Healius – Federal Court of Australia finds that lump sum payments made to lock-up doctors as customers for a 5-year period were currently deductible
A subsidiary (“Idameneo”) of an Australian public company that provided medical centre facilities and services to doctors in consideration for 50% of the fees generated by them. In order to induce a doctor to join one of the medical centres operated by it, it would typically pay a lump sum in the range of $300,000 to $500,000 to the doctor in consideration for the doctor’s promise to conduct his or her practice from the medical centre for a specified period of around five years, along with an exclusivity covenant. The taxpayer entered into 505 such agreements in the four years that were assessed.
In finding that such payments were not capital expenditures, and were currently deductible, Perram J found that:
“the payments of the lump sums are to be seen as recurrent and ongoing as Idameneo consistently tried to engage doctors to meet its ongoing demand for them. It did so 505 times in the relevant period…”
“the five year term obtained under the contracts here was [not of an enduring] nature. At the end of the five year period, the doctor was free to go …”
“the character of the outgoings was as a payment to win a customer”
The above finding that a five-year agreement did not give rise to an enduring benefit is consistent with BP Australia, which has also been cited in Canada.
Neal Armstrong. Summary of Healius Ltd v Commissioner of Taxation  FCA 2011 under s. 18(1)(b) – capital expenditure v. expense – contract purchases.