Court Upholds ATO’s $60M Appeal in Healius Tax Dispute
Tax Law - 22 Oct 2020
On 9 October 2020, the Full Federal Court unanimously overturned the decision in Healius Ltd v FCT  FCA 2011, confirming the ATO’s position that lump-sum payments made by the taxpayer to doctors for consideration of acquiring and operating medical centres were made on capital account and not immediately tax-deductible.
The taxpayer entered into a number of agreements with existing medical practices, whereby it acquired the practice and the existing doctors agreed to work for the taxpayer for a set minimum period.
The taxpayer argued that payments to doctors under these arrangements were on revenue account, and that they were immediately deductible. The ATO disallowed this, asserting that the payments were of capital or of a capital nature.
The taxpayer was initially successful in the Federal Court, where Perram J held that the taxpayer’s business was the provision of services and facilities to medical practitioners, and not the provision of healthcare services to the public. Therefore, the payments were part of the taxpayer’s business incurred to derive regular income, and not paid to establish the structure of the taxpayer’s business.
The Commissioner of Taxation was successful in the full Federal Court, which upheld the appeal, finding that the Commissioner had demonstrated that the payments were of capital nature.
The test to distinguish capital from revenue expenditure
The Court stipulated that, to determine the character of a payment, the critical factor is “the advantage that the taxpayer sought to secure by making the contentious payment… what the contentious payment was truly for, as viewed from the perspective of the taxpayer”.
The Full Court found that the payments were not simply for securing each practitioner as a customer. The lump-sum was paid for the practitioner to cease operating an existing practice and commence practice at the centre by adopting the required business structure, which was entirely controlled by the taxpayer.
The taxpayer’s revenue was dependent on practitioners adopting this mode of practice, and the payments were a means of obtaining this commitment. Accordingly, the payments enable the profit-making ability of the business, and were properly characterised in as capital in nature.
Implications of the decision
This case may have implications for businesses in determining whether they will have the ability to deduct business expenses, or whether these expenses are considered capital in nature.
The Court has indicated that it will take a broad view when considering the nature of a company, taking into account the full extent of business conducted. This includes services provided directly from the company, as well as services facilitated indirectly through the operation of business.
The Court emphasised that capital expenditure is not limited to the acquisition of a business or a capital asset. A payment may be of capital in nature if it is for an asset that will be deployed by the acquirer to earn income, as part of the business structure of the acquirer. A payment may also be of capital character without making any addition to capital assets, if incurred to protect or secure an existing asset.
Most significantly, the decision highlights that while some past cases identify characteristics which may distinguish revenue from capital expenditure (e.g. recurring payments), there are none which will be determinative. Rather, the court will take a comprehensive view of the nature of the payment, placing more weight on the question of what the payment truly enables for the business.
Co-written by Maddy Ransley.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.