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Your guide to the questions at the heart of the multi-million dollar litigation between Healius and the tax office.

In recent years, a legal battle between the GP company Healius and the Australian Tax Office has been brought to court.

It is of interest to many doctors because it appears to be a subject that has many emotions to the medical profession.

When general practitioners sign up for a company, are their clients offered the facilities and services they need to carry out their calling – for example, the medical center, administrative staff, nursing staff?

Or are they actually part of the commercial infrastructure the company uses to operate its medical centers and attract patients?

It is important to emphasize that the actual legal issues that are at the heart of Healius’ struggle are somewhat monetary in nature.

What did Healius buy?

The courts have been asked to determine whether the historical advance payments that the medical center operator has made to its doctors are capital in nature and, as such, are not deductible from their determinable income.

And that is a complex area of ​​tax law. As is no doubt known to all, Healius (
previously known as Primary Health Care Limited) is active in the development and operation of medical centers.

Doctors at the centers run their own practice, but all necessary facilities and support services, including reception and billing services, are provided by Idameneo, a wholly-owned subsidiary of Healius.

In the past, the typical regime Healius used to populate its centers with doctors was to enter into a sale of practice certificates and an agreement to provide services.

Doctors who had such arrangements in the past usually agreed to conduct their medical practice from an Idameneo center for an agreed period of time (usually five years) and received lump sums of hundreds of thousands of dollars.

Between June 2003 and June 2007, the Australian Income Tax Office (ATO) assessed Healius’s income on the basis that these flat-rate expenses were “capital or principal” for the purposes of the Income Tax Assessment Act 1997.

This meant that Healius was not entitled to deduct the lump sums from its taxable income, which resulted in Healius facing significantly higher tax claims.

Capital or not?

Healius appealed to the Federal Court of Australia and won at least initially in 2019.

The court examined the purpose of the lump sums and found:

  • The medical centers did not provide public health services. They ran a full range of medical services and facilities in Idameneo’s medical centers.
  • The doctors were the customers of the medical centers. The more doctors there were employed in the medical centers, the more profitable those medical centers would be for Idameneo and ultimately for Healius.
  • Although the doctors each signed a sales contract, they did not sell their practice to Idameneo. Each doctor continued to run his own medical practice in Idameneo medical centers. and so it was the doctors who served the patients.
  • The lump sums were not capital, and so the deductions claimed by Healius were available.

Reversal of fate

The ATO (more precisely the tax commissioner) appealed against this decision to the entire federal court. and in a decision made last month, the original decision was reversed.

It is worth looking at the reasons for this.

The appeal again centered on the question of whether the lump sum payment to doctors was properly characterized as capital (were the general practitioner payments, along with the bricks and mortar, part of the company’s infrastructure?) Or revenue.

In the Court’s view, the most important, if not critical, factor in determining the nature of the lump sums was to consider the benefit that Healius (as a taxpayer) was trying to secure in the payment.

This requires a “practical commercial investigation” and a “thorough investigation and close scrutiny of the taxpayer’s activities,” the court said.

In direct contrast to the court’s earlier decision, it found that the nature of Idameneo’s business was not properly described as a medical service company.

The judges found it was much more than that.

The lump sum agreements with practitioners “were not aimed at simply attracting every practitioner to Idameneo.”

The precautions were essential to the operation of the medical centers because “they allowed Idameneo to control the manner in which these doctors conducted their practices from.”
[centres] in all material respects, apart from the professional judgments that have to be made in the provision
medical service”.

In other words, the lump sums were more than just backing up GPs as mere customers.

“Essential to Business”

According to the court, each lump sum was a payment to the practitioner to: (a) cease operating an existing practice; (b) start trading as part of a medical center in Idameneo under the necessary procedure; and (c) accept a restriction on establishing a competing medical practice.

Ensuring the doctors’ commitment in this regard is an integral part of Idameneo’s business, the court ruled.

Along with the physical assets that make up each medical center, the commitments formed the commercial infrastructure that Idameneo then used to generate its revenue by attracting patients to its centers.

Hence the lump sums were capital expenditures; and consequently the tax refunds requested by Healius were not available.

Historical precedents

The court of law distinguished from previous rulings where customer security expenses were viewed as deductible from income.

One case cited was BP Australia Ltd v Federal Commissioner of Taxation (1965).

In this case, BP made agreements with gas station owners to sell only BP-branded gasoline.

Each owner agreed to mark their website as a BP website for the duration of the agreement. BP paid a lump sum to each owner and requested the lump sums as allowable deductions.

It was held in this case:

  • BP was already set up to provide gasoline when these agreements were signed and did not need the agreements as part of its profit structure in that sense. The agreements were not part of the infrastructure. However, in BP’s operating market, it was necessary to follow the practices of BP’s competitors and enter into agreements with gas station owners to ensure the sale of gasoline.
  • The payments were made within the framework of
  • the cost of conducting income generating operations.
  • These lump sums were therefore paid on the revenue account and allowed as deductions.

Another case cited by the federal court was NAB v Commissioner of Taxation (1997).

Here the NAB made a payment to the Commonwealth to secure the exclusive right to be a lender under a housing system for the Australian Defense Force.

It was held in this case:

  • The bank did not have to enter into the contract with the Commonwealth to be in business. It already had the resources and funding to provide the loans.
  • The advance payment was only used to secure a bundle of loan agreements as part of NAB’s business operations.
  • The payment was therefore made as part of the bank’s trading activities and thus as a permissible deduction.

The current verdict

In short, BP and NAB were paying for future customs while Idameneo was paying for something that was part of its essential commercial infrastructure.

In the words of the federal court: “It was not enough for Idameneo to build the centers and offer services to build the business of running the centers.

“Agreements had to be made with doctors to which they would commit [Idameneo’s
operating] Model … Without these obligations it had no business. “

Therefore, whenever Idameneo paid a doctor a lump sum, it “kept the structure of its business” and “made sure it had the commitments it needed to run its business”.

Without the commitment of its doctors to run their practice in a medical center in Idameneo, the company would lack the infrastructure necessary to run the business.

Conclusion

There is a long case law regarding the characterization of payments as income or capital expenditure.

As noted, this is a complex area of ​​tax law and, at the time of writing, Healius had requested special leave from the High Court of Australia to appeal the federal court’s decision.

The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.