The Nature of Expenditure (2) – Sharpcan’s Case (2)



Key facts and events


  • Sharpcan Pty Ltd (‘the taxpayer’) was a corporate beneficiary of the Daylesford Royal Hotel Trust (‘the Trust’) and was presently entitled to 100% of the income of the Trust in respect of the 2012 income year. Mr Canny, an experienced hotel operator, was the sole shareholder and director of both the taxpayer and the corporate trustee of the Trust.


  • The Trust acquired a hotel business in August 2005 and conducted that business until it was sold in November 2015. The hotel business involved deriving revenue from a number of integrated activities, including providing accommodation in its guest rooms; sales of food and drinks at its restaurant, café and public bar; gaming on 18 electronic gaming machines onsite, and wagering on racing and keno.


  • At the time the business was acquired, the Trust had been granted a ‘venue operator’s licence’ as the operator of the venue on which the gaming occurred on 18 machines. Tattersalls Gaming Pty Ltd (‘Tattersalls’) had been granted a ‘gaming operator’s licence’ enabling it to conduct gaming at the hotel by, and through, those 18 machines.



  • The parties had an agreement in place whereby Tattersalls (as the owner and operator of the 18 machines) was the gaming operator at the hotel operated by the Trust as an approved venue operator. Tattersalls derived revenue from the machines as the gaming operator and the Trust received a percentage of the net revenue from the gaming as commission.


  • Based on ‘unchallenged’ evidence given by Mr Canny, the income derived by the Trust from gaming (in the form of commission from Tattersalls) was a significant component of the integrated hotel undertaking, representing between 16% and 21% of its gross revenue for the 2006 to 2012 income years.


  • In 2009, changes to the Victorian gaming legislation were made to substantially restructure the gaming industry by providing for the creation and allocation of GMEs that had a 10-year term. While the GMEs were transferrable, transfers could only be to another approved venue operator who was subject to all of the regulatory controls. The existing licences would expire when these changes came into effect from 16 August 2012.


  • Under the new regime, gaming on the 18 machines at the hotel became gaming conducted by the Trust rather than Tattersalls (i.e., the Trust would derive income from the gaming activities directly instead of as commission from Tattersalls). However, in order to conduct the gaming at the hotel, the Trust had to acquire a GME for each machine it used (if no GMEs were acquired, the Trust would no longer be able to generate gaming income as part of its business from 16 August 2012).


  • A limited number of GMEs were allocated to hotels and clubs by means of an auction, whereby bidders would compete for an allocation of GMEs on the basis of the price they offered.


  • The Trust obtained professional advice from an analyst about their bidding strategy and the maximum price it could afford to pay to acquire the GMEs and yet maintain a reasonable rate of return. In May 2010, the Trust was successful in its bid for 18 GMEs at a total cost of $600,300 (i.e., $33,350 per GME). The Trust took up the option of paying the acquisition price by quarterly payments under a deferred payment arrangement over six years.


  • Should you have any queries, please contact Tax Ideas Accountants & Advisers on +61 2 83181545
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Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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