 August 2023, the Federal Court handed down its decision in Chief Executive Medicare on behalf of the Commonwealth of Australia v Healius Pathology Pty Ltd [2023] FCA 981, confirming that above-market pathology rents attract regulatory consequences. The proceedings were brought against Specialist Diagnostic Services Pty Ltd (now Healius Pathology Pty Ltd), trading as Laverty Pathology, in relation to four lease arrangements at two dermatology practices in Castle Hill and Kingswood, NSW. Healius was ordered to pay a penalty of $1.65 million plus $200,000 in costs. The matter was resolved by consent: Healius admitted to four contraventions without the court adjudicating on the precise market values. Medicare’s expert evidence, which was not contested at the hearing, assessed rents at the relevant sites as ranging from 100% to 470% above market value.
The practical effect is that pathology rent can no longer be treated as a stable, guaranteed income. Buyers now scrutinise pathology arrangements more heavily than they did five years ago. They want to see that the rent is at market rate, the agreement is current, transfer provisions are clear and the arrangement is compliant with the Health Insurance Act.
Health Insurance Act compliance
Part IIBA of the Health Insurance Act 1973 (Cth) governs pathology collection centre rental arrangements. The prohibited practices provisions create civil penalties for offering, giving, asking for or accepting benefits connected to pathology services. In a leasing context, the main requirement is that rent must not be ‘substantially different’ from market value. Market value is defined in reg 77 of the Health Insurance Regulations 2018 as the amount a willing purchaser would have to pay a willing (but not anxious) vendor in an arm’s-length transaction. Regulation 76 of the same instrument deems rent to be ‘substantially different’ from market value if the difference exceeds 20% of that market value. In the GP practice context, the operative risk is rent above the threshold.
Rent cannot also be related to the number, kind, or value of pathology requests. Any arrangement that links rent to referral volumes is a prohibited practice and exposes both the practice and the pathology provider to civil penalties of up to 6,000 penalty units each. At the current penalty unit value of $330 (operative from 7 November 2024 under the Crimes Act 1914), that equates to a maximum of $1.98 million per contravention. Penalty unit values are indexed periodically; the figure current at the date of any contravention applies.
Since 1 July 2018, new pathology collection centre leases must be registered with the Department of Health through Health Professional Online Services (HPOS). The Department uses data analytics to identify outlier rents and flag potential non-compliance rather than reviewing every lease individually.
The Department has used data analytics to issue compliance letters to parties to leases where rent appears to exceed market value. In December 2018, HWL Ebsworth (Geoff Bloom, Partner) reported that approximately 450 leases, representing just under 10% of all pathology-approved co-located centre leases in Australia, had received these ‘please explain’ letters. Compliance activity has continued since, culminating in the Healius penalty in 2023. Practices with pathology agreements should obtain an independent commercial property valuation to confirm that the rent is defensible and within the 20% threshold.
Buyers will verify compliance during due diligence. If the rent exceeds the threshold, the buyer faces regulatory risk that could reduce their offer or collapse the deal.
Allied health and imaging subleases
Physiotherapists, dietitians, psychologists, imaging providers and other tenants can generate reliable rental income for GP practices. These arrangements do not carry the same regulatory framework as pathology, but buyers assess them with the same lens: is there a signed agreement, is rent at market rate, can the agreement be assigned to a new owner, and will the tenant stay.
Informal arrangements in which an allied health practitioner pays monthly rent without a signed agreement pose obvious risks. The tenant can leave at any time with no obligation to give notice. The buyer cannot rely on the income continuing and will exclude it from EBITDA.
Practices that want this income included in their valuation need to formalise agreements before going to market. A signed sub-lease with clear rent, term, renewal options and assignment clauses converts an informal arrangement into a documented revenue line.
Transferability and assignment rights
The single most important element of any sub-lease agreement from a sale perspective is whether it transfers to the new owner.
Agreements should include assignment clauses allowing transfer to a new practice owner without requiring tenant consent. If the agreement requires the pathology company or allied health provider to consent to assignment, the buyer faces uncertainty. Consent may be withheld, or the tenant may use the change in ownership as leverage to renegotiate terms.
The remaining lease term is a consideration too. If a pathology agreement expires within 12 months of settlement, the buyer cannot model that income as recurring. They will either exclude it from the valuation or discount it to account for replacement risk. At least three years of remaining term at settlement is the general minimum that gives a buyer confidence.
Practices should review all sub-lease agreements for assignment rights and remaining term well before commencing sale discussions. If agreements are short or lack clear transfer provisions, renegotiate with tenants early. This is harder to do once buyers are at the table.
What buyers examine during due diligence
Buyers will verify that sublease agreements exist and are signed, confirm that rent is at market rate and complies with regulatory requirements where applicable, check the remaining term and renewal options, assess assignment rights and whether tenant consent is required, and evaluate the risk of tenant renegotiation or departure.
They will also reconcile sub-lease income with the financial statements to confirm that rent is being paid as stated. Any discrepancy between what the agreement says and what appears in the accounts raises questions about the reliability of the entire financial presentation.
If sub-lease agreements are missing, expired or non-compliant, buyers will typically discount their offer to exclude the income, require the seller to formalise agreements before settlement, or impose warranties that tenants will continue paying rent post-sale. Each of these outcomes weakens the seller’s position.
The valuation impact
Documented, transferable secondary income can support a higher EBITDA multiple by reducing buyer risk and demonstrating that the practice does not depend entirely on GP billings. The size of that premium varies with the buyer, the income amount and the quality of documentation. It disappears entirely if the agreements are informal, expired or lack clear assignment rights.
A practice generating $300,000 in EBITDA that includes $30,000 in pathology rent is a different proposition from a practice generating $300,000 from GP billings alone. The former has more diversified and lower-risk earnings.
Preparing sub-lease documentation for sale
Practices planning to sell should audit all sub-lease arrangements. Identify every tenant, whether pathology, allied health, imaging, pharmacy or other, and confirm whether each has a current signed agreement.
For each agreement, check:
- The rent amount and payment schedule
- Remaining term and renewal options
- Assignment clauses and whether tenant consent is required
- Compliance with regulatory requirements (for pathology, this means the Health Insurance Act provisions)
If agreements are informal or expired, formalise them. Work with a commercial property lawyer to draft agreements that include:
- Market-rate rent supported by independent valuation
- Clear assignment rights allowing transfer without tenant consent
- Sufficient remaining term (at least three years at settlement)
- For pathology arrangements, compliance with the 20% market value threshold under the Health Insurance Regulations 2018
Document the value of sub-lease income in financial reports. Buyers should be able to reconcile sublease revenue against signed agreements and confirm that income has been consistent over at least 2 years.
The cost of informal arrangements
Missing or poorly documented sub-lease agreements reduce buyer confidence and valuation. Practices with informal pathology or allied health arrangements face:
- Income exclusion from EBITDA calculations
- Valuation discounts of 10% to 20% if buyers include the income but apply a risk adjustment
- Extended due diligence while agreements are formalised and executed
Buyers may also impose post-sale conditions. They may require the seller to warrant that tenants will continue paying rent for a defined period, or structure part of the purchase price as an earn-out contingent on sub-lease income continuing. These conditions reduce the seller’s bargaining position and delay capital realisation.
Pathology rent reduction risk
The 2020 pandemic-era requests for 50% reductions demonstrated how quickly this income can come under pressure, and the current shift away from co-located collection centres is a structural change in the pathology business model, not a temporary negotiating tactic.
Buyers will price this risk into their offer. If a pathology agreement is due for renewal within 12 to 24 months of settlement, the buyer may assume a rent reduction and adjust accordingly. Practices can reduce this risk by negotiating longer-term agreements before sale and obtaining independent valuations confirming rent is at or below market rate.