Private ruling: Income Tax Deductions - Expenditure in the nature of capital or revenue
Published: August 2014
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2009

Ruling: Q1: Have the 'gaming venue companies' incurred a loss or outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 in respect of the payment of the initial instalment made during the year ended 30 June 2010? | A1: Yes. The 'gaming venue companies' incurred a loss and outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 for the year ending 30 June 2010 in respect of the total cost of each gaming entitlement, which includes the initial instalment. | Q2: Has the head company incurred a loss or outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 in respect of the payments made or required to be made during the financial years ended 30 June 2013 to 30 June 2017? | A2: No | Q3: Are the outgoings made by the 'gaming venue companies' and the head company in respect of the gaming machine entitlements capital, or of a capital nature, pursuant to subsection 8-1(2) of the Income Tax Assessment Act 1997 ? | A3: Yes | Q4: Alternatively did the 'gaming venue companies' incur a loss or outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 for their liability to make payments in respect of the gaming machine entitlements acquired in the year ended 30 June 2010? | A4: Yes. As set out in Question 1 the 'gaming venue companies' incurred a loss or outgoing pursuant to subsection 8-1(1) in respect of the total cost of each gaming entitlement. | Q5: If the answer to question 4 is yes, is the liability to make payments in respect of the gaming machine entitlements capital, or of a capital nature, pursuant to subsection 8-1(2) of the Income Tax Assessment Act 1997 ? | A5: Yes. | Q6: If the answer to question 5 is no, will subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 apply in relation to the timing of the deductions? | A6: The answer to question 5 is yes, the liability is of a capital nature and no amount is deductible under subsection 8-1(2) of the Income Tax Assessment Act 1997 or subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 .

Relevant facts and circumstances: 1. The principal activity of the head company is the management and operation of gaming 2. The gaming industry is closely regulated in Victoria. 3. From 16 August 2012, under the new venue operator model, a venue operator would be required to hold a 'gaming machine entitlement' to operate each gaming machine. A gaming machine entitlement would provide the venue operator with the authority to operate a single gaming machine in an approved gaming venue in a designated region and in a designated venue type (club or hotel) for a 10 year period from 2012. 4. In May 2010 a gaming machine entitlement auction was conducted by the Victorian Commission of Gambling and Liquor Regulation (VCGLR). Venue operators seeking to acquire gaming machine entitlements were required to have: - A current venue operator's licence; - Access to approved premises; - Gaming machines and gaming equipment (or alternatively, be in the process of acquiring gaming machines or gaming equipment); and - Arranged for the gaming machines to be linked to a "monitoring system". 5. A number of regulatory restrictions were placed on the auction, including: - A regional cap on the number of gaming machine entitlements; - Municipality limits on the number of gaming machine entitlements; - An individual venue limit of 105 gaming machines; and - A 35% ownership cap of the gaming machine entitlements available to an individual operator. 6. As a result of the auction the 'gaming venue companies' collectively acquired a number of gaming machine entitlements. 7. Under the Agreement for Payments the gaming venue companies were required to pay the following instalments in respect of the cost of each gaming entitlement: Instalment % of the Allocation Amount to be paid by the gaming venue company Due date Instalment 1 10% 07/06/2010 Instalment 2 10% 16/08/2012 Instalment 3 5% 30/11/2012 Instalment 4 5% 28/02/2013 Instalment 5 5% 31/05/2013 Instalment 6 5% 31/08/2013 Instalment 7 5% 30/11/2013 Instalment 8 5% 28/02/2014 Instalment 9 5% 31/05/2014 Instalment 10 5% 31/08/2014 Instalment 11 5% 30/11/2014 Instalment 12 5% 28/02/2015 Instalment 13 5% 31/05/2015 Instalment 14 5% 31/08/2015 Instalment 15 5% 30/11/2015 Instalment 16 5% 29/02/2016 Instalment 17 5% 31/05/2016 Instalment 18 5% 31/08/2016 8. Clause 1.3 of the Agreement for Payment provides that it must be read in conjunction with the Gambling Regulation Act 2003 (Vic) (the "GRA"), the regulations and the Allocation and Transfer Rules. 9. Requirement to hold an entitlement Section 3.4A.1 of the Gambling Regulation Act 2003 (Vic) (the "GRA") prohibits the conduct of gaming in a venue if the venue operator does not hold an entitlement. Section 3.4A.2 of the GRA specifies that an entitlement authorises the venue operator who holds the entitlement to acquire gaming machines and to conduct gaming machine operations in the approved venue. The entitlement does not allow for the manufacture or on-supply of gaming machines, or the service, repair or maintenance of gaming equipment 10. Granting of an entitlement Section 3.4A.5 of the GRA provides that the Minister may create entitlements and allocate them to venue operators. The allocation power also extends to forfeited entitlements. The Minister is also required to impose on an entitlement a condition that specifies the region or municipal district in which gaming may be conducted under that entitlement (the "geographic condition"), and a condition that specifies the type of approved venue in which gaming may be conducted under that entitlement (the "venue condition"). The Minister must also ensure that at least 20 per cent of entitlements are granted in regions or municipal districts outside the Melbourne Statistical Division. 11. Agreement regulating the entitlement Section 3.4A.6 of the GRA empowers the Minister to refuse to allocate an entitlement to a venue operator unless that operator enters into an agreement with the Minister that deals with matters related to the gaming machine entitlement. Section 3.4A.6A of the GRA allows the Minister to establish in the agreement any terms (or kinds of terms) that the entitlement is subject to, and to compel a venue operator that holds an entitlement to enter into and comply with such an agreement. Section 3.4A.68 of the GRA prevents a venue operator that holds an entitlement from seeking compensation from the Victorian government if they are compelled to comply with a direction to enter into such an agreement. 12. Duration of entitlement Section 3.4A.7 of the GRA provides that an entitlement takes effect from the day determined by the Minister (this is the day that the entitlements are created), and remains in force for a period of 10 years. At the end of the 10 year period the entitlements expire. An entitlement may be terminated earlier under the GRA, or extended for a period determined by the Minister under the GRA. If invited to do so, a venue operator may apply to the Minister to extend the duration of the entitlement before their current entitlement expires. Such an extension may not exceed two years in duration beginning from when the current entitlement would otherwise have expired. The Minister is also entitled to require the venue operator to pay an amount determined by the Minister for such an extension of the entitlement. The entitlement may only be extended once. 13. Entitlements may authorise preparatory action Section 3.4A.9 of the GRA provides that, in circumstances where the entitlement takes effect on a day that is later than the day of issue of the entitlement, the entitlement may authorise the venue operator that holds the entitlement to take preparatory action from a time specified in the entitlement even though the entitlement has not taken effect. Preparatory action is defined to mean: - acquiring approved gaming machines and restricted components; - installing approved gaming machines in a gaming machine area; and - doing all things necessarily incidental to carrying on the above activities. 14. Amendment of entitlement conditions Section 3.4A.12 of the GRA permits a venue operator that holds an entitlement to request the Victorian Commission for Gambling Regulation (the "Commission") to amend the geographic area condition or venue condition to which the entitlement is subject. Section 3.4A.13 of the GRA requires the Commission to decide whether to make the requested amendment either with or without changes from that requested by the venue operator holding the entitlement, and to notify the venue operator of its decision. 15. Transfer of entitlement Ownership of a gaming machine entitlement can be transferred during the 10 year term of an entitlement's existence. Section 3.4A.3 of the GRA states the 'Gaming machine entitlement allocation and transfer rules.' It provides that the Minister may make rules for the transfer of gaming machine entitlements to other Venue Operators or the State and that the rules must be published in the Government Gazette. Section 3.4A.18 of the GRA provides that a venue operator purporting to acquire an entitlement (the "specified payer") must pay the prescribed fee in respect of the transfer of an entitlement to the venue operator holding the entitlement (the "specified payee"). Section 3.4A.16 of the GRA prohibits the transfer of an entitlement to persons other than venue operators. Section 3.4A.17 of the GRA provides that any transfer of entitlements must be carried out in accordance with the allocation and transfer rules specified in the GRA. If the transfer is not carried out in accordance with the GRA, then the transfer will be void. Section 3.4A.17A of the GRA prohibits the transfer of an entitlement to another venue operator unless the transferee venue operator has entered into an agreement referred to in Section 3.4A.6 or 3.4A.6A of the GRA with the Minister dealing with matters related to the entitlement. The Victoria Government Gazette of 11 October 2012, clause 13 provides the rules for the payment of amounts owing to the State on settlement of transfers. This provides that the VCGLR must not record a transfer until it has received all unpaid monies owing under an Agreement for Payment or the transferee has executed a deed of assumption with respect to the gaming machine entitlement 16. Forfeiture of entitlements Section 3.4A.23 of the GRA specifies that a venue operator must commence the conduct of gaming by gaming machines under an entitlement within a holding period of 6 months (or longer as agreed to by the Minister) from the day that the entitlement is granted to, or transferred to, that venue operator. Section 3.4A.24 of the GRA provides that if the venue operator does not comply with section 34A.23 of the GRA, the entitlement held by the venue operator is forfeited to the State the day after the holding period expires. Section 3.4A.26 of the GRA provides that entitlements are forfeited to the State if the venue operator's license is cancelled, surrendered, or not renewed. Section 3.4A.27 of the GRA provides that entitlements are forfeited to the State if the venue operator fails to meet or comply with an agreement with the Minister to which the entitlement is subjected. Section 3.4A.28 of the GRA provides that if an entitlement is forfeited to the State, any interest, right or privilege in or, which that entitlement is subject, is extinguished. Section 3.4A.29 of the GRA prevents the venue operator from seeking compensation from the State as a result of the extinguishment of an entitlement. Section 3.4A.31 of the GRA provides that, except as otherwise provided under the GRA, no compensation is payable by the State to any person as a result of the forfeiture of an entitlement. Section 3.4A.32 of the GRA specifies that, on and after the day on which an entitlement is forfeited to the State, any amount owed to the State (under an agreement or otherwise) for the allocation of the entitlement becomes immediately due and payable to the State. Section 3.4A.33 of the GRA provides that the proceeds arising from the allocation of a gaming machine entitlement forfeited (less any State-owed amounts) must be paid to the venue operator who forfeited that entitlement. 17. The Agreement entered into by each of the gaming venue companies is identical in all material terms.

Relevant legislative provisions: Subsection 8-1(1) of the Income Tax Assessment Act 1997 | Subsection 8-1(2) of the Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Question 1: Have the 'gaming venue companies' incurred a loss or outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 in respect of the payment of the initial instalment made during the year ended 30 June 2010? | Detailed Reasoning - Answer: Yes The 'gaming venue companies' incurred a loss and outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 for the year ending 30 June 2010 in respect of the total cost of each gaming entitlement, which includes the initial instalment. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate the earning of exempt income. Specifically subsection 8-1(1) of the ITAA 1997 states: 8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a 'business for the purposes of gaining or producing you assessable income. In Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurrred'- timing of deductions (TR 97/7) the Commissioner's view of the meaning of the term 'incurred' is set out. As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape (paragraph 5 of TR 97/7). The term 'incurred in gaining or producing your assessable income' is to be read as meaning 'incurred in the course of gaining or producing your assessable income'. In Amalgamated Zinc (De Bavay's) Ltd v FC of T (1935) 54 CLR 295, at p 303, Dixon J said: "The expression 'in gaining or producing' has the force of 'in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure that to the purpose itself." The courts have held that for there to be a deduction under section 8-1 there must be a sufficient connection between the loss or outgoing and the production of assessable income. The loss or outgoing must be incidental and relevant to the earning of assessable income ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). In this matter: • The gaming venue companies had earned assessable income from providing gaming services for a number of years prior the requirement for gaming venue companies to hold 'gaming machine entitlements'. • In order to continue to provide gaming services the gaming venue companies successfully bid for 'gaming machine entitlements'. • On or about 3 June 2010 the venue operators each entered in to an agreement with the Minister of Gaming in Victoria to pay an amount for each of the gaming machine entitlements. For the year ending 30 June 2010 (the 2010 year) the gaming venue companies had a present money debt for each of the gaming machine entitlements they held under the agreements and this outgoing was incidental and relevant to the assessable income produced through providing gaming services. However paragraph 7 of Taxation Ruling 97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) states: 'For the purposes of section 8-1 it is sometimes not enough that a loss or outgoing has been incurred. The outgoing must also be properly referable to the year of income in which the deduction is sought - refer Coles Myer Finance Pty Ltd v FC of T 93 ATC 4214 at 4222. (1993) 25 ATR 95 at 105 ( Coles Myer ) The matter of the taxpayer's accounting system may be indicative, but not determinative of the income year to which an outgoing is properly referable.' Paragraph 11 of Taxation Ruling 94/26 Income Tax: section 8-1 meaning of 'incurred' - implications of the High Court Decision in Coles Myer Finance (TR 94/26) states: 'The courts have provided little guidance as to the meaning of 'properly referable'. We believe that 'properly referable' is concerned with the period of time during which the benefit from incurring loss or outgoing is put to 'profitable advantage', ie., the period during which the benefit obtained from the liability is used in the taxpayer's assessable income producing activity. Generally, this will be the period in which the goods or services to be provided as a result of the liability are in fact provided. However, if the liability is discharged prior to the provision of the last of the goods or services then the period of profitable advantage will end with the discharge of the liability. In FC of T v Citylink Melbourne Limited 2006 ATC 4404 ( Citylink) the High Court considered whether a liability to pay semi-annual concession fees were properly referable to the six month period in which the liability arose. In Citylink the concession fees were, in essence, payable for the right to operate the Citylink toll road system. The concession fees were an annual liability payable semi-annually and the amount of the liability corresponded to the period to which the concession fee related. Additional concession fees, above the base fee, were payable on the basis that additional revenue was generated in a particular period. It was held in Citylink at 142 that 'the concession fee arrangement made it clear that the advantages or gains referable to each concession fee "come home" in the relevant income years'. In this matter, the gaming entitlements relate to a ten year period. The facts indicate that the payments of the instalments are not referable to the usage of the entitlement. Further there are circumstances that can lead to the forfeiture of entitlements and if forfeiture occurs the venue operating companies become liable to immediately pay the unpaid instalments to the Victorian government (see clause 5 of the Agreement for Payment and section 3.4A.32 of the GRA). Similarly if entitlements are transferred to another gaming operator the transferor is liable for all unpaid monies owing under an Agreement for Payment unless the transferee has executed a deed of assumption with respect to the gaming machine entitlement. The fact that there are circumstances where the gaming venue companies remain liable for the full cost of the entitlements, even after the use of the entitlement has ceased, supports the view that the payments of the instalments are not 'properly referable' to the usage of the entitlement in the year in which the instalments are paid. In conclusion, the payments of the instalments are not the incurrence of the expenditure; they are merely the payment of expenditure previously incurred. As a result the total cost of each gaming machine is found to be incurred by the gaming venue companies in 2010 year. | Detailed Reasoning - Question 2: Has the head company incurred a loss or outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 in respect of the payments made or required to be made during the financial years ending 30 June 2013 to 30 June 2017? | Detailed Reasoning - Answer: No As per the reasoning given in Question 1, the gaming venue companies have incurred the expenditure relating to the total cost of each gaming machine entitlements, in the 2010 year and no amount has been incurred by the head company during the financial years ending 30 June 2013 to 30 June 2017. | Detailed Reasoning - Question 3: Are the outgoings made by the 'gaming venue companies' and head company in respect of the gaming machine entitlements capital, or of a capital nature, pursuant to subsection 8-1(2) of the Income Tax Assessment Act 1997 ? | Detailed Reasoning - Answer: Yes, the outgoings in respect of the gaming machine entitlements are capital, or of a capital nature. | Detailed Reasoning - Detailed reasoning: The first negative limb of section 8-1 of the ITAA 1997 denies a deduction for a loss or outgoing incurred where it is a loss or outgoing of capital, or of a capital nature (see paragraph 8-1(2)(a)). There is no statutory definition of 'capital' or 'capital nature'. The judgment of Dixon J in Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337 ( Sun Newspapers ) is a leading exposition of the matters examined in order to differentiate whether an amount is capital or revenue in nature. Dixon J observed that the "distinction between expenditure and outgoings on a revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss."(61 CLR at p 359) In applying the test Dixon J referred to three matters to be examined. He said (at p 363): There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play a part, and (c ) the means adopted to obtain it; that is by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. However the statements made by Dixon J in Sun Newspapers are not exhaustive or ultimately definitive of the relevant matters to be considered in each case. For example, the absence of recurrence of a payment suggests that an outgoing is capital in nature, but it is not conclusive (National Australia Bank v. Federal Commissioner of Taxation (1997) 80 FCR 352; 97 ATC 5153; (1997) ATR 378). The courts have held that, in the absence of special circumstances, expenditure is capital in nature where it is made with the view to bring into existence an asset or an advantage whether tangible or intangible for enduring benefit of the business: British Insulated & Helsby Cables v. Atherton (1926) AC 205. The term 'enduring' was referred to by Rich J at page 547 in Herring v. FCT (1946) 72 CLR 543, who stated that 'by enduring it is not meant that the asset or advantage should last forever. It is a matter of degree and only one element to be considered.' In Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at p634, Dixon J states: n What is an outgoing of capital and what is an outgoing on account of revenue depends on what expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured employed or exhausted in the process. The full Federal Court in Jupiters Ltd v Deputy Commissioner of Taxation [2002] FCAFC 206, 2002 ATC 4566 ( Jupiters ) held that the advantage sought by payment of 'special rental' under an agreement between the taxpayer and the Queensland Government was an asset of a capital nature. In the Jupiters case the full Federal Court adopted the following approach (at 2002 ATC 4571): In the leading case of Colonial Mutual Life Assurance Society Ltd v FC of T (1953) 10 ATD 274 at 283; (1953) 89 CLR 428 at 454 Fullagar J (with whom Kitto and Taylor JJ agreed) said (emphasis in original): ``... The questions which commonly arise in this type of case are (1) What is the money really paid for ? - and (2) Is what it is really paid for, in truth and in substance, a capital asset?'' In support of the view that the gaming machine entitlements liabilities are revenue in nature MRCi has referred to FC of T v Citylink Melbourne Limited 2006 ATC 4404 ( Citylink ). In Citylink Crennan J stated: The characterisation of an outgoing depends on what it "is calculated to effect', to be judged from "a practical and business point of view. The character of the advantage sought by the making of the expenditure is critical. It was held in Citylink at 154 that: The concession fees are only payable during the term of the concession period. The respondent does not acquire permanent ownership rights over the roads or lands used. All rights granted under the Concession Deed revert to the State at the expiry of the concession period. Unlike periodic instalments paid on the purchase price of a capital asset, the concession fees are periodic licence fees in respect of the Link infrastructure assets, from which the respondent derives its income, but which are ultimately "surrendered back" to the State. Accordingly they are on revenue account. However Citylink can be distinguished from the facts in this matter. In Citylink the concession fees were annual fees leading to a right to operate the road system for a twelve month period. Further the amount of the concession fee payable in Citylink corresponded to the period to which the concession fee related. The annual fees were payable semi-annually in arrears and additional fees were calculated on the basis of additional revenue generated within the particular period. In contrast the gaming machine entitlements were for a ten year period and the cost was determined as lump sums paid by instalments. The taxpayer has also referred to the High Court decision in Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634 ( Hallstroms ) where it was held that the cost of legal fees to oppose a competitor's claim for an extension to a patent were revenue in nature because the expenditure was not made to secure an actual asset but to allow the business to carry on as they had in previous years. However the facts in this matter can be distinguished from Hallstroms since the gaming machine entitlements secured by the gaming venue companies are assets which can be bought and sold during the 10 year period. The taxpayer has stated that the advantage sought in purchasing the gaming machine entitlements was to secure the ongoing revenue stream provided by the gaming machines and made a comparison with BP Australia Ltd v Commissioner of Taxation (1965) 112 CLR 286 ( BP Australia ) where the taxpayer entered into exclusive trade tie arrangements lasting between three and fifteen years. In consideration for selling its petrol exclusively the taxpayer paid petrol retailers a prescribed amount based upon the amount of petrol sold. It was stated, starting at 29, that; The advantage which BP sought was to promote sales and obtain orders for petrol by up to date marketing methods, the only methods which could prevail. Since orders were now and would in future be only obtainable from tied retailers, it must obtain ties with retailers. Its real object however was not the tie but the orders which would flow from the tie. I do not think it was acquiring a capital asset or doing any more than so conducting it business on revenue account as to increase it and make as certain as it could that its business was continuing and also would continue, if possible to expand. It was held in BP Australia , at 53, that 'on the balance' the payments to retailers were on a revenue account but this was decided on a number of factors. Firstly it was determined that the payments were part of the money making process rather than expended on the structure within which the profits were to be earned. The payments were made to make a change to the company's marketing arrangements which could be on revenue account. However the decision in BP Australia also made a distinction with two cases that required expenditure on the business structure in order to carry on its business. At 48 it was stated: Henriksen v. Grafton Hotel (1942) 24 Tax Cas 453 was a special case dealing with the payment for a license. Without the license the business could not be carried on. There was also an element of monopoly. On those grounds it was held to be a capital payment. In Adams Case (1928) 14 Tax Cas 34 the sums in question were spent on a dumping ground which the company had to have in order to carry on its business. These cases do not provide a safe analogy with sums paid to customers to secure their custom. Also in BP Australia, in discussing at 51 the manner in which 'the benefit was used, relied upon or enjoyed' it was held, that the benefit was 'used in the continuous and recurrent struggle to get orders and sell petrol' and had 'merged in and became part of the ordinary process of selling'. In respect of the method of payment it was noted, at 52, that 'the payments were not made annually over the period of benefit but on the other hand it was clear that they would have to be made again at intervals of a few years.' It was found that the period of the payments gave no indication to the nature of the advantage and could not 'outweigh the indications given by other considerations'. In the current matter most factors are indicative of the gaming machine entitlements being in the nature of capital. The nature of the 'advantage sought' is the entitlement or right of the gaming venue companies to operate gaming machines. The gaming machine entitlements are a requirement to own and operate gaming machines. The numbers of gaming machine entitlements available at the auction in May 2010 were finite and there were limitations regarding operations in certain geographic locations. Under the previous regulatory scheme, the gaming operator model, the gaming venue companies did not have the right to purchase, install, maintain or monitor gaming machines. Under the current regulatory scheme the gaming venue companies obtained, through the purchase of the gaming entitlements, the right to operate, own, install, maintain, and monitor gaming machines. This advantage was obtained for a period of ten years. The gaming entitlements can be traded by the gaming venue companies but the liability for any outstanding instalments remains with the transferring gaming venue company unless the transferee has signed a deed assuming the liability. These factors all indicate that the gaming machine entitlements are assets lasting ten years that forming part of the business structure, rather than part of the profit making process. As such the character of the advantage sought is of a capital nature. The gaming machine entitlements are a prerequisite for the operation of the gaming activities but are not actually used in the operation of the activities. They were obtained in a one-off auction in May 2010 and the after the initial incurrence of expenditure no further expenditure will be incurred in relation to the entitlements. The payments of the instalments are merely the payment of expenditure previously incurred. These factors support the view that that expenditure is capital not revenue. Weighing up all the considerations set out in Sun Newspapers and other relevant case law the gaming machine entitlements are found to be a capital outgoing pursuant to subsection 8-1(2) of the Income Tax Assessment Act 1997. | Detailed Reasoning - Question 4: Alternatively did the 'gaming venue companies' incur a loss or outgoing pursuant to subsection 8-1(1) of the Income Tax Assessment Act 1997 for their liability to make payments in respect of the gaming machine entitlements acquired in the year ended 30 June 2010? | Detailed Reasoning - Answer: Yes. As set out in Question 1 the 'gaming venue companies' incurred a loss or outgoing pursuant to subsection 8-1(1) in respect of the total cost of each gaming entitlement. | Detailed Reasoning - Question 5: If the answer to question 4 is yes, is the liability to make payments in respect of the gaming machine entitlements capital, or of a capital nature, pursuant to subsection 8-1(2) of the Income Tax Assessment Act 1997 ? | Detailed Reasoning - Answer: Yes. As set out in Question 3 the outgoings in respect of the gaming machine entitlements are capital, or of a capital nature. | Detailed Reasoning - Question 6: If the answer to question 5 is no, will subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 apply in relation to the timing of the deductions? | Detailed Reasoning - Answer: The answer to question 5 is yes, the liability is of a capital nature, and therefore no amount is deductible under subsection 8-1(2) of the Income Tax Assessment Act 1997 or subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 .