The taxpayer was an Australian public company that provided (including, relevantly, through a subsidiary trust (“Idameneo”) whose results were consolidated for tax purposes with its own 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 (generally around five years) and not to provide medical services to anyone within a radius of, say, 7km of the medical centre or the doctor’s own former practice at that practice’s previous location within that period. In the four-year period, the taxpayer entered into 505 such agreements.
In finding 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, Perram J found that:
- “the payments of the lump sums are to be seen as recurrent and ongoing as Idameneo consistently tried to engage doctors to meet its ongoing demand for them. It did so 505 times in the relevant period…” (para. 55)
- “I accept, of course, that the enduring nature of an outgoing is a very relevant matter … but I do not think that the five year term obtained under the contracts here was of such a nature. At the end of the five year period, the doctor was free to go and the evidence disclosed several examples where Idameneo had had to make further payments to keep a doctor whose five year term had expired working in one of its medical centres" (para. 70)
- "the Commissioner’s submission that by paying the lump sums Idameneo acquired the practices of the doctors or their goodwill ... [was] not consistent with ... ‘what the payments were really for’" (para. 62)
- “the character of the outgoings was as a payment to win a customer” (para. 72)
- “This is analogous to the position of the petrol company in BP Australia where Lord Pearce at 405 had referred to the fact that ‘[t]he benefit was to be used in the continuous and recurrent struggle to get orders and sell petrol’.”