Price Is Only Part Of The Cost
For most people entering into negotiations to
purchase a business, there is only one end in
sight – the final sale price. While this is
clearly important, price is just one variable in
the negotiations. Often, the simple wording of
the sale contract will have huge tax
repercussions for the purchaser, once they take
over the business.
In the recent Federal Court case of Primary
Health Care Ltd v FCT  FCA 419, the
purchaser of a medical practice was denied
depreciation deductions for copyright in the
practice’s patient records. The purchaser argued
that copyright existed in the medical records,
and that they had paid consideration for that
copyright when they bought the business.
If the purchaser had been successful in their
argument, they may have been entitled to
depreciation deductions for any cost attributed
to those medical records. Unfortunately for the
purchaser, their argument was unsuccessful.
The Court generally followed the long-held
principle not to disturb amounts allocated for
specific assets in a sale of business contract
when parties to the transaction are negotiating
on an arm’s length basis.
In this case, for most of the medical records
being transferred, there was no specific
consideration in the contract of sale.
This is not to say that if the vendor and
purchaser had agreed to specific amounts for the
transfer of the copyright, the purchaser would
have been entitled to depreciation deductions
for that amount.
Since the case was handed down, the ATO has said
that this case “highlights the limitations on
the copyright likely to subsist in medical or
However, it does show the need for a thorough
due diligence before a sale of business contract
is finalised. If both vendor and purchaser had
agreed to, say, $100,000 being allocated to the
copyright in the medical records, this amount
may have been available for depreciation by the
purchaser as it represented the cost of a
depreciating asset to the purchaser.
But for the depreciation deduction to be
available, intellectual property would need to
subsist in the medical records. Based on the
Primary Health Care case, this is possible. As
Justice Stone noted in relation to referral
records, “I am satisfied that copyright would
subsist in the letters which are in evidence
before me and which were written by the sample
Once it is established that intellectual
property does subsist, a value must be attached
to it (that is, the asset must have a “cost”) in
order for depreciation deductions to be
available to the purchaser.
As a general rule, purchasers will want to
maximise the amount in the contract that is
allocated to items that may be deductible at
some stage in the future (for example, trading
stock or depreciable property).
Vendors, on the other hand, will want to
maximise the amount in the sale contract that
attaches to items that provide for specific
concessions in the Tax Act (for instance,
As a result, vendors and purchasers have
diametrically opposed interests. This is why it
is vital to get good tax advice before signing
the contract for the sale or purchase of a