October 29, 2019
On 16 October 2019, the High Court of Australia unanimously allowed an appeal from the ATO and found the gaming licenses acquired by a Victorian hotel operator were CGT assets, therefore not eligible for a deduction in relevant income year or over the following five years (FCT v Sharpcan Pty Ltd). This overturned the Full Federal Court’s 2018 decision, where the majority held that the costs were deductible in the income year.
In 2009, the gaming machine entitlement (“GME”) regime was introduced to replace the previously adopted venue operator’s gaming license. The taxpayer, a Victorian pub operator, in May 2010 successfully bid at auction for 18 GMEs, with a useful life of 10 years each. The total cost of these GMEs were $600,300 which was paid over the next 6 years in quarterly instalments. The taxpayer contended that the purchase price should be allowed for an immediate deduction when incurred or be treated as “blackhole expenditure” and deductible over 5 years.
The High Court rejected the taxpayer’s claim and held that the 18 GMEs were in fact CGT assets acquired by the pub as they were the “means of production, necessary for the structure of the business and a barrier to entry”. Without the acquisition of the GMEs, the viability of the business would have been at a significant risk, therefore they provided an enduring advantage for the business. Although the purchase price was paid in instalments, the nature of the GMEs’ purchase was an acquisition of a capital asset, therefore it cannot be deducted as expenditure.
Further, the judges were not satisfied that the purpose of buying these GMEs was to preserve but not enhance the goodwill of the hotel business, and consequently they did not permit the 5-year deduction under the “blackhole expenditure” provisions.
This decision is a disappointing result for hotel operators, many of whom relied on the earlier Federal Court and Full Federal Court decisions to claim outright deductions for their GME expenditure. The judgement reaffirms the complexity of the “revenue vs capital” test in practice and the difficulties that even the judiciary has with its application. At DAA, we have extensive experience in dealing with this test in various circumstances. Please feel free to contact us should you have any questions in relation to your tax affairs.