Talking Tax – Issue 174

Gaming machine entitlements: Revenue vs. Capital

This week the High Court allowed the Commissioner of Taxation’s (Commissioner) appeal in Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36, bringing the long-running Sharpcan saga to an end.

The High Court determined that costs incurred in obtaining gaming machine entitlements (GMEs) were capital in nature and therefore not deductible under section 8-1 of the Income Tax Assessment 1997 (Cth) (1997 Act).  The High Court also determined that despite the costs being capital in nature, they were not deductible under section 40-880 of the 1997 Act as ‘blackhole’ expenditure.

While the Taxpayer in this instance was unsuccessful, it should be noted that the characterisation of expenditure as either revenue or capital in nature is highly fact dependent.  Gaming venue operators should seek proper tax advice on the treatment of GME costs for tax purposes.

The Full Federal Court appeal decision was covered in Talking Tax Issue 137 and the Administrative Appeal Tribunal’s (AAT) original decision was covered in Talking Tax Issue 106.

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In this case the Taxpayer was the sole beneficiary of a trust (Trust), the trustee of which operated an authorised gaming venue in Daylesford containing 18 gaming machines.  Due to legislative changes requiring authorised venues to hold GMEs, the Taxpayer acquired 18 GMEs through a competitive auction process held in May 2010.

The Taxpayer elected to pay for the GMEs under a deferred payment arrangement over six years, and argued that the costs were revenue in nature and deductible under s 8-1 of the 1997 Act for the amounts paid.  The Taxpayer’s alternative argument was that the outgoings were capital in nature, but deductible over 5 years under section 40-880 of the 1997 Act.

The Commissioner disallowed both claims.  The Commissioner’s view was that the cost of the GMEs was capital in nature and was not deductible under section 8-1, nor under section 40-880. 

The AAT at first instance, and the Full Federal Court (Thawley J dissenting) on appeal, concluded that the costs were on revenue account and deductible under section 8-1.  They further held (Thawley J again dissenting) that, if the outgoings were on capital account, they would be deductible over 5 years under section 40-880 of the 1997 Act as expenditure incurred to preserve but not enhance the value of goodwill of the business, and the value to the Taxpayer was solely attributable to the effect that the expenditure had on goodwill.

The High Court determined that the costs of the GMEs were incurred on capital account, allowing the Commissioner’s appeal.  Central to this decision was the Court’s finding that the trustee’s purpose in acquiring the GMEs was to acquire, hold and deploy the GMEs as enduring assets of the business for the purpose of generating income from gaming.

The Court reiterated that the test of whether an outgoing is incurred on revenue or capital account primarily depends on what the outgoing is calculated to effect from a practical and business point of view.  The identification of the advantage sought to be obtained ordinarily requires a consideration of how the asset is going to be used and the means of acquisition.  In this case, the GMEs were necessary for the structure of the business because the conduct of gaming in an approved venue is only lawful if the venue operator holds a GME.

In disallowing any deduction under section 40-880, the High Court determined that the purpose of acquiring the GMEs was not to preserve and not to enhance the value of goodwill of the business, but rather to acquire the GMEs as an asset to be used in the business.  The Court also determined that the value of the GMEs to the trustee was not solely attributable to their effect upon goodwill; they could be individually identified and quantified in the business accounts and had a value apart from any contribution they may have made to goodwill.

Land tax amnesty and compliance blitz

On 14 October 2019, Acting Chief Commissioner of State Revenue for New South Wales Kelly Wood announced a three-month amnesty for NSW land tax, to be followed by a significant uptick in Revenue NSW land tax compliance activity.

Scant details are available at this time, but the Acting Chief Commissioner has stated that the amnesty will exempt NSW landholders from penalties in relation to land tax liabilities disclosed to Revenue NSW during the amnesty period.

Apportioning GST on financial supplies

The ATO has recently published Draft Practical Compliance Guideline PCG 2019/D7 (Draft PCG) to explain its compliance approach to GST apportionment of acquisitions that relate to the supply of certain financial products.

The Draft PCG sets out a framework to be used by the ATO to assess the risk associated with methods to determine the extent of the creditable purpose of these acquisitions.  The risk assessment framework is made up of five zones – white (self-assessment not necessary), green (low risk), blue (low-moderate risk), yellow (moderate risk) and red (high risk).

Taxpayers will be expected to self-assess which risk zone they are in and may also be asked to advise the ATO of which risk zone their arrangements fall within.  If a taxpayer falls within a higher risk zone, they are more likely to be subject to ATO compliance activity.

Risk zone	Risk level	ATO compliance approach
White	N/A	No review other than to confirm ongoing consistency with the agreed approach
Green	Low Risk	ATO will apply compliance resources to confirm that the taxpayer meets the requirements for this risk rating
Blue	Low to moderate risk	Low to moderate priority for review. ATO may undertake compliance activity to gain assurance that the taxpayer falls within this zone or to address exceptional circumstances
Yellow	Moderate risk	Moderate priority for review. ATO may undertake compliance activity to review or test the taxpayer’s approach and will work with the taxpayer to understand and resolve any areas of difference
Red	High risk	High priority for review. Reviews are likely to be commenced as a matter of priority

Importantly, the scope of the Draft PCG does not extend to acquisitions made as part of a larger transformational or extraordinary change in the business.

The ATO will only use a taxpayer’s risk rating as a guide to determine whether some additional form of compliance activity is necessary.  The risk rating is not definitive and does not limit the operation of the law or affect the ATO’s interpretation of the law in any way.

The Draft Guideline will take effect from 1 January 2020.  Comments are due by 1 November 2019.

ATO lodges appeal in Glencore

The ATO is lodging an appeal against the Federal Court’s decision in the Glencore case.

In this case the Federal Court considered whether Swiss-based Glencore International AG and its Australian subsidiary were in breach of any transfer pricing rules in relation to the sale and purchase of copper concentrate.

The Federal Court rejected aspects of the ATO’s interpretation of the transfer pricing rules under Subdivision 815-A of Income Tax Assessment Act 1997 (Cth), allowing the taxpayer’s appeal.

This decision was discussed in detail in Talking Tax Issue 171.

This article was written with the assistance of Anne Wong, Law Graduate.