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

Deduction Availability under Section 40-880

Section 40-880 allows a deduction over five years for certain capital expenses related to business, known as "blackhole expenditure." However, there are limitations and exclusions, with most expenses not deductible if they're covered by another tax law provision.

One exception, stated in Section 40-880(6), relates to expenditure incurred to preserve (not enhance) goodwill, linked to a legal or equitable right solely influencing goodwill's value.

Main Issues of Contention:

1. "Preserve (but not enhance) the value of goodwill":

   • The Federal Full Court (FFC) viewed the exception as considering whether the expenditure aimed to preserve goodwill, regardless of any unintended enhancement. They found the expenditure's subjective purpose was goodwill preservation (as gaming income relied on gaming machine entitlements - GMEs).
   • The High Court (HC) disagreed, stating the expenditure's purpose was merely acquiring GMEs for business use, not goodwill preservation.

2. "Solely attributable to the effect that right has on goodwill":

   • The FFC noted the hotel's survival depended heavily on gaming revenue and considered GMEs' value solely influenced goodwill.
   • The HC disagreed, stating GMEs had individual value as income-generating assets, separate from goodwill's impact.

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• The Nature of Expenditure (1) - Sharpcan’s Case (1)
• The Nature of Expenditure (2) – Sharpcan’s Case (2)
• The Nature of Expenditure (3) – Sharpcan’s Case (3)
• The Nature of Expenditure (4) – Sharpcan’s Case (4)