Decision impact statement

Primary Health Care Ltd v Commissioner of Taxation

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Venue: Federal Court of Australia
Venue Reference No: VID911/2005, NSD2169/2005, NSD1790/2005, NSD2467/2005, NSD193/2006 & NSD195/2006
Judge Name: Stone J
Judgment date: 4 May 2010
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• TD 2005/1
• TR 1999/16

Subject References:
Income Tax
Contract - construction
Contract - implied terms
Intellectual Property
Copyright - original literary work
Copyright - patient medical and dental records
Copyright - centrality of authorship

Précis

Entitlement to claim deductions in respect of decline in value of copyright in patient records, allegedly acquired from medical and dental practices.

Decision Outcome:

Favourable

Brief summary of facts

Primary Health Care Limited (PHC) is a public company whose shares are listed on the Australian Stock Exchange. At all material times it was the sole beneficial owner of all the issued units in the Artlu Unit Trust (Trust) of which Idameneo (No 123) Pty Ltd was the trustee.

PHC operated medical centres and as part of its business strategy it purchased existing medical and dental practices. When purchasing a practice, PHC also entered into a contract with the medical practitioner to work in the PHC medical centre as an independent contractor.

All of the Sale of Practice Agreements provided for the sale to include the goodwill of the Practice. The taxpayer contended that the goodwill of the Practice included the assets of copyright in the medical records. This contention challenged the findings of the High Court in Commissioner of Taxation of the Commonwealth of Australia v Murry (1998) 193 CLR 605 at 608-9 that goodwill is an indivisible item of property and it is an asset legally distinct from its sources - including other assets of the business. This also challenged the Commissioner's position as reflected in TR 1999/16.

The taxpayer also contended that the purchase price for the Practice, although apportioned between goodwill and some minor physical asset, included an amount for the copyright in the medical records. This proposition challenged the findings in Murry v King (1984) 4 FCR 1 and TD 2005/1 and would have significant ramifications. If accepted, each party to a transaction could retrospectively rewrite and reapportion amounts agreed to in an executed contract.

The relevant legislative provisions are the Income Tax (Transitional Provisions) Act 1997; former Division 10B of ITAA 1936: former Division 373 of ITAA 1997 and Division 40 of the ITAA 1997. These provisions allow a deduction for depreciation, or a capital allowance, for an interest in copyright that was used or available for use, in the course of carrying on a business for the purposes of producing assessable income.

The preliminary questions was whether the Trustee was entitled to claim deductions with respect to the decline in value of intellectual property rights, namely copyright in patient records, allegedly acquired by it. If these deductions are allowed the net income of the Trust would be reduced, and therefore the income of PHC would be reduced.

Issues decided by the court

In relation to each of the sample sale of practice agreements, the Court considered the following preliminary questions:

(i)

Did copyright subsist in the patient records of the practices acquired by the Trustee?

(ii)

Did the Trustee acquire ownership of any copyright or a licence to use any such copyright?

(iii)

Did the Trustee give any consideration for any acquisition of copyright from a vendor?

(iv)

How, if at all, was any such copyright used or available for use by the Trustee for the purpose of producing assessable income, and whether any works in which such copyright subsisted were used for that purpose?

Answers:

(i)

With limited exceptions, there was no copyright existing in the majority of the patient records in evidence. However this does not imply that copyright can never subsist in medical or dental records.

(ii)

Only one contract of sale expressly provided for the transfer of copyright, and in the case of that contract only, the Trustee acquired copyright in some referral letters. The Court found that the transfer of the patient records to the remaining practices did not require the implied creation of a licence to use the copyright in those patient records.

(iii)

On the facts of this case, there was no consideration provided for the transfer of copyright. The Court considered that where the parties had agreed to allocate the sale proceeds between goodwill and certain listed assets, there was no reason why the Court should interfere to allocate any portion of the sale proceeds to the copyright transferred. By way of obiter dicta the court considered that if there was no apportionment by the parties of the consideration between the assets transferred, then the court could find an amount of the price was "reasonably attributable" to the copyright purchased.

(iv)

It was not necessary to decide this point. However, the Court considered in obiter dicta that for the purposes of determining whether the copyright was being used by the Trustee in its business-

1.

under Division 373, use of the copyright or the physical records was sufficient; and

2.

under Division 40, the requirement that the copyright be available for use is satisfied by the availability of the physical records.

On the facts of each practice the Court found that some of the Medical Practices would have "used" the copyright in the material by copying the Patient Records to a new record or new patient database and that others would have "used" the Patient Records by having physically delivered the patient records to the Trustee thus making the records available for copying.

Applying the above principles to the facts of the case, the Court held that the Trustee was not entitled to deductions in respect of decline in value of copyright in patient records, either because the copyright had not been acquired, or no consideration had been provided for it.

Tax Office view of Decision

The decision of the Court supports the Commissioner's view on the meaning of goodwill as set out in TR 1999/16.

The decision also supports the Commissioner's view of the application of the capital allowance provisions to the sale of a medical practice as relevantly set out in paragraphs 1 - 8 of Taxation Determination TD 2005/1.

While favourable to the Commissioner, the reasoning of the Court differs from the view currently expressed in the explanation section of TD 2005/1. In particular the decision:

1.

highlights the limitations on the copyright likely to subsist in medical or dental records;

2.

clarifies that there is no implied transfer or licence to use copyright in the absence of an express contractual clause requiring the transfer of intellectual property; and

3.

clarifies the amount of consideration attributable to the transfer of copyright under a contract.

The Commissioner considers that the Court's comments concerning the requirement in Division 40 to "use" or have "available for use" the copyright (if any) acquired under the contracts of sale are obiter dicta, as the Court did not have to determine this issue.

Administrative Treatment

List of Rulings and Determinations Affected

Taxation Determination TD 2005/1: Income tax: what amount of deduction is available under section 40-25 of the Income Tax Assessment Act 1997 for the decline in value of copyright in patient records in respect of arrangements similar to those described in Taxpayer Alert 2004/5?

Implications on current Public Rulings & Determinations

As noted above, the Commissioner's views as set out in the explanation section of Taxation Determination TD 2005/1 in relation to the application of the capital allowance provisions to the sale of a medical practice, differ from the reasoning of the Court. The application of the decision to TD 2005/1, specifically paragraphs 9, 22 - 25, may lead to a different outcome to that expressed in the determination. The Commissioner has reviewed TD 2005/1 and published an addendum on 29 June 2011.

Court citation:
[2010] FCA 419
2010 ATC 20-181
76 ATR 749
267 ALR 648
(2010) 186 FCR 301

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
38-325

Copyright Act 1968 (Cth) (Copyright Act)
10(1)
32(4)
35
35(6)
82(1)
196(3)
321


Copyright Amendment Act 1984 (Cth)

Income Tax Assessment Act 1936(ITAA 1936)
124L(1)

Income Tax Assessment Act 1997 (ITAA 1997)
40-25(1)
40-30(2)
373-10(1)
373-15


Income Tax (Transitional Provisions) Act 1997


Privacy Act 1988 (Cth)

Taxation Administration Act 1953
14ZZO

Case References:
Asahi Kasei Kogyo Kabushiki Kaisha v WR Grace & Co
[1991] FCA 530
22 IPR 491

Autospin (Oil Seals) Ltd v Beehive Spinning
[1995] RPC 683

BP Refinery (Westernport) Pty Ltd v Hastings Shire Council
(1977) 180 CLR 266

Breen v Williams
(1996) 186 CLR 71
138 ALR 259

Codelfa Construction Pty Ltd v State Rail Authority of NSW
[1982] HCA 24
149 CLR 337
41 ALR 367

Commissioner of Taxation of the Commonwealth of Australia v Murry
[1998] HCA 42
193 CLR 605
39 ATR 129
98 ATC 4585

Commissioner of Taxation v Krakos Investments Pty Ltd
(1995) 61 FCR 489
96 ATC 4063
32 ATR 7

Décor Corporation Pty Ltd v Dart Industries Inc
(1988) 13 IPR 385
[1989] AIPC 90-549

Exxon Corporation v Exxon Insurance Consultants International Ltd
[1982] Ch 119
[1982] RPC 69

Federal Commissioner of Taxation v Dalco
[1990] HCA 3
168 CLR 614
90 ATC 4088
20 ATR 1370

Francis Day and Hunter Ltd v Twentieth Century Fox Corporation Ltd
[1940] AC 112

Gauci v Federal Commissioner of Taxation
[1975] HCA 54
135 CLR 81
75 ATC 4257
5 ATR 672

General Clutch Corporation v Sbriggs Pty Limited
[1997] AIPC 91-333
38 IPR 359

Gold Peg International Pty Ltd v Kovan Engineering (Aust) Pty Ltd
[2005] FCA 1521
225 ALR 57

Green v Broadcasting Corporation of New Zealand
(1983) 2 IPR 191

Greenfield Products Pty Ltd v Rover-Scott Bonnar Ltd
(1990) 17 IPR 417
(1990) 95 ALR 275

Hollinrake v Truswell
[1894] 3 Ch 420

Hope v The Council of the City Bathurst
[1980] HCA 16
144 CLR 1
12 ATR 231
80 ATC 4386

IceTV Pty Ltd v Nine Network Australia Pty Ltd
[2009] HCA 14
239 CLR 458
12 ATR 231
80 ATC 4386

International Air Transport Association v Ansett Australia Holdings Ltd
[2008] HCA 3
234 CLR 151

John Brodel v Telstra Corporation
[2004] FCA 505

Kalamazoo (Aust) Pty Ltd v Compact Business Systems Pty Ltd
[1990] 1 Qd R 231
84 FLR 101

Ladbroke (Football) Ltd v William Hill (Football) Ltd
[1964] 1 All ER 465

Maggbury Pty Limited v Hafele Australia Pty Limited
[2001] HCA 70
210 CLR 181

McCormack v Federal Commissioner of Taxation
[1979] HCA 18
143 CLR 284
9 ATR 610
79 ATC 4111

Milwell Pty Ltd v Olympic Amusements Pty Ltd
[1999] FCA 63
85 FCR 436

Murray v King
(1984) 4 FCR 1
55 ALR 559

Noah v Shuba
[1991] FSR 14

O'Brien v Komesaroff
[1982] HCA 33
41 ALR 255
150 CLR 310

Pacific Film Laboratories Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia
[1970] HCA 36
121 CLR 154
1 ATR 771
70 ATC 4104

Philips Electronique Grand Public SA v British Sky Broadcasting Ltd
[1995] EMLR 472

Ray v Classic FM PLC
[1998] 25 FSR 622
41 IPR 235

Re Dickens
[1935] Ch 267

Skybase Nominees Pty Ltd v Fortuity Pty Ltd
36 IPR 529
[1997] AIPC 91-302

Telstra Corporation Limited v Phone Directories Company Pty Ltd
[2010] FCA 44
264 ALR 617

Toll (FGCT) Pty Limited v Alphapharm Pty Limited
[2004] HCA 52
219 CLR 165
211 ALR 342

Trautwein v Federal Commissioner of Taxation
[1936] HCA 77
56 CLR 63

University of London Press Limited v University Tutorial Press Limited
[1916] 2 Ch 601

Victoria Park Racing & Recreation Grounds Company Limited v Taylor
[1937] HCA 45
58 CLR 479