Private ruling: Payments Received from Medical Centre- Income or Capital
Published: November 2013
Ruling period: Income year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Does the receipt of the $A (GST inclusive) or any part thereof constitute the derivation of ordinary under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. Taxpayer is a resident of Australia for taxation purposes. 2. Taxpayer is a registered medical practitioner and employee of an organisation before he commenced practising as a medical practitioner within a medical centre. 3. Taxpayer entered into an arrangement with the medical centre. The medical centre paid them an amount of $B before he began to practice in the medical centre for a defined period less than 24 months. After this period expired, the medical centre provided that they would pay the Taxpayer another amount of $C if they wanted them to continue to practice in the medical centre for an extended number of years. 4. In return for the sum of the payments of $A, the Taxpayer had to abide by the medical centre's rules and regulations. They are also required to give a portion of the patient fees charged to the medical centre in return for their use of the premises, facilities, accounting support and support staff to enable them to render medical services.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 6-10, | Income Tax Assessment Act 1997 Section 104-35, | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 104-40 and | Income Tax Assessment Act 1997 Division 152.

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Summary: Yes, the receipt of the amount $A (GST inclusive) or any part thereof did comprise of a derivation of income under ordinary principles under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The payments are made by the medical centre in return for the Taxpayer committing to his most substantial obligations under the legal documents, which are (i) to provide personal services at the medical centre for a period (initial and subsequent periods) in the manner required under the legal documents and (ii) to allow the medical centre to take a % share for the fees generated by the Taxpayer, rather than a fixed price, as payment for ancillary services provided at the medical centre. We concluded that a receipt is likely to constitute a receipt of ordinary income where: · The receipt is made on commencement of a new contract/s; · The receipt is dependant on providing future services; · The receipt is in respect of giving up a capital asset that is incidental to the income producing activity of the business; · Even though the receipt was not received in the .ordinary course of business, it was received from a transaction in which profit making was an essential component. · The receipt is a profit made other than in the ordinary course of business but profit making as an essential component. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income applies. Arguably, the taxpayer was carrying on a personal services business and the transaction was entered into outside the ordinary course of that business. The $A amount is an isolated transaction but related to the Taxpayer's business of deriving personal services income from which they made their living. Therefore, the receipt of the $A (GST inclusive) would compromise a derivation of income under ordinary principles under section 6-5 of the ITAA 1997 by the Taxpayer. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreement is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of the CGT event D2 by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreement is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of the CGT event D1 by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreement is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of the CGT event A1 by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreements is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of relevant CGT events by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. Hence, the active asset test under section 152-35 of ITAA 1997 is not considered. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreements is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of relevant CGT events involving personal goodwill by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. Hence, whether the receipt of $C or any part thereof comprises the payment of personal goodwill and taxed under the capital gains tax provisions is not considered. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreements is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of relevant CGT events involving business goodwill by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. Hence, whether the receipt of $C or any part thereof comprises the payment of business goodwill and taxed under the capital gains tax provisions is not considered. | Detailed Reasoning - Detailed reasoning: As the receipt of $A under the agreements is assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997, the anti-overlap provisions in section 118-20 of the ITAA 1997 would operate to reduce any capital gain arising as a result of relevant CGT events by the amount of income assessed to the Taxpayer under section 6-5 of the ITAA 1997. The combined effect of sections 6-5 and 118-20 of the ITAA 1997 is that the receipt would be assessed as ordinary income and the capital gain as a result of the CGT event would be reduced to nil. Hence, the capital gains tax concessions available for small business under Division 152 of the ITAA 1997 is not considered.

Question 1: Does the receipt of $B gives rise to a capital gain due to the happening of a CGT event D2, under section 104-35 of the ITAA 1997? | Answer: N/A as the answer to Issue 1 Question 1 is Yes. | Question 2: Does the receipt of $C or any part thereof give rise to a capital gain due to the happening of a CGT event D1, under section 104-35 of the ITAA 1997? | Question 3: Does the receipt of $C or any part thereof give rise to a capital gain, due to the happening of a CGT event A1, under section 104-10 of the ITAA 1997? | Question 4: If questions 2 and/or 3 are yes, does the business pass the Active Asset Test, under section 152-35 of the ITAA 1997? | Question 1: Is the receipt of $C or any part thereof a payment for personal goodwill and hence taxed under the Parts 31 and 3-3 of the ITAA 1997? | Question 2: Is the receipt of $C or any part thereof a payment for business goodwill and hence taxed under the Parts 31 and 3-3 of the ITAA 1997? | Question 1: Are the capital gains tax small business concessions under Division 152 of the ITAA 1997 available to Taxpayer? | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax .