A unanimous decision by the High Court has allowed an ATO appeal against a previous decision to allow a pokies operator in Victoria deductions for expenditure paid to acquire gaming machine entitlements.
The respondent in the High Court case, the sole beneficiary of a trust operating the Daylesford Royal Hotel, had been successful in an initial claim for the cost of gaming machine entitlements as being on revenue account under s 8-1.
The judgement, issued this week, states that the amount of $600,300 that the trustee paid for acquiring the gaming machine entitlements (GMEs) was an outgoing on capital account, and therefore not deductible under s 8-1. “Nor was it deductible under s 40-880 of the 1997 Act, because it was not incurred to preserve but not enhance the value of goodwill and the value of the GMEs to the trustee was not solely attributable to the effect which they had on goodwill,” the High Court said.
Brief facts behind the case
The trustee of Sharpcan Pty Ltd operated a hotel in Daylesford, Victoria, which it bought from Tattersalls in 2005. Under the liquor and gaming laws at the time, the trustee was the “venue operator” of the hotel, with Tattersalls continuing to own and operate the 18 pokies at the hotel as the “gaming operator”.
In 2010, the Victorian gaming regulations changed. As a result of those changes, venue operators were allocated, through an auction process, the gaming machine entitlements. Sharpcan bought the 18 gaming machine entitlements for $600,300, the total amount payable by deferred payments over six years.
It was the tax treatment of this expenditure that was at the centre of ongoing legal wrangles. The AAT and then the Full Federal Court (by majority) found that the amount paid for the gaming machine entitlements was deductible because it was on revenue account. The ATO argued however that the gaming machine expenditure was capital expenditure or was capital in nature, and was not deductible either pursuant to s 8-1 or pursuant to s 40-880.
End of the matter
With the High Court decision, the arguments have come to a conclusive end, and will no doubt firmly figure in future precedents used when deciding subsequent cases with similar issues and facts.
An intriguing aside in the outcome was that the High Court also disallowed an argument that the amount could be viewed as “blackhole expenditure”. The implication of the High Court’s decision was that the cost of acquiring the GMEs could be added to the CGT cost base of an asset, being those GMEs (not goodwill).
For the aficionados out there, here is the transcript of the full three-hour High Court hearing, before the judgement was issued.
For our Tax Counsel John Jeffrey’s take on this important case, see the below Quick Tax video.