Sharpcan Pty Ltd and Commissioner of Taxation (Taxation)
[2017] AATA 2948
•14 December 2017
Sharpcan Pty Ltd and Commissioner of Taxation (Taxation) [2017] AATA 2948 (14 December 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2016/5781
Re:Sharpcan Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Pagone
Date:14 December 2017
Place:Melbourne
The objection decision of the Commissioner is set aside and in substitution of that decision the Tribunal allows the objection on the ground that the outgoings for the gaming machine entitlements were allowable as a deduction in the 2010 year of income under s 8-1 of the 1997 Act.
.......[sgd].................................................................
Deputy President Pagone
Catchwords
TAXATION – deductibility of expenditure – claimed deductions pursuant to the Income Tax Assessment Act 1997 – gaming machine entitlements allocated pursuant to Gaming Regulation Act 2003 (Vic) – outgoings from gaming machine entitlements allowable as deductions under s 8-1 of the Income Tax Assessment Act 1997 – application to set aside decision of Commissioner allowed
Legislation
Gaming Regulation Act 2003 (Vic)
Income Tax Assessment Act 1997 (Cth)
Tax Laws Amendment (2006 Measures No 1) Act 2006 (Cth)
Cases
AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation (2015) 255 CLR 439
Australian National Hotels Ltd v Federal Commissioner of Taxation (1987) 19 ATR 417
Berkey v Third Avenue Railway Co 155 NE 58 (1926)
BP Australia Limited v Federal Commissioner of Taxation (1965) 112 CLR 386
British Insulated and Helsby Cables v Atherton [1926] AC 205
Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation (1952) 85 CLR 423
Cliffs International v Federal Commissioner of Taxation (1979) 142 CLR 140
Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1
Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd (2007) 158 FCR 325
Commissioner of Taxation v Murry (1998) 193 CLR 605
Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39
Essenbourne Pty Limited v Commissioner of Taxation [2002] ATC 5201
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634
Heather v P‑E Consulting Group [1973] 1 Ch 189
Henriksen (Inspector of Taxes) v Grafton Hotel Limited [1942] 2 KB 184
Inland Revenue Commissioners v British Salmson Aero Engines Limited [1938] 2 KB 482
Jupiters Ltd v Deputy Commissioner of Taxation (2002) 118 FCR 163
Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd (2010) 31 VR 46
Kuru v New South Wales (2008) 236 CLR 1
National Australia Bank Ltd v Federal Commissioner of Taxation (1997) 80 FCR 352
Pridecraft Pty Ltd v Commissioner of Taxation (2004) 213 ALR 450
Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] AC 295
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337
St George Bank Limited v Commissioner of Taxation [2008] FCA 453
Tabcorp Holdings Limited v State of Victoria (2016) 328 ALR 375
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4279
Tyco Australia Pty Ltd v Commissioner of Taxation (2007) 67 ATR 63
Secondary Materials
A Tax System Redesigned, July 1999
WR Parsons, Income Taxation in Australia (1985, LBC)
REASONS FOR DECISION
Deputy President Pagone
The issues in this proceeding concern the deductibility of expenditure incurred in the year of income ended 30 June 2010 by the trustee of a trust for gaming machine entitlements allocated to it by the State of Victoria pursuant to the Gaming Regulation Act 2003 (Vic) (“the 2003 Gaming Act”). The applicant is a corporate beneficiary of the trust and was presently entitled to 100% of the income of the trust estate in respect of the year of income ended 30 June 2012. It claims that the trustee of the trust was entitled to a deduction in calculating the net income of the trust estate for the gaming machine entitlements in the 2010 year either under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) or alternatively over five years pursuant to s 40-880 of the 1997 Act commencing in the 2010 income year. The Commissioner accepts that if the gaming machine expenditure was deductible either in full under s 8-1 when incurred, or over five years under s 40-880, the net income of the trust for the 2012 year would be nil and would reduce the assessable income for the 2012 income year by the whole of the amount of $139,901 which has been assessed by the Commissioner to the applicant in that year. The Commissioner contends, however, that the gaming machine expenditure was of capital or was capital in nature, and was not deductible either pursuant to s 8-1 or pursuant to s 40‑880.
The trustee of the trust acquired 18 gaming machine entitlements as a result of a competitive auction process held on 10 May 2010 for $33,350 each for a total of $600,300. The trustee elected to pay for the gaming machine entitlements under deferred payment terms between May 2010 and 31 August 2016. $10,000 had been paid to the State to participate in the auction process and was credited to the amount payable upon the successful bid at auction. $60,030 was paid in approximately May 2010 and from 16 August 2012 to 31 August 2016 further amounts of $30,015 were paid quarterly in discharge of the total of $600,300 for the 18 gaming machine entitlements.
The applicant claims that the trustee of the trust was entitled to a deduction for the amounts paid in acquiring the gaming machine entitlements in calculating the net income of the trust estate for the year of income ended 30 June 2010. On 10 May 2010 the trustee incurred a liability to make payments totalling $600,300 over a six year period from 1 May 2010. Section 8-1 of the 1997 Act entitles a taxpayer to a tax deduction in the following terms:
General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
There is no dispute between the parties about the entitlement to a deduction under s 8-1 other than about whether the liability incurred on 10 May 2010 was a loss or outgoing of capital or of a capital nature. It was accepted, and the facts established, that the liability was incurred in gaining or producing assessable income or was necessarily incurred in carrying on a business for the purpose of carrying on or producing assessable income, and that none of the other exceptions to deductibility under s 8-1 would disentitle the claim for a deduction. The applicant contended, however, that the liability was on revenue account, and therefore deductible, whilst the Commissioner contended that the liability was of capital, or of a capital nature, and therefore not deductible under s 8-1. Whether the amount was deductible under s 40-880 arises only if the amount was not deductible under s 8-1.
The question of whether a loss or outgoing is to be regarded as on capital or on revenue account was said by Lord Greene MR in Inland Revenue Commissioners v British Salmson Aero Engines Limited [1938] 2 KB 482 at 498 as often falling on the borderline and that “in many cases it [was] almost true to say that the spin of a coin will decide the matter almost as satisfactorily as an attempt to find reasons”. The importance, and sometimes the difficulty, of the question was referred to by Lord Denning MR in Heather v P‑E Consulting Group [1973] 1 Ch 189 at 216 as follows:
The question - revenue expenditure or capital expenditure - is a question which is being repeatedly asked by men of business, by accountants and by lawyers. In many cases the answer is easy, but in others it is difficult. The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other. But this is simply not possible. Some cases lie on the border between the two, and this border is not a line clearly marked out. It is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in the marginal cases, and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then the practitioners, be they accountants or lawyers, must of necessity put them into one category or the other: and then, by custom or by law, by practice or by precept, the border is staked out with more certainty. In this area, at least, where no decision can be said to be right or wrong, the only safe rule is to go by precedent. So the thing to do is to search through the cases and see whether the instant problem has come up before. If so, go by it. If not, go by the nearest you can find.
Although sometimes difficult, and although sometimes cases may fall close to the borderline, the distinction between an expenditure on account of revenue and an expenditure on account of capital was said by Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 646 as not being “so indefinite and uncertain as to remove the matter from the operation of reason and [to] place it exclusively within that of chance, or that the discrimen [was] so unsatisfactory that it must be placed in the category of an unformulated question of fact”.
The distinction between revenue expenditure and capital expenditure may, in general terms, be understood as corresponding in the context of a business to the distinction between an outgoing that is consumed in the business and an outgoing which substitutes the money expended for “an asset or an advantage for the enduring benefit”: British Insulated and Helsby Cables v Atherton [1926] AC 205, 213. In most cases it will probably not be difficult to distinguish between a loss or outgoing on account of revenue from one which is on account of capital. An item of expenditure used to acquire an independent asset may easily be seen as an expenditure for, and therefore of, capital unless the asset acquired was a revenue asset, such as, for example, trading stock. But there are many cases where it will not be easy to determine whether a loss or outgoing was of capital or of revenue. In some cases an item of expenditure (such as for advertising) may be both consumed in the production of income and simultaneously add to the capital value of the business as reflected in its goodwill. In Hallstroms Dixon J referred to the contrast between the two forms of expenditure as corresponding:
[…] to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.
In Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 Dixon J had previously said that in determining whether an outgoing has a character of capital or revenue required:
[…] three matters … to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
The application of these principles to the liability incurred for the gaming machine entitlements is not straight forward or without difficulty. In Sun Newspapers the Court held that payments for the purpose of eliminating competition were in the nature of an outgoing of capital and therefore that the payments were not deductible from assessable income. Metaphors, such as the distinction between a tree and its fruit, may assist in conceptualising the issues, but, as was remarked by Cardozo J, metaphors “are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it”: Berkey v Third Avenue Railway Co 155 NE 58 (1926), 61; see also TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4279, 4291.
The trustee of the trust in this case acquired the gaming machine entitlements in consequence of a change to the statutory regime in Victoria governing gaming operations and in the context of the trustee having a pre-existing business in which gaming revenues formed a significant part of its income. On 8 August 2005 the trustee had acquired a business trading as a hotel for a price of $1,025,000 pursuant to an agreement with Tattersalls Gaming Pty Ltd (“Tattersalls”). The trustee became the venue operator of the hotel pursuant to the agreement with Tattersalls in respect of a venue approved for gaming under the provisions then regulating gaming. Tattersalls was the gaming operator under that regime in respect of the venue, and between 8 August 2005 and 15 August 2012 Tattersalls owned and operated 18 gaming machines at the hotel pursuant to its agreement with the trustee and its entitlements as gaming operator under the relevant State legislation. Income from gaming was paid by Tattersalls to the trustee as commissions in respect of the gaming undertaken at the premises. The profit and loss statement of the trustee for the year ended 30 June 2006, for example, included income of the trust from accommodation, gaming commissions, rebates, and gross profits from trading as a hotel which included sales of meals and alcohol.
The provisions which governed the regulation of gaming in Victoria in 2005 (when the hotel business was acquired by the trustee) changed significantly in 2010. The regime which was in place in 2005 had provided, as described above, for the issue of two distinct licences, namely, a venue operator’s licence and a gaming operator’s licence. Tattersalls held the gaming operator’s licence in respect of the premises over which the trustee acquired and held the venue operator’s licence. Section 3.4.2(d) of the 2003 Gaming Act in 2005 permitted Tattersalls, as the holder of a gaming operator’s licence, to conduct gaming at the hotel as an approved venue. The agreement between Tattersalls and the trustee thus required Tattersalls, rather than the trustee, to conduct gaming at the hotel. Section 3.6.6 of the 2003 Gaming Act in 2005, however, required Tattersalls, as the gaming operator, to ensure that certain amounts from the daily net cash balances during the period of gaming be paid to the trustee as the venue operator.
On 10 April 2008 the Victorian government announced that the licences issued to Tattersalls would not be renewed after they were to expire in 2012 and that a new regime would be introduced. A new Part 4A was introduced into the 2003 Gaming Act which provided for gaming machine entitlements to be allocated to gaming venue operators. The gaming machine entitlements permitted their holder to acquire and to conduct gaming on an approved gaming machine: see Tabcorp Holdings Limited v State of Victoria (2016) 328 ALR 375. The process adopted by the State government to enable persons to acquire gaming machine entitlements included a two stage auction which was announced to take place around April and May 2010. The trustee successfully participated in the auction and acquired 18 gaming machine entitlements that permitted it to conduct the same gaming activities from its premises from 2012 which had, until then, been conducted by Tattersalls with the same number of machines.
The new regime introduced by Part 4A permitted the Minister to create gaming machine entitlements and to allocate such entitlements to venue operators: Gaming Regulation Act 2003, s 3.4A.5. Gaming machine entitlements created under the new provisions had a 10 year period of duration but could be terminated or extended for two years from the day they would otherwise expire: Gaming Regulation Act 2003, s 3.4A.7. The obligations to make various payments which had previously fallen upon the gaming operator under s 3.6.6 were modified and were made to fall upon the venue operator under the new s 3.6.6A. A consequence of these changes for the trustee was that amounts which had been derived by Tattersalls from its gaming activities on the 18 machines at the hotel, and from which the trustee received a commission, would thereafter be derived directly by the trustee who might, however, engage Tattersalls, or some other entity, to perform gaming operations for the trustee in its business at the hotel. In fact, PVS Australia Pty Ltd (“PVS”) took over the gaming operations which had been performed by Tattersalls as gaming operator at the premises in which the trustee had been the venue operator. In March 2012 an agreement was signed between PVS and the trustee for the installation and maintenance of 18 gaming machines at the hotel in consideration for a fee per gaming machine inclusive of GST. Amongst the services performed by PVS was that of undertaking audit and other compliance activities which had previously been undertaken by Tattersalls.
The gaming machine entitlements gave the trustee a right to conduct gaming on its premises which it did not previously have. Some features of those entitlements may be thought to be of capital or of a capital nature. The gaming machine entitlements, for example, were rights that had an independent legal existence as statutory rights and could be separately transferred although, of course, they would have little practical use without gaming machines or an approved venue at which the statutory rights could be enjoyed in conjunction with gaming machines. The 18 gaming machine entitlements which came into existence that were allocated to the trustee could, however, separately be traded and transferred, although they were not acquired by the trustee for transfer or trade. Furthermore, the trustee acquired the rights by allocation of gaming machine entitlements which had been created by the Minister pursuant to statutory authority. It acquired the rights in an auction process for which it paid a market price. It secured the entitlements for 10 years and its acquisition was reflected in the economic value of the goodwill in the business.
In Hallstroms, Dixon J at 648 observed that whether an outgoing had the character of capital or revenue depended not upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process but “on what the expenditure [was] calculated to effect from a practical and business point of view”. In Tyco Australia Pty Ltd v Commissioner of Taxation (2007) 67 ATR 63 Allsop J, as the Chief Justice then was, also observed that the question of whether an item of expenditure had the character of capital or income was not answered by the mere identification of the correct description of the legal rights obtained or transferred by any transaction. His Honour said at [47]:
The mere identification of the correct description of the legal rights obtained or transferred by any transaction is generally too narrow a focus for the answering of the question. This is especially so once it is recognised that almost every commercial arrangement based on contract can be analysed jurisprudentially from the perspective of buying and selling rights or choses in action. Such rights are merely the legal or juridicial building blocks of relationships built from business and practical activity. The enquiry as to whether an outgoing is on capital or revenue account looks to the business and practical effects and advantages sought in the whole context: FCT v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 at 99; 21 ATR 458 at 465-466; 90 ATC 4461 at 4468-4469; 94 ALR 255 at 263-264 and National Australia Bank (at FCR 361-362; ATR 388-389; ATC 5162; ALR 236-237).
There are many other cases where a payment has been held to be on revenue account where the legal rights acquired might, if taken alone, suggest a different conclusion: see National Australia Bank Ltd v Federal Commissioner of Taxation (1997) 80 FCR 352; Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1; Cliffs International v Federal Commissioner of Taxation (1979) 142 CLR 140.
The character of the outgoing in this case must be answered by considering what the expenditure was effected to calculate for the business of the trustee from a practical and business point of view. The trustee was not commencing, or acquiring, a new business but had been conducting a business before the expenditure which included the derivation of income through gaming operations at its premises by Tattersalls with 18 gaming machines. The business which had been acquired by the trustee in 2005 had included, from the outset, gaming activities by the means then lawfully provided for those activities to be conducted. The business acquired by the trustee was for a price which was calculated at around four times the net profits of the hotel “from all of its activities” which had included the revenue stream then flowing through the gaming activities by Tattersalls with 18 gaming machines as the gaming operator under the regulations then in force. The trustee would not have continued deriving a stream of income from gaming on 18 machines after 2012 unless it obtained gaming machine entitlements for 18 machines as had been operating at the hotel. That part of its income would have ceased unless gaming machine entitlements were obtained to enable that part of its income to continue, but the fact that an amount is paid to permit the continuation of an income earning activity is not necessarily determinative of the character of the payment as being on capital account. It is common for regular recurrent fees to be paid for the right to conduct, or to continue to conduct, income earning activities which would otherwise cease without payment for the right.
The outgoing for the gaming machine entitlements in the trustee’s business is more like a fee paid for the regular conduct of a business than the acquisition of a permanent or enduring asset. The payment for a right which is required as a condition for trading will sometimes be capital in nature, but the payment for the right to trade will not always be an outgoing on capital account. In Henriksen (Inspector of Taxes) v Grafton Hotel Limited [1942] 2 KB 184 a right to trade for three years was described as a capital asset, whereas the payment for an excise licence was regarded as part of the working expenses for the year. Du Parcq LJ said at 194-196:
The payment of the £570 was an expense which secured for them the right to open the Grafton Hotel as a licensed house: without that right they must either have ceased to trade there altogether, or carried on some different trade, but they could not have continued in business as licensed victuallers in those premises. In other words, when the licence dies, the trade dies, unless the grant of a new licence enables it to be carried on for a further period.
Thus the question which we have to consider comes to be whether a payment of a lump sum made to obtain permission to trade for a term of years is of such a character that it “is proper and necessary” to deduct it “in order to ascertain the balance of profits and gains.” (See the speech of Lord Parker in Usher's Wiltshire Brewery, Ld. v. Bruce.) It is conceded that if the payment was in the nature of a capital payment, it is not deductible. Unfortunately the expression “capital payment” does not appear to be capable of precise definition. At any rate I will not attempt to define it, but will confine myself to dealing with the facts of the present case. Here each sum in question was part of a total amount paid to acquire the right to trade for a period of years. At the date when that period began the possession of that right was essential before trading could be begun. In these circumstances, I am of opinion that each sum paid must be considered part of a capital outlay. This view is, I think, in accordance with the principle laid down by the Lord Chancellor in British Insulated and Helsby Cables, Ltd. v. Atherton, when he said: “But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. For this view there is already considerable authority.”
In two Scottish cases, Lord Clyde (Lord President) formulated the question for decision as follows: “Are the sums in question part of the trader's working expenses, are they expenditure laid out as part of the process of profit earning; or, on the other hand, are they capital outlays, are they expenditure necessary for the acquisition of property or rights of a permanent character the possession of which is a condition of carrying on the trade at all?”: (see Robert Addie & Sons Collieries, Ltd. v. Inland Revenue Commissioners, and Inland Revenue Commissioners v. Adam).
It is true that the period for which the right was acquired in this case was three years and no more, and a doubt may be raised whether such a right is of “enduring benefit” or “of a permanent character.” These phrases, in my opinion, were introduced only for the purpose of making it clear that the “asset” or “right” acquired must have enough durability to justify its being treated as a capital asset. This is borne out, so far as Lord Clyde's judgments are concerned, by the fact that in Adam's case, the duration of the right acquired was eight years, and that his Lordship there spoke of its “relatively permanent character.” “Permanent” is indeed a relative term, and is not synonymous with “everlasting.” In my opinion the right to trade for three years as a licensed victualler must be regarded as attaining to the dignity of a capital asset, whereas the payment made for an excise licence is no doubt properly regarded as part of the working expenses for the year.
(Footnotes omitted)
The decision in Henriksen was referred to with approval in the joint judgment in AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation (2015) 255 CLR 439 at [18] as an example of a payment being on capital account, notwithstanding it being recurrent, because it reflected the monopoly value of what was acquired. In the present case, in contrast, the amount of the outgoing reflected the economic value of the income stream expected from putting other assets to use to derive income from gaming. The gaming machine entitlements had no intrinsic economic value other than by reference to the income stream expected from its use with other assets to derive gaming income. The amounts paid for the gaming machine entitlements were amounts, like those considered in BP Australia Limited v Federal Commissioner of Taxation (1965) 112 CLR 386 at 398, “which had to come back penny by penny with every order during the period in order to reimburse and justify the particular outlay”. The close connection between the amounts paid for the gaming machine entitlements and the income stream expected from the payments was in part reflected, as a practical business and commercial matter, in the amount which the purchaser had been willing to pay for the business when it had included commissions income from 18 gaming machines. It was also reflected in the mechanism provided by the amendments in 2010 to the 2003 Gaming Act for the payment of the amounts due to the government by instalment from gaming receipts. It can also be assumed that any separate economic value of the gaming machine entitlements would diminish over time to “nil” as the period for which they were granted was consumed and decreased by the passage of time. The outgoings were, finally, unlike premiums for a lease which secures, albeit it for a diminishing period, a right to occupy and enjoy premises: cf Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] AC 295; WR Parsons, Income Taxation in Australia (1985, LBC) [6.146]-[6.148]; Australian National Hotels Ltd v Federal Commissioner of Taxation (1987) 19 ATR 417; Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39; Jupiters Ltd v Deputy Commissioner of Taxation (2002) 118 FCR 163, [27]-[30]. The rights attaching to the gaming machine entitlements had nothing comparable to the rights to occupy and enjoy real estate.
The Commissioner also submitted that the outgoing was of capital, or of capital nature, because it had been incurred “for the purpose of preserving and protecting” the trustee’s business: see Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation (1952) 85 CLR 423, 433-4. It is true that the expenditure had an effect upon the income producing structure of the trustee’s business, and it is true that a consequence of the outgoing was to have preserved the trustee’s ability to derive income from gaming activities at the hotel, but it would not be accurate to characterise the outgoing as “for the purpose of preserving and protecting” the trustee’s business. The outgoings were for the statutory entitlement to conduct gaming at its premises on gaming machines over time, and the amount of the bid reflected the expected income stream from the use of those other assets which the gaming machine entitlements permitted. An incident of acquiring the gaming machine entitlements by the outgoing may have been to have preserved the trustee’s income earning structure, but the purpose of the outgoing was to obtain the right to conduct gaming to enable the trustee to derive the future income which was expected from the gaming.
The conclusion that the amounts incurred for the acquisition of the gaming machine entitlements were on revenue account makes it unnecessary to consider the alternative ground relied upon by the trustee, namely that the amounts were deductible over five years commencing in the 2010 income year pursuant to s 40-880(2). Whether it is desirable to consider issues which are not strictly necessary for the disposition of a case will vary from case to case. In Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd (2010) 31 VR 46 the Court of Appeal of the Supreme Court of Victoria said at [103]:
Whether in any given case a trial judge should proceed to decide issues which, strictly speaking, do not fall for decision is a matter for assessment in the circumstances of the case. But it is an assessment which trial judges should be astute to carry out. This is consistent with the observation made by the High Court, with respect to intermediate appellate courts:
[A]lthough there can be no universal rule, it is important for intermediate courts of appeal to consider whether to deal with all grounds of appeal, not just with what is identified as the decisive ground. If the intermediate court has dealt with all grounds argued and an appeal to this Court succeeds, this Court will be able to consider all the issues between the parties and will not have to remit the matter to the intermediate court for consideration of grounds of appeal not dealt with below.
The observation made by the joint judgment of the High Court quoted by the Court of Appeal in Kheirs emphasised the importance of all issues being dealt with to have enabled the High Court to dispose of “all the issues between the parties” in a subsequent appeal: see Kuru v New South Wales (2008) 236 CLR 1, [12]. In the present case, the alternative ground does not require the finding of contested facts and can be dealt with on appeal even if not determined in this proceeding.
In St George Bank Limited v Commissioner of Taxation [2008] FCA 453 Allsop J, as the Chief Justice then was, declined to deal with alternative issues notwithstanding the request by the parties that he do so, where views his Honour might have expressed as obiter dicta, might have created an impediment to the administration of revenue legislation. His Honour observed at [99]‑[100]:
The application of Division 974 of the 1997 Act
99.It is unnecessary to decide this aspect of the case. The parties, however, fully argued the relevant issues. I was invited by the Commissioner to provide my reasons on the issues argued even if they were not necessary for my decision. After initially submitting that I should not do so, SGB put submissions to the effect of those put by the Commissioner in this respect. I have given careful consideration to complying with the request of the parties to discuss Division 974 even if it is not necessary for a decision. I have come to the view that I should not, for three reasons. First, no separate body of facts needs to be found for the assistance of a Full Court, should I be found to have erred in my earlier analysis. Secondly, however detailed and concluded my views, they would not be essential for the reasoning underlying the orders made. They would, as obiter dicta, lack a degree of authority. Subject to conforming with the law of Australia as laid out by Parliament and as interpreted and declared by the courts as the judicial branch of government: (see Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd (2007) 158 FCR 325) it is for the Commissioner and the ATO to administer the revenue legislation as they interpret it. There has been public comment made by the Commissioner, the ATO, and others, apparently doubting elements of these basal governmental separations, responsibilities and functions discussed in Indooroopilly 158 FCR 325. This is not the place to enter that debate. It is, however, appropriate to recognise that courts decide cases and, in so doing, declare the law, including the meaning and effect of laws of the Parliament. To the extent that my views on Division 974 would be clearly obiter dicta, they may create an unnecessary impediment to the administration of the revenue legislation if they are not part of the ratio decidendi of the decision. Thirdly, the business community and capital markets, likewise, will have my views that are not part of the ratio decidendi affecting questions of advice and judgment in circumstances where the views of the Commissioner and the ATO can be sought by ruling or assessment, and, thereafter, be directly and specifically tested and ruled upon in a way binding on both the revenue and the taxpayer.
100.I should add that I have come to these views having had the benefit of the thorough and careful submission of counsel for both sides (for which I express my gratitude) and having considered these submissions in considerable detail.
To these considerations may be added the desirability for the efficient disposition of disputes at first instance. An inflexible rule requiring first instance decision makers to consider all arguments, or alternative grounds or positions, could lead to forensic decisions which prolong and unjustifiably complicate proceedings to delay final determination. It is also relevant to bear in mind that the decision in this case is of the Tribunal and not of a court, although it is a decision of a judicial member of the Tribunal and the Commissioner and taxpayers alike may have some expectation that like cases be decided alike.
In the present case it is desirable to deal with the alternative submission. The concern expressed in St George Bank Limited that any obita dicta may “create an unnecessary impediment to the administration of the revenue legislation” is lessened in the present case because the Commissioner will be able to challenge the alternative basis for the decision if he elects to appeal the principal basis for allowing the deduction. The circumstances are unlike those in Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd (2007) 158 FCR 325 where the Commissioner had not been able to appeal an adverse decision on a fringe benefits tax assessment in light of a favourable decision on an income tax assessment: see Essenbourne Pty Limited v Commissioner of Taxation [2002] ATC 5201. An ability in this case for the Commissioner to raise all issues on any appeal will not, of course, guarantee that an appellate court will consider and determine all issues on appeal (see Pridecraft Pty Ltd v Commissioner of Taxation (2004) 213 ALR 450 at [112]), but that will depend upon the view taken by the appellate court about the need and desirability for the appellate court to deal with the alternative issues. The position of the business community is, as observed in St George Bank Limited, relevant in deciding whether to consider issues that will be clearly obiter, but its position is significantly different from that of the Commissioner. The business community will often be affected by observations made in cases to which they were not parties. Members of the business community are not usually bound by decisions to which they are not a party, which nonetheless affect them as relevant precedent, but do not have the Commissioner’s obligation of the administration of revenue laws more broadly than in their own affairs. It is also relevant in this case that the provisions in question are of some importance, complexity and difficulty, have not previously had independent consideration and were fully argued by senior counsel experienced in tax law by both parties.
Section 40-880 permits a taxpayer to claim a deduction of a capital nature where a deduction would not be available under s 8-1. Section 40-880(2) enables a taxpayer to deduct over five years in equal portions capital expenditure which was incurred in relation to, amongst other circumstances, a taxpayer’s business, a business that the taxpayer used to carry on, or a business that a taxpayer proposes to carry on. Section 40-880(5)(f) restricts the operation of the deduction, however, if the expenditure could, apart from that section, be taken into account in working out the amount of a capital gain or a capital loss from a CGT event. In broad terms, in other words, the section is aimed to allow a taxpayer to claim tax deductions over five years for certain expenditure incurred of a capital nature that would not otherwise be allowable as a reduction in calculating a taxable capital gain.
The Commissioner accepted that s 40-880(2) applied to the expenditure in question but submitted that it was not deductible because the expenditure could be taken into account, as contemplated by s 40-880(5)(f), in working out the amount of a capital gain or a capital loss from a CGT event. The applicant, for its part, conceded that s 40-880(5)(f) applied but relied upon the exclusion to that exception found in s 40-880(6) which provided:
The exceptions in paragraph (5)(b) and (f) do not apply to expenditure that you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill.
The issues between the parties in relation to s 40-880, were, therefore, whether the expenditure on the gaming machine entitlements was to preserve (but not to enhance) the value of goodwill, whether the expenditure was incurred in relation to a legal or equitable right, and whether the value to the trustee of the trust of the right in respect of the expenditure was solely attributable to the effect that the right had on goodwill.
The background to the enactment of s 40-880 was the Review of Business Taxation undertaken in 1998 and 1999 under the chairmanship of Mr John Ralph (“the Ralph Review”). In July 1999 a report was published entitled A Tax System Redesigned in which gave some examples of “blackhole expenditure” that were recommended to be made immediately deductible, including the costs of defending title to an asset, the costs of defending a takeover, the costs of winding up or closing business, the costs of an unsuccessful takeover, the costs of demolishing an asset, and expenditure contributing to the creation of business goodwill such as business relocation costs and market development costs, unless the expenditure gave rise to, or improved, a recognisable asset: see A Tax System Redesigned, 188. The Ralph Review had been undertaken in the context of broader issues of tax reform which were ultimately not adopted, but a provision to provide deductions for “blackhole expenditure” was enacted. The Commissioner contended, however, that expenditure in acquiring the gaming machine entitlements gave rise to a recognisable asset and, therefore, was intended to have been excluded from the recommendations made by the Ralph Review.
Section 40-880 was originally enacted in different terms from the present s 40-880, and when first enacted gave a tax deduction for capital expenditure incurred in the following terms:
(1)You can deduct amounts for capital expenditure you incur that is one of these:
(a)expenditure to establish a business;
(b)expenditure to convert your business structure to a different business structure;
(c)expenditure to raise equity for your business;
(d)expenditure to defend your business against a takeover;
(e)costs to your business of unsuccessfully attempting a takeover;
(f)costs of liquidating a company that carried on a business and of which you are a shareholder;
(g)costs to stop carrying on a business;
to the extent that the business is or was carried on for a taxable purpose.
The Tax Laws Amendment (2006 Measures No 1) Act 2006 (Cth) replaced s 40-880 and also replaced the provision concerning the cost base of a CGT asset in ss 110-25(5) and (5A) of the 1997 Act. The explanatory memorandum to those changes explained at [2.144] that the fourth element of the cost base in the calculation of a capital gain or a capital loss was no longer to apply to capital expenditure incurred in relation to goodwill. A consequence of that exclusion was explained to be “that expenditure in relation to goodwill [which] already attract[ed] deductibility over five years [did] not receive less generous CGT treatment by reason of the enlargement of the fourth element”.
The explanatory memorandum does not otherwise provide much enlightenment as to the mischief, intention or purpose to the enactment of s 40-880(6) in the terms enacted. The explanatory memorandum stated at [2.70]-[2.71]:
2.70Expenditure is deductible where it is incurred in relation to a lease or other legal or equitable right, and the value of the expenditure to the taxpayer arises solely from the effect that the right has in preserving, but not enhancing, the value of goodwill. For example, capital expenditure may be incurred in relation to a right that is both unlimited in duration, and which merely prevents goodwill from being damaged. Such a right has no distinct value in itself. Its value lies in the effect its existence has upon the value of the goodwill. Such expenditure represents in substance a blackhole expense even though it is in relation to an asset.
[Schedule 2, item 30, subsection 40-880(6)]
2.71Where a taxpayer incurs an expense in relation to a right and that right enhances the value of the goodwill, or has an inherent value in itself then it would not be appropriate to allow a deduction as a business related cost as the expenditure does not represent a loss to the taxpayer.
The Commissioner submitted that an example of expenditure that would be allowed as a deduction under s 40‑880(6) would be expenditure to secure a restrictive covenant, such as a payment to a departing business partner in return for an agreement not to operate a similar business in competition.
There are three elements to s 40-880(6) that need to be considered upon the assumption, of course, that the expenditure is of capital. The first is whether there was expenditure incurred “to preserve (but not enhance) the value of goodwill”. The second is whether the expenditure was “in relation to a legal or equitable right”. The third is whether the value to the trustee of the right was “solely attributable to the effect that the right had on goodwill”.
It may be convenient to deal first with the second of three elements because it is clear that the expenditure on the gaming machine entitlements was incurred “in relation to a legal or equitable right”. The expenditure in the present case secured the legal entitlement under the 2003 Gaming Act to do the things contemplated by s 3.4A.2 which included the right to conduct gaming on an approved gaming machine in an approved venue operated by a venue operator. The statutory rights conferred by the gaming machine entitlements was, therefore, a legal right and the expenditure was “in relation to” that right.
Whether the expenditure was incurred “to preserve (but not enhance) the value of goodwill” is to be determined by asking what the expenditure was calculated to achieve from a practical and business point of view. Section 40-880(6), on any view, is directed to business expenditure and should be construed in a practical and business way. The motive for the expenditure is not the focus of the inquiry but, rather, whether the objective purpose of the expenditure was of preserving, as distinct from enhancing, the value of goodwill. “Value”, in this context, is to be understood as the importance or worth of the goodwill to the taxpayer rather than to any monetary amount the goodwill may have had or at which it may have been recorded. The expenditure in this case was for the statutory gaming machine entitlements but that fact does not of itself determine whether it was expenditure to preserve, but not to enhance, the value of goodwill. Plainly it was expenditure “in relation to the legal or equitable right”, but the acquisition of a statutory right by expenditure assumed to be of capital does not determine the character of the purpose of its incurrance.
In Commissioner of Taxation v Murry (1998) 193 CLR 605 the majority of the Court explained goodwill to be the valuable right or privilege to use the other assets of a business to produce income. Their Honours said in a joint judgment at [23]:
Goodwill as property
From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes "the attractive force which brings in custom". Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.
(Footnotes omitted).
The goodwill referred to in s 40-880 must similarly be understood as the right obtained from the use of the gaming machine entitlements with the trustee’s other assets to produce income. The evidence in this case was that the purpose for incurring the expenditure was to secure entitlements for the trustee to continue gaming activities which had previously been carried on by Tattersalls at the trustee’s premises. The trustee had previously derived income from Tattersall’s gaming activities and the expectation of that income was reflected in the trustee’s goodwill. The expenditure on the gaming machine entitlements was to enable the trustee to derive directly the income from gaming activities which the trustee had previously derived indirectly as commissions by the gaming activities carried on by Tattersalls. That purpose of the expenditure (on the assumption that it was of capital) was, from a practical and business point of view, to preserve the value of goodwill and was also reflected in the trustee’s goodwill.
The expenditure must not, however, have been to enhance goodwill for the expenditure to be deductible, and the expenditure in this case did “enhance” the value of the goodwill because the gaming machine entitlements which were acquired increased the trustee’s rights by 10 years longer than it had previously. The trustee had acquired entitlements in 2005 to receive (by way of commissions) income from gaming activities until 2012. The gaming machine entitlements acquired in 2010 necessarily enhanced its goodwill by extending the entitlement by 10 years. Whether expenditure enhanced goodwill is not answered by looking only to monetary amounts recorded in an entities’ books, but by reference to what the expenditure achieved from a practical business and commercial point of view. The expenditure from that perspective enhanced the goodwill of the business by extending the number of years over which the trustee could expect to derive income from the gaming machine entitlements at the premises with 18 gaming machines. It is true that the trustee was previously able to derive income through the use of 18 machines and that it continued after 2012 to derive income from the operation of only 18 machines, but its expenditure on the gaming machine entitlements enhanced the goodwill by extending the period of time in respect of which it was able to exercise the rights obtained under the 2003 Gaming Act.
It follows that a deduction would not be available under s 40-880 and that it is not necessary to consider the third element of the exclusion. The third element of the exclusion is that the value to the taxpayer of the right in respect of the expenditure incurred was “solely attributable to the effect that the right has on goodwill”. In Murry the goodwill in connection with the business in that case was distinguished from the licence permitting a taxi driver to carry on the business. At [68] it was said:
For legal purposes, goodwill is the attractive force that brings in custom and adds to the value of the business. It may be site, personality, service, price or habit that obtains custom. But with the possible exception of a licence to conduct a business exclusive of all competition, a licence that authorises the conduct of a business is not a source of goodwill. A taxi licence therefore is simply an item of property whose value is not dependent on the present existence of a business. It is not and does not contain any element of goodwill.
It was submitted in this case that this passage from Murry was distinguishable because the gaming machine licences were not a tradeable item of property having a value independent from the business conducted at a venue. It is unnecessary to embark upon a detailed analysis of the similarities and differences between the taxi licence in Murry and the machine gaming entitlements acquired under the 2003 Gaming Act. For present purposes it is important to note that the exclusion in s 40-880 applies in limited circumstances, including by reference to whether value to the taxpayer can be said to be attributable “solely” to the effect that the right has on goodwill. The section is intended to have limited application and in this case the value to the trustee had an effect not only on the goodwill (by enhancing the right to conduct business by 10 years) but also upon the income stream expected to be derived from the conduct of the business with the benefit of the licence. It follows that s 40-880 would not have been available to the trustee to allow deductions over five years from 2010 in the calculation of the net income of the trust estate in the relevant years.
Accordingly, the decision of the Tribunal, subject to hearing from the parties, will be to set aside the objection decision of the Commissioner and to substitute that decision with a decision by the Tribunal allowing the objection on the ground that the outgoings for the gaming machine entitlements were allowable as a deduction in the 2010 year of income under s 8-1 of the 1997 Act.
30. I certify that the preceding 29 (twenty nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President Tony Pagone
AssociateDated: 14 December 2017
Date of hearing: 24 October 2017 Counsel for the Applicant: Mr T Murphy QC with Mr D McInerney Solicitor for the Applicant: Rigby Cooke Counsel for the Respondent: Mr G Davies QC with Ms J Jaques Solicitor for the Respondent: Australian Taxation Office
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