Karen is the CEO of Medico Pty Ltd, a company that owns a number of bulk billing
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Medico's Payments to GPs
Medico Pty Ltd wishes to extend its business, and so enters into a number of contracts with some General Practitioner doctors (GPs) who do not yet offer services to Medico's clinics. In exchange for Medico giving each of these GPs a lump sum of $300,000, each GPs agrees to make themselves available to service clients in Medico's clinics for at least 5 days a week (except for holidays) for the next 4 years (as independent contractors). While doing so, the GPs can keep 50% of revenue that they charge the patients (consistent with industry practice).
In the current tax year, Medico spent $20 million on these $300,000 GP payments. Its accountants are unsure whether they are capital or not.
Karen's legal fees
Karen owns a rental property (in her own private capacity - unrelated to her role as CEO), which had a leaking roof and so needed repair. She arranged for a roof plumber to attend the property at 3:00pm on a Tuesday. She also turned up at that time. She used her own key to allow entry for both herself and the plumber to the property. However, the tenant insisted that he had not given Karen permission to come at that time and called the police, who charged Karen with trespass. Karen went to court and incurred $10,000 in legal fees. She was found not guilty.
The following information is relevant for Medico's concerning its transactions during the current tax year:
• purchase of an X-ray machine for $50,000 for use in one of its clinics (with an effective life of 10 years); and
• purchases of skin-care products (for sale to customers) of $20,000; and
• sales of skin-care products to customers: $80,000.
Total closing stock value for skin-care products at the end of the current tax year located in their head office was as follows:
• cost of $25,000
• replacement value of $20,000
• market selling value of $70,000.
The closing stock at the end of the previous tax year had been valued at cost and was $10,000.
Supporting your answers with cases and legislative authority, discuss the following:
a.The deductibility for Medico regarding the $20 million of costs of paying the GPs.
a.The deductibility for Karen for the legal fees as a general deduction
The tax consequences for Medico relating to the X-ray machine and the skin care products, assuming that the objective is to minimize Medico's income tax liabilities for the tax year (4 Points).