Healius – Federal Court of Australia, Full Court finds that lump sum payments made to lock-up doctors at medical centres effectively controlled by the payer were capital expenditures

A subsidiary (“Idameneo”) of an Australian public company 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.

The Full Court reversed the primary judge, and found that Idameneo paid the lump sums as capital expenditures, stating that in each case, it was securing the “lasting protection for the goodwill of the [medical] Centre” and that it was “maintaining the structure of its business” by “ensuring it had in place the commitments that it needed to operate its business.”

The Court went on to state that “[i]f all that Idameneo had done was to set up the Centres and then secured practitioners as customers to occupy the Centres and pay for services then term contracts with upfront lump sum payments might indeed be seen to be analogous to those made in BP Australia,” where it was found that securing five-year agreements of gas stations to serve as BP gas stations did not give rise to an enduring benefit. However, here it was instead found that Idameneo’s “business activity was not focussed upon selling services to practitioners, it was focussed upon running the Centres and attracting patients,” so that the payments enhanced the goodwill of and built up the structure of Idameneo’s own business.

Neal Armstrong. Summary of Commissioner of Taxation v Healius Ltd [2020] FCAFC 173 under s. 18(1)(b) – capital expenditure v. expense - current expense v. capital acquisition.