The Nature of Expenditure (3) – Sharpcan’s Case (3)



Case facts…


  • The Commissioner assessed the taxpayer (as beneficiary of the Trust), to assessable income of $139,901 for the 2012 income year on the basis that the cost of the GMEs were not deductible outright, or over five years as a blackhole expenditure. It was accepted that if the outgoing for the GMEs was either deductible to the Trust in full, or over five years, the net income of the Trust for the 2012 income year would be nil, which would result in a reduction in the taxpayer’s assessable income for the same income year by $139,901.


  • The taxpayer objected to the assessment, which was disallowed by the Commissioner. The taxpayer sought a review of the matter by the AAT and was successful in having the Commissioner’s objection decision set aside. The Commissioner appealed to the FFC which, by a majority of 2:1 (with Thawley J dissenting), dismissed the appeal.


  • The Commissioner then appealed to the HC. The HC has the final say on the matter, which is discussed below.


High Court’s decision

On 16 October 2019, the HC handed down its decision which unanimously overturned the decision of the FFC, being that the taxpayer was entitled to an (outright) deduction under S.8-1 for the $600,300 it paid for the GMEs or, in the alternative, that the amount could be deducted over five years under S.40-880.


The nature of the payments

Ultimately, the HC concluded that payment for the acquisition of the GMEs was an outgoing on capital account, and therefore, not deductible under S.8-1. In this regard, the HC stated that the GMEs were a capital asset of enduring value, acquired by the Trust as the means of production necessary for it to conduct gaming activities in the period following expiration of its arrangements with Tattersall’s.

In the HC’s view, the relevant case law makes clear that the test of whether an outgoing is incurred on revenue or capital account depends primarily on what the outgoing is calculated to effect from a practical and business point of view. In this regard, the Trust’s purpose in paying the purchase price for the GMEs was to acquire, hold and deploy the GMEs as enduring assets of the hotel business for the purpose of generating income from gaming for the next 10 years.

In this regard, the GMEs were part of the ‘structure’ of the business. This was because the conduct of gaming in an approved venue was only lawful if the venue operator held a GME (which therefore constituted a ‘barrier to entry’). Further, even though the purchase price was paid in several instalments, it was in the nature of a once-and-for-all outgoing for the acquisition of an enduring asset. That is, it was not a case of regular and recurrent payments for the use of an asset (it was a lump-sum paid off in instalments).


In reaching this conclusion, the HC also made the following observations:

Assets of enduring advantage –the purchase price for the GMEs was not in any sense, in the nature of periodic licence fees (e.g., an annual fee paid to obtain the use of an asset for a year) but rather, were merely instalments of the purchase price “for” the GMEs.


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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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