In Healius’ case, the Federal Court (‘FC’) held that lump sum payments paid by the taxpayer during the 2003 to 2007 income years to medical practitioners to secure their services for a period of five years were deductible under S.8-1.
The facts in Healius’ case
The key facts and sequence of events in Healius’ case can be summarised as follows:
- Healius Ltd, a publicly listed company formerly known as Primary Health Care, was the head company of a tax consolidated group of which Idameneo (No 123) Pty Ltd (as trustee of the Artlu Unit Trust) was a subsidiary member. As the case concerned the affairs of Idameneo (No 123) Pty Ltd specifically, it is referred to as the taxpayer for these purposes.
- The taxpayer began its business in 1985 when its founder, the late Dr Edmund Bateman, opened a general practice.
- In the early years of the business, the taxpayer acquired pre-existing medical centres which were already staffed by doctors. However, by the time of the commencement of the income years relevant to the dispute (i.e., 2003 to 2007), it had changed its business model and began to open new medical centres (and not just operate pre-existing ones).
- The business of the taxpayer comprised three segments, being the provision of premises and services to doctors, a pathology business, and a development business which bought and developed medical centres which it then sold and leased back. Only the first of these businesses (i.e., the provision of premises and services to doctors) was relevant to the current proceedings.
- The change to the business model necessitated that the taxpayer engaged doctors to work at the new medical centres. During the relevant income years, it opened 18 new medical centres and entered into arrangements with 505 doctors to whom it paid lump sum amounts totalling some $157,996,130 for them to bring their practices across to its medical centres.
- Most of these contracts were of five years duration but amongst them, there were some with terms as short as six months and a few as long as ten years. Note, the proceedings were conducted on the basis that the Court should approach the matter of contract length on the assumption that the duration of the contracts was on average around five years, as contracts with different durations were seen as being at the margins.
- The Commissioner assessed the taxpayer on the basis that the lump sum payments were ‘capital or of a capital nature’, and therefore, not deductible. The Commissioner disallowed the taxpayer’s objections and it appealed to the Federal Court for a review of the objection decisions.
The contractual provisions
The proceedings before the Court were concerned largely with the contracts executed between the taxpayer and one doctor, Dr PH. Dr PH entered into two contracts with the taxpayer. The first was entitled Provision of Services to Medical Practitioner (‘the Practitioner Contract’), and the second, Sale of Practice (‘the Sale Deed’).
The key details from each of these contracts are now discussed. Note, although the individual contracts (of each doctor) were not identical in every respect, there were no material differences between them.