Thinking | 12 October 2018
Talking Tax – Issue 137
Pub’s gamble pays off: gaming machine entitlements deemed revenue expenditure
A humble Daylesford hotel is the latest battleground in the age-old capital v revenue tax battle.
In a win for hotels and pubs across Victoria, the Full Federal Court rejected the Commissioner of Taxation’s (Commissioner’s) appeal in Commissioner of Taxation v Sharpcan Pty Ltd  FCAFC 163.
In deciding against the Commissioner, the Court found that a lump sum payment (albeit made under deferred payment terms) for gaming machine entitlements (GMEs) was deductible under section 8-1 of the Income Tax Assessment Act 1997 (1997 Act).
While seen as a win for pubs and hotels with gaming operations in Victoria, the outcome of this case should be treated with caution. It should be noted that the characterisation of expenditure as either revenue or capital in nature is highly fact dependent. In fact, this was one of the key findings of the majority in ruling in favour of the Taxpayer.
The Taxpayer (the trustee of a trust) operated a hotel which was an authorised venue containing 18 gaming machines. Due to legislative changes requiring authorised venues to hold GMEs in order to conduct gaming operations, the Taxpayer acquired 18 GMEs through a competitive auction process held in May 2010.
The Taxpayer had elected to pay for the GMEs under a deferred payment arrangement over six years beginning in May 2010. In bidding for the GMEs, the Taxpayer engaged an analyst to prepare a report setting out the maximum price the Taxpayer should pay to acquire GMEs while maintaining a reasonable rate of return.
The Taxpayer argued it was entitled to a deduction under section 8-1 of the 1997 Act for the amounts paid in acquiring the GMEs for the purposes of calculating the net income of the trust for the year of income ended 30 June 2010.
The Taxpayer’s alternative argument was that the outgoings were deductible over 5 years under section 40-880 of the 1997 Act.
In the Administrative Appeals Tribunal (AAT), Deputy President Pagone found that the gaming machine entitlement fees were on revenue account under section 8-1 of the 1997 Act, stating that the outgoings reflected the expected income stream from the use of the gaming assets which the GMEs permitted.
Whilst the payment for a right which is required as a condition for trading will sometimes be capital in nature, the payment for the right to trade will not always be an outgoing on capital account. In this case, the AAT found that the outgoing for entitlements in the trustee’s business was more like a fee paid for the regular conduct of a business than the acquisition of a permanent or enduring asset.
In upholding the Tribunal’s decision, the Full Federal Court confirmed that GMEs purchased due to legislative changes were rightly characterised as revenue expenditure.
The parties accepted that each GME was a CGT asset. Further, Justice Greenwood, with whom Justice McKerracher agreed, accepted that the GMEs were capable of being bought and sold subject to limitations inherent in the relevant legislative regime.
However, Justice Greenwood stressed that the character of the expenditure is to be examined in a manner that takes account of what the expenditure is calculated to effect from a practical and business point of view. That is, Justice Greenwood took a substance over form approach.
Although it was accepted by Justice Greenwood that there were factors which suggested the outgoing was of a capital nature, he concurred with many of the findings of the AAT and concluded that the outgoing was on revenue account.
A detailed review of the AAT decision can be found in Talking Tax Issue 106.
Legislation and government policy
Government gets with the times: removal of GST on feminine hygiene products
On 3 October 2018, the Treasurer, Hon Josh Frydenburg, announced that there was unanimous agreement by the States and Territories to remove GST on feminine hygiene products from 1 January 2019.
Treasury has also released a Consultation Paper on the draft definition of ‘feminine hygiene products’ for GST purposes and contains a table which explains the types of products proposed to be included in the definition.
This is a welcomed, albeit well overdue, announcement.
The closing date for submissions is 22 October 2018.
The digital economy and Australia’s corporate tax system
On 2 October 2018, the Government released a discussion paper on the challenges to the Australian corporate tax system arising from digitalisation, inviting public submissions on the consultation.
While digitalisation has delivered significant benefits for Australian consumers and businesses, the Government said it remains concerned that some very profitable, highly digitalised companies pay very little tax in the countries in which they do business.
The paper also questions whether Australia should pursue interim options ahead of an OECD-led, consensus-based solution to address the impacts of digitalisation on the international tax system. To this end, the discussion paper looks at the experience of other countries that have introduced (or are contemplating) interim measures.
Submissions are due by 30 November 2018.
Toward a centralised registers system
On 1 October 2018, the Government released draft legislation, Commonwealth Registers Bill 2018 and Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018, proposing to implement its 2018-19 Federal Budget measures to modernise the ABR and ASIC business registers and introduce Director Identification Numbers (DINs).
The legislative package proposes the creation of a new Act (Commonwealth Registers Act 2018), as well as amendments to a range of existing laws.
Initially, the existing business registers administered by ASIC and the ABR will be moved onto a single platform to be administered by the ABR within the ATO. This includes the registers for companies, business names and ABNs (among other things). Additional registers may also be brought into the new regime under future legislative reforms.
The draft legislation will also introduce a legal framework for proposed DINs. This is intended to rectify the fact that while the law currently requires that directors’ details be lodged with ASIC, there is no requirement for the regulator to verify the identity of directors.
Broadly, the requirement to obtain a DIN will initially apply only to appointed directors and acting alternate directors of:
- a company, registered foreign company or registered Australian body (which are registered under the Corporations Act 2001 (Cth); or
- an Aboriginal and Torres Strait Islander corporation (which are registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006).
The DIN will require all directors to confirm their identity and will be a unique identifier for each person who consents to being a director. The person will keep that unique identifier even if their directorship with a particular company ceases.
This is intended to provide traceability of a director’s relationships across companies over time and to assist regulators and external administrators in investigating a director’s potential involvement with unlawful activity.
Existing directors will have 15 months to apply from the start date of the new requirement. A person appointed as a director of a body corporate after this start date would be required to apply for a DIN within 28 days unless an exemption applies.
Civil and criminal penalties may apply to directors who fail to apply for a DIN within the applicable timeframes.
Guidelines on absentee owner exemptions
On 1 October 2018, the Victorian Government published guidelines in relation to the Treasurer’s discretion:
- under section 3B of the Land Tax Act 2005 (Land Tax Act), to exempt absentee persons who hold an absentee controlling interest in a corporation from being taken to hold that controlling interest;
- under section 3BA of the Land Tax Act, to exempt absentee beneficiaries of an absentee trust from being taken to be an absentee beneficiary of that trust; and
- under section 3E of the Duties Act 2000 (Vic) (Duties Act), to exempt a person who has a controlling interest in a foreign corporation, or a substantial interest in the capital of a trust estate of a foreign trust, from being taken to hold that interest.
The effect of the exemptions are as follows:
- Under section 3B of the Land Tax Act, if an exemption has been granted for all of the absentee persons who hold an absentee controlling interest, the corporation will not be an absentee corporation and therefore will not be liable to pay the absentee owner land tax surcharge. However, the exemption will not apply to a corporation that is incorporated outside Australia.
- Under section 3BA of the land Tax Act, if an exemption has been granted for all of the absentee beneficiaries in relation to an absentee trust, the trust will not be an absentee trust. Therefore, the trustee of the trust will not be liable to pay the absentee owner land tax surcharge.
- Under section 3E of the Duties Act, a person who has an exemption is taken not to have a controlling interest in the corporation or a substantial interest in the trust estate. The effect of this exemption is that the corporation or trust will not be a foreign corporation or foreign trust, and therefore will not be liable for the foreign purchaser additional duty. However, all other duties that are liable to be paid will remain payable, and the exemption will not apply to a corporation that is incorporated outside Australia.
When determining whether an exemption should be granted in relation to an absentee corporation under section 3B of the Land Tax Act, the following factors will be considered:
- The nature and degree of ownership and control. For example, the greater the degree of ownership or control the absentee person has, or absentee persons have, in the corporation, the greater this factor will weigh against the grant of the exemption.
- Practical influence to determine the outcome of decisions of the corporation. For example, the greater the absentee person’s role in the management and operation of the corporation’s activities, the greater this factor will weigh against granting the exemption.
- The effect of the practice or behaviour of the absentee person on the financial and operating decisions of the corporation. For example, the greater the frequency and the impact of the absentee person’s involvement in determining the corporation’s financial and operating policies, the greater this factor will weigh against granting the exemption.
An absentee corporation is also less likely to be granted an exemption if it does not have any management staff based in Australia.
When determining whether an exemption should be granted in relation to an absentee trust under section 3BA of the Land Tax Act, the following factors should be considered:
- The nature and degree of the absentee beneficiary’s interest in the trust. For example, the greater the degree of interest the absentee beneficiary has, or the absentee beneficiaries have, in the trust, the greater this factor will weigh against granting the exemption.
- For a discretionary trust, the frequency or proportion of distributions made to the absentee beneficiary and the relationship between the absentee beneficiary and the trustee.
- Practical influence that the absentee beneficiary can exert, and the rights the absentee beneficiary can enforce to determine or influence the outcome of the decisions about the trustee’s administration of the trust.
- The practice or behaviour of the absentee beneficiary affecting the trustee’s administration and conduct of the trust.
Among other things, the guidelines also note that where the commercial activities of the corporation or trust make a significant contribution to the Victorian economy and community (by engaging local labour and utilising local materials and services), this will weigh in favour of granting the exemption.
When determining whether an exemption should be granted in relation to foreign corporations under section 3E of the Duties Act, the following factors should be considered:
- The nature and degree of ownership and control the foreign person has in the corporation. For example, the greater the degree of ownership or control the foreign person has in the corporation, the greater this factor will weigh against granting the exemption.
- Practical influence the foreign person can exert and the rights the foreign person can enforce to determine, directly or indirectly, the outcome of decisions about the corporation’s financial and operating policies.
- The practice or behaviour of the foreign person affecting the corporation’s financial and operating policies.
When determining whether an exemption should be granted in relation to foreign trusts under section 3E of the Duties Act, the following factors should be considered:
- The nature and degree of the person’s beneficial interest in the capital of the trust estate. For example, the greater the degree of beneficial interest the foreign person has in the trust estate, the greater this factor will weigh against granting the exemption.
- In respect of a discretionary trust:
- where the principal or primary beneficiary of the trust is a foreign person, this factor will weigh more heavily against granting the exemption;
- where a trust is a foreign trust because the class of general beneficiaries includes a foreign person, who has never received any distributions from the trust and is unlikely to receive any distribution, this factor will weigh in favour of granting the exemption; and
- the closer the relationship between the foreign beneficiary and the trustee or the appointer of the trust, the greater this factor will weigh against granting the exemption.
- Practical influence that the foreign person can exert and the rights the foreign person can enforce to determine, directly or indirectly, the outcome of decisions about the trustee’s administration and conduct of the trust.
- The practice or behaviour of the foreign person affecting the trustee’s administration and conduct of the trust.
Among other things, the guidelines also note that where the commercial activities of the corporation or trust significantly add to the supply of housing stock in Victoria (either through new developments or through redevelopment, where such development is primarily residential) this will weigh in favour of granting the exemption.
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