Private ruling: INCOME TAX - DEDUCTIONS - BLACK HOLE EXPENDITURE - SECTION 40-880
Date of advice: 31 January 2017
Published: July 2017
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2011

Ruling: Q1: Is each Trading Trust entitled to claim a deduction under section 40-880, in respect of the gaming machine entitlement (GME) instalment expenditure incurred by each entity following the acquisition of the gaming businesses carried on at the Relevant Venues? | A1: No. | Q2: Is each Trading Trust entitled to claim a deduction under section 40-880, in respect of the GME expenditure incurred by each entity following the acquisition of the gaming businesses carried on at the Relevant Venues, by way of reimbursement (GME Reimbursements) to the unrelated third party vendors of those businesses? | A2: No. | Q3: If the answer to Question 1 and/or Question 2 is 'Yes', has each of the relevant Trading Trust: a. calculated an excessive amount of 'Net Income', for the purposes of section 95 of the Income Tax Assessment Act 1936 (ITAA 1936); or b. calculated a shortfall in respect of their carry forward taxation losses, for the purposes of Schedule 2F of the ITAA 1936, in respect of each income year during the Relevant Period? | A3: Not applicable, as the answer to Question 1 and Question 2 is No. | Q4: If the answer to Question 1 and/or Question 2 is 'yes', and the answer to Question 3 is also 'Yes', does the Commissioner further agree that each beneficiary of the relevant Trading Trusts has included an excessive amount of 'Net Income' in their assessable income for each distribution received from those trusts during the Relevant Period, pursuant to section 97 of the ITAA 1936? | A4: Not applicable, as the answer to Question 1 and Question 2 is No. | Q5: If the answer to Questions 1 and/or Question 2 is 'Yes', and the answers to Questions 3 and 4 are also 'Yes', will the Commissioner agree to the amendment of either the Assessment (where the relevant review period remains open) or the Losses Schedule for each affected taxpayer? | A5: Not applicable, as the answer to Question 1 and Question 2 is No.

Relevant facts and circumstances: Family Group is a family owned group of businesses that operates licenced venues in a particular State. Certain entities in Family Group (collectively, the Trading Trusts) each purchased a gaming and hospitality business at the Relevant Venues during the income years between 20xx and 20xx. Each Relevant Venue carried on a gaming and hospitality business and had bottle shop operations at the relevant date of acquisition. TAB operations were also provided at some Relevant Venues. Each Relevant Venue operates a number of gaming machines. The operation of each gaming machine requires, among others, the Relevant Venue's operating entity to hold a valid GME issued by the State. This ruling has considered the following information provided by Family Group: ● Business Sale Agreement (BSA) for each Relevant Venue; ● Statement of Adjustments in respect of each Relevant Venue; and ● Entitlements Related Agreement for Venues for each Relevant Venue; This ruling also considers the following publicly available information: ● Gambling Regulation Act 2003 (X); ● Determination of Gaming Machine Entitlement Allocation and Transfer Rules, Relevant Government Gazette , No. S 205, Wednesday 22 July 2015; ● Gambling Information Sheets published by the Relevant State Regulations: ● Gaming machine entitlements , August 2012; ● Deferred payment terms for transferred entitlements , June 2012; ● Regulatory Requirements for transferring ownership of a gaming venue , November 2012; and ● Transfer of gaming machine entitlements , August 2012; ● Entitlements Transfer Register on the Relevant State website; and ● The Venue Manual, August 2016 (available on the Relevant State website). Move to a new regulatory regime of GMEs In 20xx, the Relevant Government announced the new GME regime whereby Tattersalls and Tabcorp would no longer exclusively hold their respective gaming operator's licence and gaming licence. Instead, GMEs would be issued to operators of approved venues permitting them to conduct gaming on approved gaming machines in their own right. The then vendors of the Relevant Venues participated in an auction process in May 20xx to obtain their GMEs, or otherwise purchased GMEs from other unrelated venue operators. GMEs The Gambling Regulation Act 2003 (X) (and Regulations) (together the Gambling Act) provides the regulatory framework under which gaming machines are permitted to be operated in the State. Under section 3.4A.1 of the Gambling Act the 'conduct of gaming' in an approved venue is lawful only if the venue operator holds a GME. The 'conduct of gaming' is defined in subsection 3.1.4(1) of the Gambling Act as: (a) the management, use, supervision and operation of gaming equipment; and (b) the sale, redemption or use of gaming tokens; and (c) the installation, alteration, adjustment, maintenance or repair of gaming equipment; and (d) the use or distribution of proceeds from the conduct of gaming; and (e) accounting, banking, storage and other acts in connection with or related or incidental to gaming and the conduct of gaming. The authority conferred by a GME is specified in section 3.4A.2 of the Gambling Act as follows: (1) A gaming machine entitlement authorises the venue operator that holds the entitlement, subject to this Act, any related agreement referred to in section 3.4A.6 or 3.4A.6A and any conditions to which the entitlement is subject— (a) to acquire approved gaming machines and restricted components; and (b) to conduct gaming on one approved gaming machine in an approved venue operated by the venue operator; and (c) to do all things necessarily incidental to carrying on the activities authorised by the section. (2) A gaming machine entitlement does not authorise the entitlement holder to engage in any business by way of— (a) manufacture of gaming machines or restricted components; or (b) supply of approved gaming machines or restricted components to any person; or (c) service, repair or maintenance of gaming equipment or games. Currently, to operate a gaming machine in the State, one must: ● hold a current club or hotel venue operator's licence; ● hold a GME; ● have access to approved premises; ● obtain gaming machines and gaming equipment; ● arrange for the gaming machines to be linked to the monitoring system; ● attach GMEs to approved premises; ● employ staff who hold valid Gaming Industry Employee licences to perform the prescribed duties; and ● comply with all legislative and regulatory requirements. Other features and restrictions of the GME regime include the following: ● the total number of gaming machines that can be operated in the State (outside of Crown Casino) is more than 25,000. Therefore up to 28,000 GMEs in total can be made available to venue operators; ● no more than 105 gaming machines can be operated in any one venue; and ● each GME authorises a venue operator to operate one gaming machine for a period of 10 years. Payment terms for the GMEs On acquisition of a GME, each vendor had the option to pay the cost of the GME up-front, or pay the fee in instalments over a period of 6 years beginning in 2010 and ending in 2016. Each of the vendors of the businesses acquired by the Trading Trusts elected to pay the GME fees in instalments. The 'Entitlement Related Agreement for Payment' specifies the minimum payment terms that a venue operator must comply with consisting of 18 instalments: ● the first instalment of 10% was payable within 28 days of the close of the Gaming Auction; ● a further instalment of 10%, payable on or before 5pm, 16 August 2012 (operational commencement date); and ● 16 quarterly instalments of 5% are payable on or before the last day of every third month following the date from which entitlements can be used to operate machines (instalments 3 to 18). Transfer of GMEs Entitlements may be transferred or traded through a transfer scheme. The Relevant State facilitates the transfer market process through the Entitlement Transfer Market (ETM) set up to allow venue operator licensees to advertise, monitor, request the transfer of entitlements or request amendments to entitlement conditions. Through the ETM, venue operators advertise their wish to transfer or buy one or more GMEs. The transfer of any GME will not be finalised until the Relevant State records the transfer on the ETM Register. Negotiations regarding the transfer may take place between an existing GME holder and an interested party prior to the transfer being finalised. Transfer of GMEs from venue operator (vendor) to Trading Trusts Section 3.4A.17 of the Gambling Act states that GMEs must be transferred in accordance with the “gaming machine entitlement allocation and transfer rules” which are determined by the Relevant Government. Further, section 3.4A.17A states that GMEs cannot be transferred unless the transferee has entered into an Entitlement Related Agreement for Venues agreement with the Minister for Gaming (the Minister). The current GME Allocation and Transfer Rules, effective on and after 3 August 20xx, are detailed in Relevant Government Special Gazette Number S205 dated 22 July 2015. The key points are as follows: ● A transfer of a GME is only valid for the purposes of the Gambling Act if it is recorded by the RELEVANT STATE on the ETM Register; and ● A transfer will not be recorded by the RELEVANT STATE unless: ○ the transferee has provided an executed counterpart to the RELEVANT STATE of an Entitlement Related Agreement for Venues entered into with the Minister; and ○ the RELEVANT STATE has received all amounts owing to the State that are outstanding in relation to the GMEs by way of any Unpaid Allocation Amount for the GME or a Deed of Assumption for the relevant obligations with respect to the GMEs has been executed. On 15 March 20xx, the Minister amended the GME Allocation and Transfer Rules to enable venue operators to transfer ownership of GMEs on 'deferred payment terms'; essentially a schedule of regular interest-free instalments. Previously, entitlements acquired on the ETM had to be paid for upfront and in full before the Relevant State could record the transfer. The process for transferring GMEs on deferred payment terms is detailed in Gambling Information Sheet 'Deferred payment terms of transferred entitlements' as follows: ● Venue operators who acquire GMEs can enter into an approved Deed of Assumption with the Minister and the vendor/venue transferring the GMEs; ● This document must be completed and signed by the venue operators involved in both the transfer and acquisition of the GMEs; ● The approved Deed of Assumption transfers the deferred payment schedule for the GMEs acquired from one venue operator to another, making the venue operator who acquires the transferred GMEs liable to the State for the full amount that remains; ● The Deed of Assumption must then be returned to the Relevant State, who in turn request approval from the Minister before a transfer of the GMEs can be finalised and recorded on the ETM by the Relevant State; and ● Once the Relevant State records the transfer of GMEs on the ETM, the venue operator who has acquired the GMEs will be responsible for making all subsequent instalments to the State as per the deferred payment schedule. The transfer of the GME and the recording of the transfer on the ETM usually occur on the same day as settlement. Each Trading Trust entered into a Deed of Assumption on the specified dates. Following the acquisition of the Relevant Venues, the Trading Trusts applied to the Relevant State to transfer the respective GMEs held by each vendor to each relevant Trading Trust. Accordingly, the Trading Trusts were (as of the date of transfer), and continue to be, entitled to operate gaming machines in accordance with the GMEs in respect of each gaming machine. GME Instalment expenditure On transfer of the GMEs to the relevant Trading Trust, the Trading Trusts incurred a liability in respect of the outstanding instalments payable on the GMEs under the deferred payment terms ( GME Instalments ). GME Reimbursements In addition to incurring the GME Instalments on the purchase of the relevant business, each Trading Trust also incurred expenditure to reimburse the vendors of the Relevant Venues for a certain amount of the GME instalments previously paid by the vendors in respect of each GME (GME Reimbursements) . The GME Reimbursements have been calculated as the difference between the GME instalments paid by the vendor and the proportion of the total cost of the GMEs that relates to the period during which the GME was in effect, as a proportion of the ten years for which the GME is valid. Effectively, it represents an amount paid by the vendor for a period subsequent to the sale of the business. The BSAs for the purchase of each Relevant Venue by the Trading Trusts contains provisions for adjustments to take into account the GME Reimbursements. The BSAs also contain clauses to the effect that each contract is conditional upon the Relevant State approving the transfer of the GMEs. The Statement of Adjustments for each settlement of the Relevant Venues indicates the amount allowed by the Trading Trust (as purchaser) to each former Vendor on account of the GME Reimbursements agreed upon in the BSA. The Trading Trusts have not claimed any amount of their GME costs (GME Instalments and GME Reimbursements) as a deduction in any income year. The Trading Trusts have, in all material respects, continued to operate the venues in the same manner with which the venues were operated prior to acquisition. Relevantly, the Trading Trusts carry on the gaming business that was acquired from the vendors at the same business premises, under the same trading name and serving the same, or substantially the same, customers who attend the venues to use the gaming machines and access the accompanying liquor and dining services. The accounting treatment of the GMEs has been to recognise an intangible asset, recorded at fair value, being the present value of the GMEs. The intangible asset is amortised over the useful life of the GMEs, being the period to 15 August 20xx. Revenue from the operation of gaming machines forms a significant proportion of the total revenues generated by the business acquired by each Trading Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 8-1(1) | Income Tax Assessment Act 1997 Subsection 8-1(2) | Income Tax Assessment Act 1997 Section 15-2 | Income Tax Assessment Act 1997 Subsection 40-30(1) | Income Tax Assessment Act 1997 Subsection 40-30(2) | Income Tax Assessment Act 1997 Section 40-880 | Income Tax Assessment Act 1997 Subsection 40-880(1) | Income Tax Assessment Act 1997 Subsection 40-880(2) | Income Tax Assessment Act 1997 Paragraph 40-880(3)(d) | Income Tax Assessment Act 1997 Subsection 40-880(5) | Income Tax Assessment Act 1997 Paragraph 40-880(5)(a) | Income Tax Assessment Act 1997 Paragraph 40-880(5)(b) | Income Tax Assessment Act 1997 Paragraph 40-880(5)(d) | Income Tax Assessment Act 1997 Paragraph 40-880(5)(f) | Income Tax Assessment Act 1997 Subsection 40-880(6) | Income Tax Assessment Act 1997 Subsection 104-25(1) | Income Tax Assessment Act 1997 Paragraph 104-25(1)(c) | Income Tax Assessment Act 1997 Subsection 104-25(3) | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Subsection 110-25(2) | Income Tax Assessment Act 1997 Subsection 110-25(5) | Income Tax Assessment Act 1997 Subsection 110-25(5A) | Income Tax Assessment Act 1997 Section 112-35

Reasons for decision: Summary: Under section 40-880, taxpayers are entitled to deduct certain business related capital expenditure, known as 'black hole' expenditure, provided certain conditions are met. Subsections 40-880(1) and (2) state the following: Object 40-880(1) The object of this section is to make certain business capital expenditure deductible over 5 years if: (a) the expenditure is not otherwise taken into account ; (b) a deduction is not denied by some other provision; and (c) the business is, was or is proposed to be carried on for a taxable purpose. Deduction 40-880(2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your business; or (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on; or (d) to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business. ( emphasis added ) Subject to satisfying all the requirements in section 40-880, each Trading Trust that has incurred GME Instalments would be able to deduct the expenditure, in equal proportions over five income years starting in the year in which the expenditure is 'incurred'. | Detailed Reasoning - Incurred: This term is not defined in the ITAA 1997. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions , sets out the Commissioner's view of the meaning of the term 'incurred'. Under paragraph 5 of that Ruling, you broadly incur an outgoing at the time you owe a present money debt that you cannot escape. The taxpayer must be “definitively committed” to the liability or has “completely subjected” itself to the liability ( FC of T v James Flood Pty Ltd (1953) 88 CLR 492 at 506). The taxpayer must be “subject to an immediate obligation to pay the sum referred to, notwithstanding that payment is not in fact made in the year in question” ( De Simone and Anor v FC of T [2009] FCA 446; 2009 ATC 20-101 paragraph 8). Here, the obligation of the Trading Trusts to pay the GME Instalments arises from the transfer of the GMEs and the Deed of Assumption each has entered into to effect the transfer. The process for transferring GMEs from one venue operator to another is governed by the GME Allocation and Transfer Rules , as published in Relevant Government Gazette No S 205. Rule 7 of the GME Allocation and Transfer Rules states that a transfer of GMEs is only valid if it is recorded by the Relevant State on the ETM Register. The process is also summarised in Gambling Information Sheet 'Deferred payment terms for transferred entitlements' published by the Relevant State. This document makes it clear that the venue operator who has acquired the GMEs is responsible for making all subsequent instalments once the Relevant State records the transfer of the GMEs on the ETM. The Commissioner considers that the GME Instalments are incurred by each Trading Trust only when the transfer of the GMEs on deferred payment terms is finalised and recorded on the ETM Register by the Relevant State. It is only from this point that the venue operator who has acquired the GMEs will be responsible and “definitively committed” for making all subsequent instalments to the State as per the deferred payment schedule. The Commissioner does not consider that a liability was created when the Deed of Assumption was entered into because the transfer is still conditional upon and subject to the approval of the Minister. As explained in TR 97/7, a liability that is contingent will not be a presently existing liability. Therefore, the GME Instalments were incurred by each Trading Trust in the income year the transfer of the GMEs was recorded by the Relevant State on the ETM Register; from that point in time each Trading Trust became responsible for making all subsequent instalments to the State as per the deferred payment schedule. | Detailed Reasoning - 'In relation to' a business: The Commissioner accepts that each of the Trading Trusts carries on a business for a taxable purpose, comprising owning and operating the venues offering hospitality (including food, drink and accommodation where relevant), gambling through TAB facilities (where relevant) and gaming machines. As explained in paragraph 15 of Taxation Ruling TR 2011/6 Income Tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues , the expression 'in relation to' denotes the proximity required between the expenditure and the former, current or proposed business. For capital expenditure to be 'in relation to' a business, there must be a sufficient and relevant connection between the expenditure and the business. It is clear that the GME Instalments were incurred in connection with the hospitality and gaming venue business acquired and then carried on by the respective Trading Trusts. The business acquired by each Trading Trust generates a significant proportion of their total revenue from the operation of gaming machines - typically more than 40%. Therefore, the Commissioner accepts that the expenditure is incurred 'in relation to' each business. | Detailed Reasoning - Capital expenditure: Expenditure is only deductible under section 40-880 if it is capital expenditure. The Commissioner agrees with Family Group that the GME Instalments are capital in nature. The primary authority in determining whether an amount of expenditure is capital in nature is Dixon J's statement in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 ( Sun Newspapers ) at 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 its part, and (c) the means adopted to obtain it; that is, by providing periodic 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. Upon consideration of the factors in Sun Newspapers , the Commissioner considers the GME Instalments are capital expenditure for the following reasons: | Detailed Reasoning - Character of advantage sought: According to paragraph 67 of TR 2011/6, the character of the advantage sought provides important direction and is the best guidance as to the nature of the expenditure as it says the most about the essential character of the expenditure itself. If the expenditure produces some asset or advantage of a lasting character for the benefit of the business it will be considered to be capital expenditure ( British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 at 213-214). The Commissioner considers that the essential character of the GME Instalments was to secure the GMEs which provides an enduring benefit to the business; namely, for each GME, the right to operate a gaming machine in an approved venue for a maximum period of ten years from 16 August 2012. As to whether a GME is an enduring asset, 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. The essential character of this advantage is structural and goes to the profit-yielding structure of the business, rather than the profit-making process. Each GME is part of the structure that is necessary for the earning of profit, and not the operation of the process to obtain regular returns by means of a regular outlay (as per Dixon, J in the Sun Newspapers case at CLR 359). Each GME enables the holder to operate one gaming machine (and preclude someone else from holding that GME) and there are statutory caps on the number of GMEs that are issued to an operator of any given venue and to operators within a geographical region. In AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation [2015] HCA 25; ATC 20-521 ( AusNet ), the High Court ruled on the characterisation of certain payments made by AusNet to the Relevant State of X made in connection with its acquisition of an electricity transmission business. Relevantly, the majority (French CJ, Kiefel and Bell JJ) in AusNet stated at paragraph 18: The fact that a payment can be viewed as part of the consideration for the acquisition of a business or capital asset weighs heavily in favour of its character as a capital outlay In terms of approaching the characterisation of a payment, the majority in AusNet at paragraph 24, cited with approval Fullager J's approach in Colonial Mutual Life Assurance Society Ltd v FCT (1953) 89 CLR 428 at 454 in asking the question in every case (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? The majority also reiterated at paragraph 22, the observation of Dixon J in Hallstroms Pty Ltd v FCT (1946) 72 CLR 634 at 646, that characterisation involves considering what the expenditure is calculated to effect from a “practical and business point of view.” Expanding on this approach, the majority of the High Court in AusNet stated at paragraph 46: The critical question must always be - what was the expenditure calculated to effect from the taxpayer's point of view? What was the taxpayer paying the money for?... Their answer to this question was that the expenditure was capital on the following basis: ● AusNet paid the charges to secure rights to carry on their respective businesses of the distribution and transmission of electricity; ● The payment was part of the “consideration moving from it [AusNet] for the acquisition of the Assets” (which included the Transmission Licence); and ● From the perspective of AusNet, “from a practical and business point of view”, the payments were calculated to effect the acquisition of the Transmission Licence (as well as other assets of the business) which was properly viewed as part of the structure of the business. Following the approach in AusNet , the Commissioner considers that the GME Instalments are, from a practical and business point of view, capital payments: ● made to secure the rights to carry on the gaming and hospitality business acquired by each Trading Trust; ● that are part of the consideration moving from each Trading Trust for the acquisition of the GMEs; and ● calculated to effect the acquisition of the GMEs which is properly viewed as part of the structure of the business acquired. | Detailed Reasoning - The manner in which it is to be used: Each GME is a prerequisite for the operation of a gaming machine, but is not actually used up in the operation of such activity (i.e. is part of the fixed, and not circulating, capital). This indicates a relationship to the profit-yielding structure of the business (comprising the operation of a collection of gaming machines) and that the expenditure is capital. | Detailed Reasoning - The means adopted to obtain it: The GMEs were secured by the Trading Trusts entering the Deed of Assumption under which the Trading Trusts assumed responsibility for making all subsequent and outstanding instalment payments to the State. Therefore, the outlay is in essence a once-off payment rather than periodical (even though it is paid in instalments) and supports the view that the expenditure is capital. | Detailed Reasoning - Summary of factors: In summary, the indicators discussed in Sun Newspapers and the approach in AusNet point to the conclusion that the GME Instalments are capital expenditure. The GME Instalments incurred in the relevant income year by each Trading Trust would be deductible under section 40-880 unless one of the exclusions in subsection 40-880(5) applies. | Detailed Reasoning - EXCLUSIONS TO DEDUCTIBLITY UNDER SECTION 40-880: Subsection 40-880(5) states, as is relevant to your circumstances, as follows: You cannot deduct anything under this section for an amount of expenditure you incur to the extent that: (a) it forms part of the cost of a depreciating asset that you hold, used to hold or will hold; or (b) you can deduct an amount for it under a provision of this Act other than this section; or (c) Not relevant (d) it is in relation to a lease or other legal or equitable right; or (e) Not relevant (f) it could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event (g) Not relevant (h) Not relevant (i) Not relevant (j) Not relevant | Detailed Reasoning - Depreciating asset exclusion - subsection 40-880(5)(a): Under paragraph 40-880(5)(a), you cannot deduct expenditure under section 40-880 if it forms part of the cost base of a depreciating asset. A depreciating asset is defined under subsection 40-30(1) as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. The definition excludes, amongst others, intangible assets except for those listed in subsection 40-30(2): paragraph 40-30(1)(c). The GMEs do not fall within one of the types of intangible assets listed in subsection 40-30(2) and therefore are not depreciating assets as defined in subsection 40-30(1). Therefore, the exclusion under paragraph 40-880(5)(a) does not apply to prevent the GME Instalments from being deductible under section 40-880. | Detailed Reasoning - Deductible under a provision of this Act other than this section exclusion - paragraph 40-880(5)(b): Under paragraph 40-880(5)(b), you cannot deduct expenditure under section 40-880 if it is deductible under a provision of the Act (which includes both the ITAA 1997 and the ITAA 1936) other than section 40-880. As the Commissioner has determined above, the GME Instalments are capital in nature and therefore excluded from the general deduction under section 8-1. Family Group also agrees with this categorisation in its ruling application. The Commissioner considers there is no other provision of this Act under which the expenditure could be deductible, apart from section 40-880. Therefore, the exclusion under paragraph 40-880(5)(b) does not apply to prevent the GME Instalments from being deductible under section 40-880. | Detailed Reasoning - Lease or other legal/equitable right exclusion - paragraph 40-880(5)(d): Under paragraph 40-880(5)(d), you cannot deduct expenditure under section 40-880 if it is 'in relation to a lease or other legal or equitable right'. The expression 'in relation to a lease or other legal or equitable right' or any part of the expression is not defined in the legislation. Paragraph 40-880(5)(d) replicates the former paragraph 40-880(3)(d) that is now repealed. In respect of paragraph 40-880(5)(d), paragraph 2.68 of the Explanatory Memorandum (EM) to Tax Laws Amendment (2006 Measures No. 1) Bill 2006 states: This exclusion replicates that found in the repealed section 40-880, having been added in 2002 in the context of the Government's review of the treatment of expenditure incurred on leases or other legal or equitable rights. The 2005-06 Budget announced that the Government would take a case-by-case approach in relation to the taxation of rights. Since that paragraph states that the exclusion contained in paragraph 40-880(5)(d) replicates that found in the repealed section 40-880, it is relevant to consider the repealed paragraph 40-880(3)(d). In discussing that exclusion, paragraph 3.67 of the EM to the Taxation Laws Amendment Bill (No. 5) 2002 stated: The Government is reviewing the treatment of expenditure incurred in relation to leases or other legal or equitable rights as part of the consideration of the recommendations of the Review of Business Taxation. The appropriate income tax treatment of capital expenditure incurred in relation to these leases and rights will be determined as part of that review. Consequently, capital expenditure on leases or other legal or equitable rights will be excluded from deduction under section 40-880. For example, expenditure representing lease surrender payments incurred in closing down your business will not be deductible under section 40-880. ( emphasis added ) It is therefore relevant to consider what 'leases and rights' were contemplated in the recommendations of the Review of Business Taxation in order to determine the intended scope of the phrase 'in relation to a lease or other legal or equitable right' in paragraph 40-880(5)(d) and former paragraph 40-880(3)(d). The proposed review of the taxation of 'leases and rights' was discussed at pages 217-280 of the Review of Business Taxation, A Platform for Consultation , Discussion Paper 2 Volume I, February 1999 (Discussion Paper). Specifically, at paragraph 8.1 on page 217, the following is stated: | Detailed Reasoning - What is a lease or right?: Leases and rights are essentially arrangements for transferring some or all of the benefits of ownership of an asset from the owner to the recipient of the lease or right. The following kinds of rights contracts are covered by the discussion: ● leasing and similar contracts which provide rights over physical assets, for example, leases of equipment; ● contracts giving rights over intangible assets, such as spectrum licences and rights in films, patents, copyright, and industrial designs; ● indefeasible rights of use over assets, such as telecommunication cables; ● profits á prendre , that is, a right to take a product such as standing timber from another person's land; ● contracts for services; ● restrictive covenants; and ● rights to receivables arising from 'rights' contracts, for example, lease receivables. Paragraph 8.2 of the Discussion Paper then states that the paper deals with the following broad category of rights: i) rights granted over the use of physical and intangible business assets; ii) rights under financial transactions; and iii) rights that are trading stock, such as software produced or developed for sale. The broad categories together with the examples set out above indicate that relevant rights are proprietary rights, whether they are of, or against, the grantor of the right. Therefore, it is expected that leases and rights of the sorts outlined above in the Discussion Paper would be excluded from deductibility under paragraph 40-880(5)(d). The Commissioner considers that GMEs are rights which may come within the 'leases and or other legal or equitable rights' that were considered by the Review of Business Taxation. Specifically, the rights attached to a GME cover the use of a physical asset in the form of a gaming machine, and also constitute intangible business assets that are similar in nature to the contracts giving rights over intangible assets identified in the Discussion Paper. Consequently, the GME Instalments, which are expenditures incurred on acquiring the GMEs, are in relation to a lease or other legal or equitable right that is excluded from a deduction under section 40-880, pursuant to the exclusion in paragraph 40-880(5)(d). The Commissioner notes that the Trading Trusts have conceded that paragraph 40-880(5)(d) could apply. The Commissioner considers that the GME Instalments would also be excluded from being deductible under section 40-880 by the exclusion in paragraph 40-880(5)(f) as explained further below. | Detailed Reasoning - Taken into account in working out the amount of a capital gain or capital loss from a CGT event exclusion - paragraph 40-880(5)(f): Paragraph 40-880(5)(f) excludes expenditure from being deductible under section 40-880 if it could be taken into account in working out a capital gain or loss from any CGT event that may apply. The Trading Trusts agree that the GME expenditure is prima facie excluded from deductibility under this paragraph. A 'CGT asset' is broadly defined in section 108-5 as 'any kind of property or a legal or equitable right that is not property'. | Detailed Reasoning - GME is a CGT asset: 'Property' is not defined in the ITAA 1997 and it instead takes its ordinary legal meaning. The following description of 'property' by the Australian Law Reform Commission (Traditional Rights and Freedoms - Encroachments by Commonwealth Laws (ALRC Interim Report 127), 3 August 2015)) is a useful starting point: The term 'property' is used in common and some legal parlance to describe types of property that is both real and personal. 'Real' property encompasses interests in land and fixtures or structures upon the land. 'Personal' property encompasses tangible or 'corporeal' things—chattels or goods. It also includes certain intangible or 'incorporeal' legal rights, also known in law as 'choses in action', such as copyright and other intellectual property rights, shares in a corporation, beneficial rights in trust property, rights in superannuation and some contractual rights, including, for example, many debts. Intangible rights are created by law. Tangible things exist independently of law but law governs rights of ownership and possession in them—including whether they can be 'owned' at all. In Yanner v. Eaton (1999) 201 CLR 351; [1999] HCA 53; (1999) 73 ALJR 1518, the High Court accepted that property refers not to a thing but to a description of a legal relationship with a thing; and, more specifically, to the degree of power that is recognised in law as permissibly exercised over the thing. There is neither a single test nor a single determinative factor for identifying a proprietary right. Courts have emphasised different characteristics in different circumstances. One formulation that has been applied in Australia is the 'Ainsworth test' - which asks whether a right is definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree. However, courts have also focused on factors such as excludability (whether it is possible to exclude others from the right in question), commercial value (whether something is treated in commerce as a valuable proprietary right), and enforceability of the right against third parties generally. Accordingly, in determining whether something amounts to property, it is necessary to weigh up a range of factors and to treat none as definitive. Under Chapter 1 of the Gambling Act, a 'gaming machine entitlement' means an entitlement created under Part 4A of Chapter 3 of the Gambling Act. The authority conferred by a GME is specified in section 3.4A.2 of the Gambling Act. Under subsection 3.4A.2(1) of the Gambling Act, a GME authorises the venue operator that holds the GME to acquire approved gaming equipment and to conduct gaming on one approved gaming machine in an approved venue. The 'conduct of gaming' is defined in section 3.1.4 of the Gambling Act to include the operation of gaming machines and the use or distribution of proceeds from the conduct of gaming. GME is 'property' It is considered that a GME is 'property' for the following reasons: ● definable, identifiable and capable of assumption by third parties : the rights attached to a GME as well as its duration, are defined specifically under the Gambling Act. Each GME is identifiable by a unique ID and each GME is also capable of being assigned or sold to third parties independent of the business, activity or operation conducted in respect of it. The Entitlements Transfer Register (ETR) contains a record of GMEs that have been transferred through the ETM; ● commercial value : based on recorded transfers on the ETR, a GME has commercial value on an active transfer market. The value of each GME is likely to reflect the potential profits that could be earned from acquiring and operating a gaming machine which is one of the rights a GME confers; and ● akin to a taxi licence which has been held to be property : in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42; 98 ATC 4585 ( Murry ) , the majority of the High Court held that a non-exclusive taxi licence is an item of property because it has economic potential and is capable of being sold or leased for reward to a third party independently of any business conducted in respect of it. The majority of the High Court held that the value of the licence would no doubt reflect the profit that could be earned from commencing a business of the kind which the licence authorised. For similar reasons, it is considered that a GME should also be regarded as property. GME is still a CGT asset even if it is not 'property' However, even if a GME is not 'property', a GME is still a 'CGT asset' if it is a 'legal or equitable right that is not property' pursuant to section 108-5. There is little doubt that a GME is a statutory right that confers on the holder a bundle of legal rights including the right to conduct gaming (as defined in subsection 3.1.4(1) of the Gambling Act) on one gaming machine, albeit subject to meeting other conditions. A GME is therefore a 'legal or equitable right' and a CGT asset. CGT events that could happen to the GME The relevant CGT events that could happen in relation to a GME are CGT event A1 (Disposal of a CGT asset) and CGT event C2 (Cancellation, surrender and similar endings). It must be noted that paragraph 40-880(5)(f) refers to expenditures that 'could' be taken into account. Paragraph 2.73 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 makes it clear that a capital gain or loss that has not yet been realised or is disregarded is still caught under the exclusion under paragraph 40-880(5)(f) such that the expenditure 'could…be taken into account in working out the amount of a capital gain or capital loss' from a CGT event. Paragraph 2.73 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 states as follows: Where an amount can be taken into account in working out a capital gain or loss from a CGT event, it is not deductible. A capital gain or loss that has not yet been realised or where the capital gain or loss is disregarded (eg, because it is a pre-CGT asset) or reduced is excluded from deduction under section 40-880 by paragraph 40-880(5)(f). An amount is not taken into account in working out a capital gain or loss if the expenditure cannot be included in the cost base or reduced cost base of the asset (eg, expenses related to the sale of a CGT asset that falls through)…… ( emphasis added ) Therefore, the expenditure to acquire the GMEs is capable of being taken into account under CGT events A1 or C2 and prima facie excluded under paragraph 40-880(5)(f), even though no GME has expired or been sold by the Trading Trusts to date. This view is reflected in paragraph 318B of TR 2011/6 which has recently been amended to include Example 40A which is relevant to GMEs: Example 40A 318A. The Koala Hotel and Tavern (KHT) carries on a hospitality business that includes offering authorised gaming activities on gaming machines. Under state gaming regulations, KHT must hold a gaming machine entitlement for each gaming machine operated at its premises. There are statutory caps on the number of entitlements issued state wide, and to each holder and in each region. Each entitlement, identified by its unique serial number, authorises its holder to operate a gaming machine for a 10 year term, after which a reapplication and reallocation process will occur. Each entitlement is tradable on a state regulated entitlement trading market. 318B. KHT applied for, and was granted by the state, an allocation of gaming machine entitlements upon payment of an agreed price per entitlement. The capital expenditure incurred to acquire a gaming machine entitlement constitutes the first element of the cost base of the entitlement and will be taken into account in determining the capital gain or capital loss arising from either the sale or expiry of the entitlement. The expenditure therefore is excluded by the exception in paragraph 40-880(5)(f). ( emphasis added ) | Detailed Reasoning - CGT event A1 - disposal of a GME: Each GME is tradeable on the ETM. When a GME is traded, CGT event A1 'Disposal of a CGT asset' happens under section 104-10 as a result of the change of ownership that occurs from you to another entity. The first element of the cost base of a CGT asset under subsection 110-25(2) is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). The phrase "in respect of" has been said to have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer ( Trustees, Executors and Agency Co Ltd v Reilly (1941) VLR 110 at p 111). It is immaterial whether or not the consideration is paid or given to the seller of the asset. Paragraph 101 of Taxation Ruling TR 95/35: income tax: capital gains: treatment of compensation receipts , states that money or property are regarded as paid or given in respect of the acquisition of an asset if there is some direct and substantial link between the money or property and the acquisition of the asset. The Commissioner considers that the GME Instalments are money paid 'in respect of' acquiring the GMEs and therefore form part of the first element of the cost base or reduced cost base of the GMEs. The GME Instalments are payments made in direct connection to the acquisition of the GMEs by each Trading Trust entering into the Deed of Assumption as part of the transfer of the GMEs from the vendors of the Relevant Venues. Therefore, the GME Instalments can be taken into account in working the capital gain or loss from any future disposal of the GMEs and, as such, will be excluded from being deductible under section 40-880 pursuant to paragraph 40-880(5)(f) unless subsection 40-880(6) applies. | Detailed Reasoning - Assumption of liability: Alternatively, the Commissioner considers that the GME Instalments also form part of the first element of the cost base of the GME assets under the assumption of liability rule. Under section 112-35, if you acquire a CGT asset from another entity that is subject to a liability, the first element of your cost base and reduced cost base of the asset includes the amount of the liability you assume. Given the GMEs were acquired with the Trading Trust entering into the Deed of Assumption to assume the liabilities to the State for the remaining instalments, section 112-35 could also apply. | Detailed Reasoning - CGT event C2 - expiry of a GME: Alternatively, if the Trading Trusts do not dispose of the GMEs, CGT event C2 'Cancellation, surrender and similar endings' will happen under paragraph 104-25(1)(c) upon the expiry of each GME after the 10 year period on 15 August 2022. Under subsection 104-25(1), CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring ; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a convertible interest - being converted. ( emphasis added ) The Macquarie Dictionary Online defines an 'intangible asset' as follows: Noun an asset, such as a patent, copyright, brand name, etc., which has no physical properties but which can be identified, given a monetary value, and therefore recorded on a balance sheet A GME is considered to be an intangible asset as it has no physical form but can be identified and given monetary value. Given a GME has a specified life, CGT event C2 will happen to a GME at expiry, assuming it is not sold or forfeited earlier. Under subsection 104-25(3), you make a capital gain from CGT event C2 if the capital proceeds from the ending of the intangible asset are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. As discussed above, the GME Instalments that must be paid to the State in respect of the GMEs acquired is included in the first element of the cost base and reduced cost base of each GME. Therefore, the expenditure incurred to acquire each GME can be taken into account in working out the (likely) capital loss from the expiry of each GME. Accordingly, expenditure incurred on acquiring each GME will be excluded from a deduction under section 40-880 pursuant to the exclusion in paragraph 40-880(5)(f) unless subsection 40-880(6) applies. | Detailed Reasoning - Goodwill: Goodwill is a CGT asset that upon disposal can give rise to CGT event A1. Expenditure incurred to acquire goodwill is included in the first element of the cost base of goodwill. Goodwill is not defined in the ITAA 1997. In Taxation Ruling TR 1999/16: Income tax: capital gains: goodwill of a business , the Commissioner provides his view on what is meant by the goodwill of a business, based on the legal definition of goodwill as explained by the High Court in the Murry case. Paragraph 12 of TR 1999/16 provides a useful summation of the meaning of goodwill: …goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible item of property that is legally distinct from the sources from which it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated. The Commissioner considers that the GME Instalments incurred on acquiring the GMEs was not incurred to acquire goodwill but to acquire individual GMEs. A mere right to enter a market was held in Murry [at 68] not to be goodwill or even a source of goodwill. “…a licence that authorises the conduct of a business is not a source of goodwill….A taxi licence therefore is simply an item of property whose value is not dependent on the present existence of a business. It is not and does not contain any element of goodwill .” ( emphasis added ) As explained in paragraphs 27 and 126 of TR 1999/16: 27. Goodwill is one CGT asset separate and distinct from other assets of the business such as plant, licences (whether exclusive or non-exclusive), statutory permits, quotas, entitlements , valuable contractual rights and items of intellectual property (for example, a trademark, patent, copyright or registered design). 126. The cost base of goodwill does not include the cost base of other assets of a business… ( emphasis added ) Therefore the GME Instalments incurred on acquiring the GMEs did not result in the acquisition of goodwill; instead the GME Instalments are included in the cost base of the GMEs as separate CGT assets of the business acquired and then carried on by each of the Trading Trusts. | Detailed Reasoning - Subsections 110-25(5) and 110-25(5A): Subsection 110-25(5) includes in the fourth element of the cost base of an asset capital expenditure incurred for the purpose or the expected effect of increasing or preserving the value of an asset. However, subsection 110-25(5A) states that the fourth element of the cost base of an asset does not apply to 'capital expenditure incurred in relation to goodwill.' Therefore, subsection 110-25(5A) operates to exclude from the fourth element of the cost base of an asset expenditure that has the purpose or the expected effect of increasing or preserving the value of goodwill. Family Group submit that the GME Instalments were incurred in relation to preserving the goodwill of the businesses acquired and then operated by the Trusts. This is on the basis that: ● The goodwill acquired by the Trading Trusts on purchasing the relevant businesses carried on at the venues included an amount referable to the gaming businesses which was and remains a core component of those businesses; ● This is evidenced by the substantial share of revenue attributable to the operation of gaming machines in each business; ● The gaming business could not be carried on without acquiring the GMEs and all referable goodwill would be lost; and ● Therefore, the GME Instalment expenditure incurred merely preserves the value of the goodwill acquired. Family Group further contend that subsection 110-25(5A) supports their view that the GME Instalments on acquiring the GMEs is deductible under section 40-880 because of the effect that subsection 110-25(5A) has in removing expenditure in relation to goodwill from the fourth element of the cost base, thereby mitigating the exclusion under paragraph 40-880(5)(f) that could otherwise apply to deny the deduction under section 40-880. The Commissioner does not consider that the proper characterisation of the GME Instalments resulted in the acquisition of any goodwill (as already discussed) or was in relation to preserving the goodwill of the Trading Trusts. Rather, it was expenditure incurred for the purpose of acquiring each GME which gave each Trading Trust the right to conduct a gaming business that it previously did not conduct. This right is in the form of a GME - a specifically identifiable asset with its own acquisition cost such that the expenditure incurred to acquire this right properly forms part of the first element of the cost base of this asset. This is also the appropriate characterisation of the expenditure under the underlying asset approach (see TR 95/35: income tax: capital gains: treatment of compensation receipts ). Under this approach, the relevant underlying asset here is the GME (together with the rights embodied in the GME), not goodwill, and the essential character of the expenditure in question here is expenditure incurred to acquire the GME, not expenditure to increase or preserve goodwill value. Therefore, neither subsections 110-25(5) nor 110-25(5A) can be relevantly engaged. Further, subsection 110-25(5A) does not have the effect of preventing expenditure to acquire a CGT asset from forming part of the first element of the cost base of an asset (and consequently being excluded from deductibility under section 40-880 by paragraph 40-880(5)(f)). It merely prevents expenditure incurred in relation to goodwill from forming part of the fourth element of the cost base of an asset in order to ensure that such expenditure is still eligible for the more concessional treatment under section 40-880 if prescribed conditions are met. Therefore on the basis that the GME Instalments are expenditures incurred to acquire each GME, they form part of the first element of the cost base of each GME and are not deductible under section 40-880; accordingly subsections 110-25(5) and 110-25(5A) are not relevant. On the basis of the above explanation the GME Instalment expenditure would only be deductible to the Trading Trusts if the exception under subsection 40-880(6) applies. | Detailed Reasoning - Subsection 40-880(6) - an exception to the exclusions in subsection 40-880(5): Subsection 40-880(6) states as follows: The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill. Therefore, the exception in subsection 40-880(6) is satisfied if the following conditions are satisfied: (a) the expenditure is in relation to a legal or equitable right; (b) the expenditure is incurred to preserve, but not enhance, the value of goodwill; and (c) the value of the right to you is solely attributable to the effect that the right has on preserving goodwill value. | Detailed Reasoning - In relation to a legal or equitable right: As already discussed, in accordance with section 3.4A.2 of the Gambling Act, each GME confers (amongst other rights) the legal right to operate one gaming machine in an approved venue in the State. Therefore, the expenditure incurred to acquire the GMEs is in relation to the acquisition of a legal or equitable right. Therefore condition (a) is satisfied. | Detailed Reasoning - Preserving, but not enhancing, the value of goodwill: Family Group contend that the GME Instalments preserve but do not enhance the value of the goodwill of the business acquired by each Trading Trust. Relevantly, Family Group contends that for each Trading Trust: ● The GMEs were acquired solely to continue operating the gaming business carried on at the purchased venues; ● From the perspective of the acquired venue's customers, there has been no change to the day-to-day operations of the gaming business; ● Obtaining the GMEs did not confer any new or additional benefit to the Trading Trust or their business; ● The GME Instalments merely preserves the value of the goodwill acquired; ● But for the successful acquisition of the GMEs, the Trading Trust could not carry on the gaming business and all goodwill referable to the gaming business would be lost; and ● The GME Instalments have not enhanced the value of the goodwill of the business in any way. | Detailed Reasoning - Preserving the value of goodwill: The concept and meaning of goodwill has briefly been discussed in the context of subsection 110-25(5A). To satisfy subsection 40-880(6), the essential character of the expenditure must be to preserve the value of goodwill and have that effect - this is clear because the expenditure cannot have the effect of enhancing goodwill and expenditure which has nothing to do with the value of goodwill will not satisfy subsection 40-880(6). The test in subsection 40-880(6) is whether objectively, the essential character of the expenditure is to preserve the value of goodwill. The essential character test is appropriate given the context and objects of section 40-880 and the construction of subsection 40-880(6) - the scope of which is intended to apply to expenditure of a very limited, prescribed nature. It is also consistent with the 'underlying asset' approach (see TR 95/35: income tax: capital gains: treatment of compensation receipts ) which focuses on the substance/reality of the relevant matter or transaction. The Commissioner considers that the GME Instalments were incurred to acquire a specific identifiable asset i.e. a GME which is a right to operate a gaming machine, and not to preserve the value of goodwill (being the attractive force of custom arising from carrying on the business as a whole). While the ability to continue the business acquired by each Trading Trust depended, in part, on acquiring the GMEs, this does not mean that the value of goodwill is preserved merely by the incurrence of the expenditure to acquire the GMEs. To do so would ignore the substance of the expenditure and the important rights inherent in the GMEs themselves. Taking a broad interpretation would permit effectively any business expenditure to fall within the scope of subsection 40-880(6), no matter how remote, since all business expenditure has a connection to the goodwill of the business ultimately. This is contrary to the provision's object which serves to relieve expenditure that does nothing else apart from preserving the value of goodwill of a business. The Commissioner considers that the essential character of the relevant expenditure was directed at acquiring assets in the form of GMEs, rather than being in relation to preserving the goodwill value of the business acquired by each Trading Trust. The expenditure simply was not directed at preserving the value of goodwill that emanated from combining the use of all the existing assets of the business of the Trading Trusts, rather it was expenditure to acquire a set of rights and assets. In summary, the Commissioner does not accept that the essential character of the expenditure is directed solely at preserving the value of the goodwill of the Trading Trusts. Furthermore, the Commissioner does not accept that the Trading Trusts have each satisfied the remaining condition in subsection 40-880(6) concerning the value of the right being solely attributable to the effect the right has on preserving goodwill value (if indeed any). This is explained further below. | Detailed Reasoning - The value to you of the right is solely attributable to the effect that the right has on goodwill: For the exception under subsection 40-880(6) to apply, the Commissioner must also be satisfied that the 'value to you of the right is solely attributable to the effect that the right has on goodwill.' When read in its context, the effect that the right has can only be to preserve the value of goodwill, if the operation of subsection 40-880(6) is to be engaged. The 'you' referred to in subsection 40-880(6) refers to each of the Trading Trusts which have incurred the GME Instalments. The Commissioner believes that there are two components to this last requirement in subsection 40-880(6), namely: (a) what is the value of a right to a taxpayer; and (b) is the value of the right to the taxpayer solely attributable to the effect the right has on preserving goodwill. | Detailed Reasoning - Value to you of the right: In considering the value of a right to a taxpayer, the Commissioner considers that this involves a consideration of the objective value of the right, rather than the subjective value of the right in the mind of the taxpayer. While the Commissioner accepts that the 'value to you' concept has regard to your intention of how you will realise that value, in this case, through holding the GME in order to operate a gaming machine, rather than through selling it, the meaning of 'value to you' cannot be completely devoid of all objectivity. Nor does 'value to you' preclude the consideration of market value if there is one. A GME confers the right to operate a gaming machine and has a value to you (through use as opposed to through sale) that reflects the net present value of the future profits that you expect to derive from operating the gaming machine as authorised by the GME for the life of the entitlement. It is an item of valuable property in accordance with the High Court's observations in Murry (as cited earlier in this ruling with respect to CGT assets). The Commissioner does not regard the words 'value to you' in subsection 40-880(6) as having the effect that the value of the right can only be subjectively determined by the taxpayer. 'Value to you' is not to be interpreted as 'value according to you', 'value in your mind' or 'value to you and you alone' but rather 'value to you or someone in a similar situation to you'. The expression 'value to you' is required in the context of subsection 40-880(6) because rights which merely preserve the goodwill value attaching to a taxpayer's business can only ever have value to the taxpayer carrying on the business and no one else. They are rights that have no distinct or inherent value other than preserving the goodwill value of a business. Therefore, the term 'value to you' is used essentially to overcome the limitation of the absence of a market for the type of right that falls within the scope of subsection 40-880(6). The Commissioner notes that the expression 'value to you' is used in section 15-2 and in the former paragraph 26(e) of the ITAA 1936. However, the use of the expression in that particular instance is of limited significance to the interpretation of subsection 40-880(6) which is worded differently and arises in a completely different context. Whereas the former paragraph 26(e) of the ITAA 1936 relates to the determination of whether there is a benefit given, granted or allowed to the taxpayer whose value has to be determined, subsection 40-880(6) is about providing relief as a black hole deduction for certain expenditures that do no more than preserve the value of the goodwill of a business. The context is entirely different and adopting the interpretation under one provision for the purpose of interpreting another is inappropriate and is of limited practical use. | Detailed Reasoning - Solely attributable to the effect the right has on preserving goodwill: The Commissioner believes the words 'attributable' involves a relationship of cause and effect, similar to the interpretation of that word in Commissioner of Taxation v. Sun Alliance Pty Ltd (in liq) (2005) 225 CLR 488; [2005] HCA 70; ATC 4955; ATR 560. The existence of the word 'solely' before 'attributable' requires a narrow nexus between the subject matters [the value of the right and the effect of the right on goodwill value]. The reference to 'solely attributable' implies that there can be no other objective reason, effect or purpose in incurring the expenditure and no other value attached to the right other than its effect on preserving goodwill value. Therefore, the words 'solely attributable' preclude rights which have an inherent value. Support for this is found in the following extracts of the EM which include clear references to the distinct objective or inherent value of the right. 2.70 Expenditure is deductible where it is incurred in relation to a lease or other legal or equitable right, and the value of the expenditure to the taxpayer arises solely from the effect that the right has in preserving, but not enhancing, the value of goodwill. For example, capital expenditure may be incurred in relation to a right that is both unlimited in duration, and which merely prevents goodwill from being damaged. Such a right has no distinct value in itself. Its value lies in the effect its existence has upon the value of the goodwill. Such expenditure represents in substance a black hole expense even though it is in relation to an asset. 2.71 Where a taxpayer incurs an expense in relation to a right and that right enhances the value of the goodwill, or has an inherent value in itself then it would not be appropriate to allow a deduction as a business related cost as the expenditure does not represent a loss to the taxpayer. ( emphasis added ) This view is consistent with the view expressed in paragraph 317 of TR 2011/6: The subsection ensures that expenditure in relation to a right which has no value of itself and does not increase the value of goodwill from what it was before the expenditure took effect is not excluded from deduction under section 40-880. ( emphasis added ) A GME confers valuable statutory rights to the holder that are also tradeable, if the holder so chooses, in a regulated transfer scheme. As discussed, the Commissioner considers that a GME is property, and if not property, then at least a valuable right that is not property. The Commissioner considers that a GME is an asset with an inherent value (reflecting the net present value of the expected future profits that can be derived from operating a gaming machine which a GME authorises for ten years) which precludes it from being a right whose value is solely attributable to the effect the right has on preserving the goodwill value of a business. As a result, a deduction is not allowable for the cost of acquiring this distinct and valuable asset under section 40-880 as a business related cost since the expenditure does not represent a loss to the taxpayer. Therefore the requirements in subsection 40-880(6) are not satisfied. This view is reflected in Example 40A of TR 2011/6 which has recently been amended to include that example. Although the example is in relation to the application of subsection 40-880(6) to an ongoing gaming and hospitality business, the Commissioner considers that the same principles would apply to the purchase of an ongoing business where the expenditure in question under section 40-880 involves the purchaser assuming liabilities for the GME Instalments. | Detailed Reasoning - Example 40A: 318A. The Koala Hotel and Tavern (KHT) carries on a hospitality business that includes offering authorised gaming activities on gaming machines. Under state gaming regulations, KHT must hold a gaming machine entitlement for each gaming machine operated at its premises. There are statutory caps on the number of entitlements issued state wide, and to each holder and in each region. Each entitlement, identified by its unique serial number, authorises its holder to operate a gaming machine for a 10 year term, after which a reapplication and reallocation process will occur. Each entitlement is tradable on a state regulated entitlement trading market. 318B. KHT applied for, and was granted by the state, an allocation of gaming machine entitlements upon payment of an agreed price per entitlement. The capital expenditure incurred to acquire a gaming machine entitlement constitutes the first element of the cost base of the entitlement and will be taken into account in determining the capital gain or capital loss arising from either the sale or expiry of the entitlement. The expenditure therefore is excluded by the exception in paragraph 40-880(5)(f). 318C. Subsection 40-880(6) does not prevent paragraph 40-880(5)(f) from applying. The value to KHT of the entitlements is not solely attributable to the effect that the entitlements have on the goodwill in KHT's business. Each entitlement has a distinct value to KHT because it permits KHT to conduct authorised gaming activity using a gaming machine at its business premises and thereby earn profits, which it otherwise could not earn, from such conduct for a 10-year period. An entitlement may also be traded on a secondary market. This value arises regardless of whether the expenditure can also be said to be 'to preserve' goodwill to any extent. 318D. As the expenditure is recognised under the capital gains tax provisions, a deduction under section 40-880 is not allowable. | Detailed Reasoning - Black hole deductions - measure of last resort: Instead, the GME Instalments incurred on acquiring each GME will form part of the first element of the cost base of each GME as a CGT asset, upon either their disposal or expiration as the case may be. This result is consistent with the policy that the deduction under section 40-880 is for business capital expenditure that is not recognised in some way elsewhere in the tax law. This is reflected in both the objects of section 40-880 and throughout the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006: The objects of section 40-880, as stated in subsection 40-880(1): The object of this section is to make certain business capital expenditure deductible over 5 years if: (a) the expenditure is not otherwise taken into account ; (b) a deduction is not denied by some other provision; and (c) the business is, was or is proposed to be carried on for a taxable purpose. ( emphasis added ) Paragraphs 2.9 and 2.17 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 state: 2.9 This measure provides treatment for business capital expenditure not recognised in some way elsewhere in the tax law…. 2.17 There are a number of exceptions which require, in effect, that the expenditure must not be taken into account in some way elsewhere in the income tax law. This means that the expenditure would not already be deductible, capitalised, amortised or capped in some way under another provision. The expenditure must also not be denied a deduction, including by limiting or capping the deduction, elsewhere in the tax law. ( emphasis added ) Section 40-880 is a provision of last resort and priority is given to the treatment in other provisions of the tax law, as reflected in the list of exclusions under subsection 40-880(5). Accordingly, since the expenditure to acquire each GME is taken into account by the CGT provisions, a deduction under section 40-880 is not allowable. | Detailed Reasoning - Detailed reasoning: The GME Reimbursements are expenses each Trading Trust incurred on the purchase of their business for which they were contractually obliged under each contract of sale of business to reimburse the vendor. The GME reimbursements have been calculated as the difference between the GME Instalments paid by the vendor and the proportion of the total cost of the GMEs that relates to the period during which the GME was in effect (for the vendor), as a proportion of the ten years for which the GME is valid. | Detailed Reasoning - The deduction available under section 40-880(2): Under subsection 40-880(2), you can deduct, in equal proportions over a period of five income years starting in the year in which you incur it, capital expenditure that is incurred 'in relation to your business' or 'in relation to a business proposed to be carried on.' Family Group makes the following contentions with respect to the GME Reimbursements: (a) that the GME Reimbursement expenditure was incurred by each Trading Trust in respect of the business that each Trading Trust proposed to carry on at the time of entering into the contract to buy the business carried on at the Relevant Venues; (b) that each Trading Trust incurred the GME Reimbursements at the time of the contract of sale since at this point in time the Trading Trust have 'completely subjected' themselves to the liability and there is a legally enforceable obligation to pay; and (c) that the GME Reimbursements are business capital expenditure, being expenditure that confers the right to operate gaming machines in each venue for a period commencing on acquisition of the business and ending on 15 August 2022 when the GMEs expire. | Detailed Reasoning - Business capital expenditure: The Commissioner agrees that the GME Reimbursements are capital expenditures in relation to the prospective business each Trading Trust proposed to carry on at the time it entered into the contract to purchase the business. As discussed in the context of the GME Instalments, the Sun Newspapers and AusNet decisions provide guidance on the characterisation of an expense. For the same reasons applicable to the GME Instalments, the Commissioner regards the GME Reimbursements to be capital receipts on the basis that from a practical and business point of view, the GME Reimbursements are: ● made to secure the rights to carry on the business acquired by each Trading Trusts; ● part of the consideration moving from the Trading Trust for the acquisition of the GME; and ● calculated to effect the acquisition of the GME which is part of the structure of the business acquired. | Detailed Reasoning - Incurred: A review of each BSA reveals that although there is provision for the purchaser to make the GME Reimbursements, this is conditional in each case on the Relevant State/Minister granting approval for the transfer. Without such an approval, no liability to make the payment will arise. As explained in TR 97/7, for an expense to be incurred a presently existing liability must exist and a liability that is contingent will not be a presently existing liability. The Commissioner's view is that the GME Reimbursement expenses are conditional on the Relevant State/Minister approving the transfer and therefore are only 'incurred' when this happens. Despite the BSA, a pecuniary liability did not exist at this time because it was still conditional on the approval and registration of the transfer by the Relevant State. The liability to pay was not due until settlement of the sale and the actual transfer of the GMEs. Support for this outcome can be found in the Full Federal Court case of FC of T v Malouf [2009] FCAFC 44; ATC 20-099. In this case, a taxpayer's obligation to pay the balance of the purchase price under a contract for the sale of land was conditional on the vendor completing the first stage of the development project. The court held that the contract was not an unconditional agreement and the taxpayer's obligation to pay under the contract was “dependent upon… the happening of events which were anticipated but were under the control of neither party.” Therefore, the liability was not incurred upon entering of the contract but upon the satisfaction of the condition. In summary, the obligation of the Trading Trust to make the GME Reimbursements are provided for in the BSA and are therefore business capital expenditure incurred by each Trading Trust on the date when the Relevant State approves each transfer. The expenditures would be deductible under subsection 40-880(2) in the year they are incurred, provided the exclusions under subsection 40-880(5) do not apply. | Detailed Reasoning - Depreciating asset exclusion - subsection 40-880(5)(a): As discussed in Question 1, the GMEs are not among the intangible assets listed in subsection 40-30(2) and therefore are not depreciating assets as defined in subsection 40-30(1). Therefore, the GME Reimbursements do not form part of the cost of a depreciating asset and paragraph 40-880(5)(a) does not apply. | Detailed Reasoning - Deductible under a provision of this Act other than this section exclusion - paragraph 40-880(5)(b): As the Commissioner has already determined above, the expenditures incurred on acquiring the GMEs are capital in nature and therefore excluded from the general deduction under section 8-1. The Commissioner considers there is no other provision of this Act under which the expenditure could be deductible, apart from section 40-880. Therefore, the exclusion under paragraph 40-880(5)(b) does not apply to prevent the GME Reimbursements from being deductible under section 40-880. | Detailed Reasoning - Lease or other legal/equitable right exclusion - paragraph 40-880(5)(d): For the same reasons given in Question 1 in relation to the GME Instalments, the Commissioner considers that the exclusions under paragraph 40-880(5)(d) can apply. This is on the basis that the GME Reimbursements are in relation to acquiring GMEs which are a 'legal right' to operate a gaming machine. This has been accepted by Family Group in its private ruling application. | Detailed Reasoning - Taken into account in working out the amount of a capital gain or capital loss from a CGT event exclusion - paragraph 40-880(5)(f): The first element of the cost base of a CGT asset under subsection 110-25(2) is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). Family Group recognises the possibility that the reimbursements could be taken into account when calculating the capital loss incurred by the Trading Trusts upon expiration of its GMEs. For similar reasons given in respect of the GME Instalments, the Commissioner considers that there is a direct link between the GME Reimbursements and the acquisitions of the GMEs such that the GME Reimbursements are monies paid 'in respect of' acquiring the GMEs and therefore are included in the first element of the cost base of a GME asset. Therefore, the GME Reimbursements are expenditures that could be taken into account in working out the amount of a capital gain or capital loss from the disposal of a GME (CGT event A1) or expiry of a GME (CGT event C2). In summary, both the exclusions in paragraphs 40-880(5)(d) and (f) could apply to the GME Reimbursements. Therefore, it is necessary to consider the application of the exception to the exclusions under subsection 40-880(6). | Detailed Reasoning - Subsection 40-880(6) exception: Family Group makes the following contentions on why they believe the exception under subsection 40-880(6) should apply: ● Consideration must be given specifically to the subjective intention of the Trading Trust in incurring the GME Reimbursements; that is what is the value to the Trading Trust in reimbursing the vendor?; ● The reimbursements were made solely to reimburse the vendor the expenditure which they had effectively 'prepaid' to the Relevant State, the only benefit of which was to enable the Trading Trusts to continue operating the gaming businesses purchased and, in doing so, preserve the value of that purchased goodwill; ● The GMEs were not acquired on the basis that they constituted valuable assets in their own right. ● The GMEs do not have any inherent value of themselves to each Trading Trust. The fact that hypothetically the GMEs have their own inherent value is not relevant and subsection 40-880(6) does not permit the Commissioner to consider such objective value; and ● To treat GMEs as assets separate to goodwill is artificial and uncommercial. As discussed, the exception in subsection 40-880(6) is satisfied if the following conditions are satisfied: (a) the expenditure is in relation to a legal or equitable right; (b) the expenditure is incurred to preserve, but not enhance, the value of goodwill; and (c) the value of the right to you is solely attributable to the effect that the right has on preserving goodwill value. | Detailed Reasoning - In relation to a legal or equitable right: As already discussed, in accordance with section 3.4A.2 of the Gambling Act, each GME confers (amongst other rights) the legal right to operate one gaming machine in an approved venue in the State. Therefore, the GME Reimbursements incurred on acquiring the GMEs is in relation to the acquisition of a legal or equitable right. Therefore condition (a) is satisfied | Detailed Reasoning - Preserving the value of goodwill: As discussed in the context of the GME Instalment expenditures in Question 1, the Commissioner's view of this requirement is as follows: ● To satisfy subsection 40-880(6), the essential character of the expenditure must be to preserve the value of goodwill and have that effect; ● The essential character test is appropriate given the context and objects of section 40-880 and the construction of subsection 40-880(6) the scope of which is intended to apply to expenditure of a very limited, prescribed nature; and ● The object of the provision is to provide relief for expenditure that does nothing else apart from preserving the value of goodwill of a business. The Commissioner considers that the essential character of the relevant expenditure was directed at acquiring assets in the form of GMEs, rather than being in relation to preserving the goodwill value of the businesses acquired by each Trading Trust. While the ability to continue the business acquired by each Trading Trust depended, in part, on acquiring the GMEs, this does not mean that the value of goodwill is preserved merely by the incurrence of the expenditure to acquire the GMEs. To do so would ignore the substance of the expenditure and the important rights inherent in the GMEs themselves. In summary, the Commissioner does not accept that the essential character of the expenditure is directed solely at preserving the value of the goodwill of the businesses acquired by the Trading Trusts. Furthermore, the Commissioner does not accept that the Trading Trusts have each satisfied the remaining condition in subsection 40-880(6) concerning the value of the right being solely attributable to the effect the right has on preserving goodwill value (if indeed any). This is explained further below. | Detailed Reasoning - The value to you of the right is solely attributable to the effect that the right has on goodwill: In relation to the 'value to you' aspect of subsection 40-880(6), the Commissioner's view as already discussed above is as follows: ● In considering the value of a right to a taxpayer, the Commissioner considers that this involves a consideration of the objective value of the right, rather than the subjective value of the right in the mind of the taxpayer; ● The meaning of 'value to you' cannot be completely devoid of all objectivity. Nor does 'value to you' preclude the consideration of market value if there is one; ● The Commissioner does not regard the words 'value to you' in subsection 40-880(6) as having the effect that the value of the right can only be subjectively determined by the taxpayer. 'Value to you' is not to be interpreted as 'value according to you', 'value in your mind' or 'value to you and you alone' but rather 'value to you or someone in a similar situation to you'; and ● While the expression 'value to you' is used in section 15-2 and in the former paragraph 26(e) of the ITAA 1936, the use of the expression in that particular instance is of limited significance to the interpretation of subsection 40-880(6) which is worded differently and arises in a completely different context. In relation to whether the value of the right is 'solely attributable' to goodwill, the Commissioner considers that: ● The words 'attributable' involves a relationship of cause and effect, similar to the interpretation of that word in Commissioner of Taxation v. Sun Alliance Pty Ltd (in liq) (2005) 225 CLR 488; [2005] HCA 70; ATC 4955; ATR 560; ● The reference to 'solely attributable' implies that there can be no other objective reason, effect or purpose in incurring the expenditure and no other value attached to the right other than its effect on preserving goodwill value; and ● Therefore, the words 'solely attributable' preclude rights which have an inherent value . Support for this is found in already cited paragraphs 2.70 and 2.71 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006, which include clear references to the distinct objective or inherent value of the right. This view is consistent with the already cited view expressed in paragraph 317 of TR 2011/6. The Commissioner considers that a GME is an asset with an inherent value (reflecting the net present value of the expected future profits that can be derived from operating a gaming machine which the GME authorises for 10 years) which precludes it from being a right whose value is solely attributable to the effect the right has on preserving the goodwill value of a business. As a result, a deduction is not allowable for the cost of acquiring this distinct and valuable asset under section 40-880 as a business related cost since the expenditure does not represent a loss to the taxpayer. Therefore the requirements in subsection 40-880(6) are not satisfied. This is consistent with Example 40A which has recently been inserted in TR 2011/6 and already cited. | Detailed Reasoning - Black hole deductions - measure of last resort: The GME Reimbursements will form part of the cost base of the GME as a CGT asset, upon either their disposal or expiration as the case may be. This result is consistent with the policy that the deduction under section 40-880 is for business capital expenditure that is not recognised in some way elsewhere in the tax law. This is reflected in both the objects of section 40-880 and throughout the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006. Section 40-880 is a provision of last resort and priority is given to the treatment in other provisions of the tax law, as reflected in the list of exclusions under subsection 40-880(5). Accordingly, since the GME Reimbursements incurred to acquire the GMEs are taken into account by the CGT provisions, a deduction under section 40-880 is not allowable. | Summary: Not applicable, as the answer to Question 1 and Question 2 is No. | Summary: Not applicable, as the answer to Question 1 and Question 2 is No. | Summary: Not applicable, as the answer to Question 1 and Question 2 is No.