Deductibility of Gaming Machine Entitlements: Commissioner of Taxation v Sharpcan [2019] HCA 36

Thursday 17 October 2019 @ 1.49 p.m. | Corporate & Regulatory | Taxation

In Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 (16 October 2019) the  High Court of Australia unanimously allowed an appeal from a judgment of the Full Court of the Federal Court of Australia (see [2018] FCAFC 163 (27 September 2018)) on the deductibility under the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) of payments to acquire gaming machine entitlements ("GMEs") under the Gambling Regulation Act 2003 (Vic).

Background

Spazor Pty Ltd ("the Trustee") was the trustee of a trust of which Sharpcan Pty Ltd (the respondent) was the beneficiary. The Trustee purchased a hotel business, but under the purchase agreement, rather than purchasing 18 gaming machines at the premises, the trustee was paid a percentage of the income derived by the owner of the machines who was an authorised gaming operator under the Gambling Regulation Act 2003 (Vic).

Following the amendment of the Gambling Regulation Act 2003 (Vic) to provide for GMEs to be put up for auction and allocated directly to gaming venue operators, the Trustee bid for and obtained the 18 GMEs. This permitted the Trustee to operate each gaming machine for ten years, and also to sell and transfer to other venue operators, subject to the relevant approvals.

To fund the purchase price of $600,000, the Trustee entered an agreement with the Minister for Gaming. The agreement provided for deferred payment by installments and forfeiture in case of default of payment. After it made the payment, the Trustee claimed the purchase price as a deduction under the 1997 Act section 8-1 or one-fifth of that price under section 40‑880.

Review by the Administrative Appeals Tribunal

Both claims were disallowed by Commissioner for Taxation. On review, that decision was set aside by the Administrative Appeals Tribunal (the Tribunal) (see Sharpcan Pty Ltd and Commissioner of Taxation [2017] AATA 2948 (14 December 2017)). The Tribunal held that the purchase price was not an outgoing of a capital nature and was therefore, deductible under the 1997 Act section 8-1.

Appeal to the Federal Court

In Commissioner of Taxation v Sharpcan Pty Ltd [2018] FCAFC 163 (27 September 2018) an appeal by the Commissioner was dismissed by a majority of the Full Court which found that the outgoing was not on capital account because:

  1. it had to be recouped out of every day's trading across the business;
  2. it reflected the economic value of the income stream expected from using the gaming machines which the GMEs permitted;
  3. it was incurred in relation to an integrated hotel business; and
  4. the Trustee, confronted with changed circumstances from government intervention by the amendment of the Gambling Regulation Act, had to respond to the possible loss of gaming revenue.

The majority Full Court also found that in alternative, one-fifth of the purchase price would have been deductible under section 40-880 as the purpose of the expenditure was to preserve the goodwill of the hotel business and the value to the Trustee of the GMEs was solely attributable to their effect on the goodwill of the business

The High Court Decision

In overturning the decision of the Full Federal Court the High Court unanimously held that the GMEs were assets of enduring value acquired by the Trustee as the means of production, necessary for the structure of the business, and a barrier to entry, and that the four factors identified by the Full Court were not to the point. As a result, the court held that the purchase price, although paid in installments, was in the nature of a once-and-for-all outgoing for the acquisition of a capital asset, and thus not deductible under the 1997 Act section 8‑1, see paragraph [26]:

“. . . The nature of a once-and-for-all outgoing for the acquisition of an asset is determined by the character of the advantage sought to be achieved by its acquisition, not by the source of funds with which it is purchased. The relevant distinction is between a once-and-for-all outgoing for the acquisition of something of enduring advantage and a periodical outlay to cover the use and enjoyment of something for periods commensurate with those payments. The intended source of funding did not imply that the purchase price of the GMEs was not a once-and-for-all outgoing for the acquisition of something of enduring advantage.”

The High Court further found that the evidence did not establish that the subjective or objective purpose of purchasing the GMEs was to preserve but not enhance the goodwill of the hotel business, and that the value of the GMEs was not solely attributable to their effect on goodwill, but resided in their capacity to generate gaming income and to be sold and transferred. The High Court therefore held that no deduction under the 1997 Act section 40‑880 was permitted, see paragraph [48]:

“. . . It is sufficient to observe, as Thawley J found, that the evidence did not establish that the Trustee's subjective purpose in purchasing the GMEs was to preserve but not enhance the goodwill of the hotel business; and it is plain that that was not the objective purpose.”

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products. Nothing on this website should be construed as legal advice and does not substitute for the advice of competent legal counsel.

Sources:

Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 and Judgement Summary.

Commissioner of Taxation of the Commonwealth of Australia v Sharpcan Pty Ltd [2019] HCATrans 48 (20 March 2019)

Commissioner of Taxation v Sharpcan Pty Ltd [2018] FCAFC 163 (27 September 2018)

Sharpcan Pty Ltd and Commissioner of Taxation (Taxation) [2017] AATA 2948 (14 December 2017)

Related Articles:

Legislation hotline: 1800 077 088

FREE legislation news, delivered weekly.

Sign up now.

We love legislation. About us.

NEW information resources - great for training.

Access now.

Law One product page. Search national legislation.Point in Time product page. Search legislation by time period.