The Full Federal Court in FCT v Healius [2020] FCAFC 173 has upheld the Australian Taxation Office’s (ATO) appeal of the Federal Court decision in Healius v COT [2019] FCA 2011 which considered whether lump sum payments made by a medical centre to its doctors were assessable on revenue or capital account.

Background

The taxpayer operated medical centres and engaged doctors, mostly general practitioners, to conduct their medical practices at the medical centres.

During the 2003 to 2007 income years (Relevant Years), the taxpayer paid doctors lump sums of approximately $300,000 to $400,000 each in return for their promise to exclusively conduct their practices from one of the taxpayer’s medical centres for a period of typically five years.

The Commissioner of Taxation (Commissioner) assessed the taxpayer’s income for the Relevant Years on the basis that the lump sum payments were of a capital or of a capital nature and therefore not immediately deductible. This was because the Commissioner considered the taxpayer’s core business structure was the provision of medical services to the public.

The taxpayer argued the lump sum payments were part of a process by which it operated its business in order to obtain regular returns, and the payments were not paid to establish the structure or organisation of the taxpayer’s business.

The Federal Court decision

The Federal Court (Justice Perram) held the lump sums payments were immediately deductible on revenue account.

Justice Perram held the provision of medical services by the doctors to the public did not form part of the business structure of the taxpayer. The taxpayer’s business was providing services and facilities to health care providers that conducted their own business/es from the taxpayer’s premises.

Applying the High Court decision in COT v Sharpcan [2019] HCA 36 (which we discussed in our earlier article), Justice Perram held the correct approach to determine the character of the lump sum payments was to compare the expected business structure of the taxpayer after the outgoing with the expected structure “but for” the outgoing. In this instance, if the payments had not been made, the business structure of the taxpayer would still have consisted of the medical centres and associated infrastructure.

The Full Court decision

The ATO appealed and the Full Court of Jagot, Moshinsky and Colvin JJ allowed the appeal.

Accepting the ATO’s contentions, the Full Court found:

“with due respect to the careful analysis of the primary judge, the Commissioner has demonstrated that the Lump Sum payments were capital outgoings. That is principally because they were not simply payments to secure medical practitioners as customers who would then pay to use the facilities and support services provided by the Centre. Rather, they were payments made for the practitioner (a) to cease operating an existing practice (or otherwise practising independently of the Centre); (b) to commence trading as part of the Centre by adopting Idameneo’s required mode of practice; and (c) during the arrangements as well as thereafter to accept a restraint on establishing a medical practice that would compete with the Centre.”

The acquisition by the taxpayer of the goodwill of the doctors was not an essential part of the arrangement from the perspective of the taxpayer. Rather, the lump sum amounts were paid to secure advantages for the taxpayer that added to and enhanced “the structure (including goodwill) of [the taxpayer’s] business”. The Full Court, accordingly, found the lump sum amounts were not paid to acquire the goodwill of the existing practices.

In addition, the Full Court considered that the business of the taxpayer was not the provision of services to doctors and other health care providers to conduct their businesses at its medical centres but was more accurately described as the taxpayer operating the medical centres. All material aspects of the conduct of the business of providing medical services to patients of the medical centres were in the hands of the taxpayer.

Conclusion

It has been reported the taxpayer is reviewing the Full Court’s decision and considering its options including whether to apply to the High Court for special leave to appeal.

As we reported in our earlier article in relation to Sharpcan, the revenue/capital distinction is one over which reasonable minds will differ; each case must be assessed on its own merits having regard to what the outgoings were were actually made for. This has been highlighted yet again by the Full Court’s decision in Healius.

If you require more information in relation to the Full Court’s decision in Healius or require advice or assistance on understanding whether business outgoings are on revenue or capital account please contact.

Sam Campbell
Senior Associate | Business Law
M +61 423 515 454 | T +61 3 9611 0135
E: scampbell@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au