Medical practitioners generate significant goodwill within their practice and may wish to realise some or all of that goodwill, either by sale of their practice on retirement or sale whilst still working.
Whether or not goodwill exists, and separable from the practitioner, is relevant as it is illustrative of whether the sale of the practice will be characterised as a revenue or capital receipt in the hands of the medical practitioner. This can have enormous income tax implications for the medical practitioner, with capital receipts enjoying the general 50% Capital Gains Tax (CGT) concessions and possible access to the Small Business CGT concessions, as compared to revenue receipts, which are taxed at marginal rates (i.e. no concessional treatment).
To further complicate the issue, a number of listed healthcare companies have been aggressively purchasing medical practices around Australia.
One of these healthcare companies, Primary Health Care Limited (Primary), obtained a private ruling from the ATO confirming that payments it made to acquire practices had a revenue characterisation for Primary. This allowed Primary to amend prior year income tax returns and adjust the treatment of acquisition costs in future tax returns to allow it to receive an estimated income tax refund of $155m for the 2010 through 2015 income years.
Primary’s ASX announcement of 15 July 2015 suggests that all future contracts between Primary (and other large healthcare companies by implication) will be on revenue account. This suggests that the ATO is of the view medical practitioners will not be able to access the general 50% CGT concessions or the small business CGT concessions on future sales of their practices to large healthcare companies.
We are of the opinion that this announcement is not necessarily relevant for all taxpayers. If a medical practitioner is selling their practice, the characterisation of that receipt as revenue or capital in nature is dependent on the relevant facts of the sale, and is not determined by the treatment of the outgoing, for the purchaser or determined by the ATO, on a broad and inflexible view. If the facts support that the sale is on capital account, we are of the opinion the taxpayer should be able to characterise the receipt as such.