Commissioner of Taxation v Sharpcan Pty Ltd, [2019] HCA 36

The taxpayer had been receiving a percentage of the income derived from 18 gaming machines at its hotel premises. However, the licence of the gaming machine operator was not renewed due to a regulatory change that provided for gaming machine entitlements ("GMEs") to be allocated directly to gaming venue operators. Consequently, the taxpayer bid for and was allocated 18 GMEs permitting it to operate gaming machines at its premises for 10 years, arranging to pay the purchase price to the state government by instalments from 2010 through to 2016.

In finding that the $600,300 paid for the allocation of the 18 GMEs was a capital expenditure, and not an outgoing on revenue account that was deductible under s 8-1 of the Income Tax Assessment Act 1997(Cth), the Court stated (at paras. 33-34):

[T]he determination of whether an outgoing is incurred on capital account or revenue account depends on the nature and purpose of the outgoing: specifically, whether the outgoing is calculated to effect the acquisition of an enduring advantage to the business. And the identification of what (if anything) is to be acquired by an outgoing ultimately requires … a comparison of the expected structure of the business after the outgoing with the expected structure but for the outgoing, not with the structure before the outgoing. Other things being equal, it makes no difference whether the outlay has the effect of expanding the business or simply maintaining it at its present level. If a once-and-for-all payment is made for the acquisition of an asset of enduring advantage which, once acquired, forms part of the profit-earning structure of the business, the payment is incurred on capital account.

… It was necessary for the Trustee to purchase the GMEs in order to continue to carry on its business as it had done up to that point. But the purchase price was a once-and-for-all payment for the acquisition of an asset of enduring advantage – the 18 GMEs – which once acquired formed part of the profit-earning structure of the Trustee's business. It was incurred on capital account.

Before finding that the taxpayer’s expenditures for 10-year assignable gaming licences (“GMEs”), which it required in order to be permitted to continue using gaming machines on its hotel premises, were capital expenditures, the Court discussed the Citylink case ((2006) 228 CLR 1) in the following terms (at para. 21):

Citylink provides no support for the idea that the acquisition of the GMEs was not the acquisition of an asset of enduring advantage. As the majority in Citylink noted, the concession agreement there in issue was essentially a licence agreement "to use capital assets for the limited period of the concession". It followed, as the majority held, that concession fees under the agreement, which were payable semi-annually and calculated in part on the basis of revenue generated, were "periodic licence fees" for such use. They were not the purchase price for the acquisition of any enduring advantage, because the agreement did not confer any "permanent ownership rights" over the roads and lands which were the subject of the concession. Although the concession agreement was of 30 years' duration, that fact did not alter the character of the advantage sought by the fees payable under it.

Due to a regulatory change, a hotel owner which had been sharing in the revenues generated from 18 gaming machines on its premises was required to bid for 18 assignable gaming machine licences (“GMEs”) in order to be able to continue with the 18 machines, as a result of which it was allocated 18 GMEs that permitted it to operate gaming machines at its premises for 10 years.

After finding that the $600,300 payable in annual instalments to the state government for the allocation of the 18 GMEs was a capital expenditure, the Court went on to find that the expenditure was not deductible under s. 40-880 of the Income Tax Assessment Act 1997(Cth) as expenditure incurred to preserve but not enhance the value of goodwill in relation to a legal or equitable right whose value was solely attributable to its effect on goodwill, stating (at para. 52):

The majority erred in considering the effect on the goodwill of the integrated hotel business and … in conflating goodwill with the going concern value of the business. Here the GMEs were assets which could be individually identified and quantified in the accounts of the Trustee's business, which had a value quite apart from any contribution that they may have made to goodwill. That value resided in their capacity to generate gaming income and the fact that they could be sold and transferred to other venue operators, albeit subject to some restrictions and qualifications.

Before finding that the taxpayer’s expenditures for 10-year assignable gaming licences (“GMEs”), which it required in order to be permitted to continue using gaming machines on its hotel premises, were capital expenditures, the Court stated (at para. 49):

[T]he evidence … demonstrated that the Trustee was motivated to purchase the GMEs by the realisation that it could not continue to carry on its gaming business unless it did so. Motive, however, is different from purpose. [T]he motive for a person's conduct is the person's reason for engaging in it. By contrast, the purpose of a person's conduct is the end that is sought to be accomplished by it. Here, although it may be accepted that the Trustee's motive for purchasing the GMEs was that the Trustee wished to continue to carry on its gaming business as it had done up to that point, the end that the Trustee subjectively sought to accomplish in outlaying the purchase price of the 18 GMEs, and thus the subjective purpose of the expenditure, was to acquire the 18 GMEs necessary to continue to trade. That was also the objective purpose of the outlay. Looked at objectively from a practical and business point of view, the purpose of paying the purchase price of the GMEs was to acquire the GMEs as an asset of the Trustee to be used in the course of the Trustee's hotel business.