On 16 October 2019, the High Court handed down its decision in FCT v Sharpcan Pty Ltd unanimously allowing the Commissioner of Taxation’s (Commissioner) appeal from the Full Federal Court’s decision.  The taxpayer argued that $600,300 paid to the Victorian State Government for 16 gaming machine entitlements (GMEs) to use in an integrated hotel business in Daylesford was an outgoing on revenue account and deductible under section 8-1 of the Income Tax Assessment Act 1997.  The Commissioner argued the payments made for the GMEs were on capital account as they were payments for GMEs which were a capital asset and not deductible under section 8-1.  The High Court found for the Commissioner and also found the payments were also not deductible over five years under the ‘black-hole’ provisions in section 40-880.

AAT’s decision

At first instance before the Administrative Appeals Tribunal (AAT) (Pagone J), the taxpayer was successful in arguing payments made for the GMEs were deductible in full in the relevant income years they were incurred (these payments had been made via quarterly instalments over 6 years) because they could be categorised more like a revenue fee paid for the regular conduct of the hotel business rather than acquisition of a permanent or enduring capital asset.  Pagone J found there was no intrinsic economic value to the GMEs other then the income stream expected from its use.  While obiter, Pagone J however also found the payments could not be deducted over 5 years as a capital deduction under section 40-880 as the amount paid enhanced (and did not merely preserve) the value of goodwill of the business and fell within an exclusion to that section. 

The Commissioner appealed to the Full Federal Court.

Full Federal Court’s decision

A majority of the Full Federal Court (Greenwood ACJ and McKerracher J) agreed with the AAT finding that the payments made for the GMEs were deductible under section 8-1.  The Full Court found whilst there were factors to suggest the outgoings were capital in nature what was crucial was they were incurred in relation to an ongoing integrated hotel business including gaming and were intended to preserve revenue from gaming and the contribution of this revenue on the revenue of other aspects of the business.  Contrary to the AAT, the view of the majority was section 40-880 did apply as the outgoings in relation to the GMEs was incurred to preserve the value of goodwill of the business even if the value of goodwill was ultimately enhanced.  Thawley J (dissenting) found the outgoings in relation to the GMEs were not deductible as the payments for the GMEs represented the purchase price of the GMEs and the GMEs were a capital asset.  Thawley J also found section 40-880 did not apply.

The Commissioner was successful in seeking special leave from the High Court to appeal the Full Federal Court’s decision.

High Court’s decision

Noting Thawley J’s dissenting judgement in the Full Federal Court, in relation to the question of what was the correct categorisation of the outgoings in relation to the GMEs the High Court said:

Thawley J was correct that the GMEs were a capital asset of enduring value acquired by the Trustee as the means of production necessary for the Trustee to conduct gaming activities in the period following expiration of the Trustee's arrangements with Tattersall's. It was not to the point that the Trustee intended to recoup the purchase price of the GMEs over time out of every day's trading. It was not to the point that the purchase price of the GMEs may have reflected the economic value of the income stream expected to be derived from gaming. It was not to the point that the Trustee's hotel business was an integrated business which would have been significantly prejudiced and possibly failed if the Trustee had not purchased the GMEs. And it was not to the point that the reason the Trustee determined to acquire the GMEs was the change in the law that made it necessary for a venue operator to own GMEs rather than dealing through Tattersall's. The Trustee's purpose in paying the purchase price of the GMEs was to acquire, hold and deploy the GMEs as enduring assets of the hotel business for the purpose of generating income from gaming. There can be no question that the purchase price was incurred on capital account.

Applying the previous High Court decisions of Hallstroms Pty Ltd v FCT [1938] HCA 73 and Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337, the High Court held the test of whether an outgoing is incurred on revenue or capital account depends on the advantage sought and obtained and consideration of the manner in which it is to be used, whether the acquisition is either a once-and-for-all outgoing for something of enduring advantage or a periodic outlay to cover the use and enjoyment of something for periods commensurate with those payments.  It was the nature of the once-and-for-all outgoing for the acquisition of an enduring asset being the GMEs that was crucial.

The High Court’s also held that section 40-880 did not have application because the GMEs were a kind of property and therefore a CGT asset so the purchase price for the GMEs could be brought to account in the first element of the CGT cost base of the GMEs and fell within an exclusion to section 40-880.

The High Court’s decision in Sharpcan reiterates the fundamental concepts in determining whether a payment is capital or revenue. While Sharpcan concerned GMEs, the same concepts need to be applied to other payments such as licence fees to conduct a business and whether those payments are capital or revenue amounts.

If you require more information in relation to the High Court’s decision in Sharpcan or require advice or assistance on understanding whether business outgoings are on either revenue or capital account please contact.

Sam Campbell
Senior Associate | Business Law
M +61 423 515 454 | T +61 3 9611 0135
E: scampbell@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au