The Nature of Expenditure (5) – Sharpcan’s Case (5)



Was a deduction available under S.40-880

Broadly speaking, S.40-880 provides a deduction over five years for certain business related capital expenditure that is neither deductible (other than under S.40-880), nor otherwise taken into account for income tax purposes (generally referred to as ‘blackhole expenditure’). Note that, although not relevant to Sharpcan’s case, S.40-880 has since been amended to provide an immediate deduction in some situations (for certain start-up expenditure of a small business).

However, any deduction under S.40-880 is limited by an extensive list of exclusions and exemptions, most of which provide that no deduction is available if the expenditure is taken into account under another provision of the income tax law (and for this reason, is referred to as a ‘provision of last resort’).

Section 40-880(6) provides that:

“The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure 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 precise scope of this exception and its application to the facts of the case formed the basis of the ‘battleground’ between the parties. The two main issues of contention were as follows:

“… to preserve (but not enhance) the value of goodwill…”

Based on the way the exception is worded under S.40-880(6), the FFC held the view that it required only the consideration of whether the expenditure was incurred to preserve the value of goodwill (rather than to enhance the value) based on the mindset or purpose at the time the expenditure was incurred. This means that if the purpose was to preserve the value of goodwill, but the incurring of the expenditure had the effect or consequence of enhancing the value of goodwill, then the exception could still apply (subject to the other elements of the subsection being satisfied). The FFC found that the subjective purpose of the expenditure was to preserve the value of the goodwill (as gaming would cease without the GMEs).

The HC disagreed, noting that, while the trust was motivated to acquire the GMEs so that it could continue to generate gaming income (following the change in the law governing the gaming machines), motive does not necessarily equate to the purpose of the expenditure which, in this case, was simply to acquire the GMEs for use in its business.


“… solely attributable to the effect that right has on goodwill…”

In relation to this issue, the FFC even noted that it would be difficult to see how the business undertaking of the hotel would have survived at all without the gaming revenue and its associated impact on the other areas of the business. On the basis of this dependence, the value to the Trust of the GMEs is considered to be solely attributable to the effect that the GMEs had on the goodwill of the business.

The HC disagreed, noting that the majority of the FFC erred in considering the effect on the goodwill of the integrated hotel business. In this case, the GMEs were assets which could be individually identified and quantified in the accounts of the Trust’s business, which had a value quite apart from any contribution that they may have made to goodwill. That value resided in their capacity to generate gaming income, and the fact that they could be sold and transferred to other venue operators, albeit subject to some restrictions and qualifications.


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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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