Primary Health Care Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID911/2005, NSD2169/2005, NSD1790/2005, NSD2467/2005, NSD193/2006 & NSD195/2006)
Judgment date: 4 May 2010
Date published: 4 July 2011
Decision outcome: Favourable

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

Overview 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? | (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?

Issues decided:
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? (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?

ATO 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. | 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:

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
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