The Nature of Expenditure (4) – Sharpcan’s Case (4)



The nature of the payments…

Purchase price funded out of revenue – In its reasoning, the majority of the FFC had attributed significance to the fact the Trust purchased the GMEs with the intention that the purchase price should be funded out of receipts of gaming income derived from the operation of the GMEs. However, the HC rejected this reasoning, concluding that 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.

Economic value of income stream – The majority of the FFC considered it significant that the trustee calculated the maximum which it was prepared to bid for the GMEs on the basis of a projection of what the GMEs were likely to return over the course of their ten-year period.

However, according to the HC, this reasoning was misplaced. In its view, most rational business operators would not contemplate the acquisition of a capital asset unless the present discounted value of the income stream it was expected to generate was at least as much as its purchase price. However, there was nothing in principle or authority which supported the idea that this should be used as a basis to treat the acquisition of a capital asset as if it were acquired on revenue account.

Obstacle to integrated business – The majority of the FFC also considered it significant that the purchase price of the GMEs was “incurred in relation to a business properly understood as an integrated hotel business” and referred to the Commissioner as having artificially looked “through and beyond the integrated undertaking of the hotel business and excised from it that part of it which related to gaming”.

However, the HC also rejected this submission. The determination of whether an outgoing is incurred on capital or revenue account depends on the nature and purpose of the outgoing. That is, whether it is calculated to effect the acquisition of an enduring advantage to the business. In this regard, the GMEs represented a structural solution. The purchase price was paid to a third party (i.e., the State Government of Victoria) for the acquisition of entitlements of 10 years duration which allowed it to lawfully operate gaming machines, on the Trust’s hotel premises. The benefit to the Trust of purchasing the GMEs was therefore the acquisition of an enduring asset as part of the profit-earning structure of the Trust’s business from which to derive gaming income.


No commercial choice – In its reasons, the majority in the FFC emphasised that the impending statutory regime presented a major threat to the revenue, profitability and goodwill of the hotel business unless the GMEs were acquired. As a result, the Trust was deprived of any commercial choice other than to bid successfully for the GMEs.

However, the HC also considered this reasoning to be misplaced. This was because the determination of whether a taxpayer has acquired an asset on capital or revenue account is not affected by whether the taxpayer’s assessment of the need to acquire the asset has been “foisted” upon them. Nor is it dependent on whether, but for the acquisition of the asset, the taxpayer might have suffered a substantial reduction in income or be unable to continue in business.

Rather, such determination depends on whether the asset was acquired as part of fixed capital (the profit-making structure of the business), or as part of the working capital to be used up in the course of the regular and recurrent operation of the profit-making structure of the business. In this regard, the HC agreed that the GMEs were a capital asset of enduring value.


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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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