Current expense vs. capital acquisition

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Commissioner of Taxation v Healius Ltd, [2020] FCAFC 173

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 primary judge had found that such payments were not outgoings of “capital or of a capital nature” within the meaning of s 8-1(2)(a) of the Income Tax Assessment Act 1997 (Cth), so that they were deductible when incurred.

In finding that the payments (the “Lump Sums”) instead were capital expenditures, the Court stated (at paras 140, 144, 150 - 152):

… Just as much as the Centres needed the physical capital assets comprised by the bricks and mortar of the buildings, they also needed the capital asset of practitioner commitments to be at the Centre for five years (and thereafter subject themselves to the restraint). …

… The Lump Sum amounts were paid to achieve … lasting protection for the goodwill of the Centre. They did have an enduring character, at least to that extent.

… Each time it … made a payment of a further Lump Sum amount it was maintaining the structure of its business. It was ensuring it had in place the commitments that it needed to operate its business… .

… Those arrangements enabled Idameneo, in effect, to run the practices of the practitioners at Idameneo’s cost and in return to receive the agreed percentage of the fees earned. Its business activity was not focussed upon selling services to practitioners, it was focussed upon running the Centres and attracting patients. …

If 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, National Australia Bank and Tyco. But, on the evidence, the Lump Sum amounts were not paid to secure the custom of the practitioners.

Administrative Policy

17 February 2010 Internal T.I. 2009-0348461I7 F - Transfert d'une PCMC à une société mère

fully claimed films productions acquired from production sub on capital account

After a subsidiary (“Imageco”) of a Canadian-controlled private corporation (“Canco”) produced a film and DVD (the "CFVPs"), being Canadian film or video productions for which Imageco received the film and video production tax credit, it transferred the CFVPs to Canco. The Directorate indicated that the CFVPs likely were acquired by Canco on capital account, and were to be included as a Class 10(x) asset.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 10 - Paragraph 10(x) full cost of CFVPs acquired by parent from production sub (which claimed the credits) added to Class 10(x) 88

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