Ron Jorgensen and Nicholas Dodds

Deduction of Gaming Machine Entitlement Expenditure

Ron Jorgensen and Nicholas Dodds

March 27, 2019

Gaming

The Commissioner has successfully sought special leave to appeal the decision of the Full Federal Court in Sharpcan P/L [2018] FCAFC 163, which had confirmed that gaming machine entitlement fees are a general deduction in full in the income year incurred, or, alternatively, a capital deduction over 5 years.

Prior to 13 July 2016, the ATO accepted that gaming machine entitlement fees were a capital deduction over 5 years, but has subsequently treated the expenditure as non-deductible capital payments resulting in a capital loss on transfer or expiry of the entitlement (PBR 1012929236599; cf TR 2011/6A1).

The change adversely affected tax deductions and cash flow for some gaming operators for the 2010 auction and possibly for the current 2018 allocation payments.

The cases

At first instance, the Administrative Appeals Tribunal in Sharpcan P/L v FCT [2017] AATA 2948, constituted by Pagone J sitting as Deputy President) decided that gaming machine entitlement fees:

  1. were a general deduction in full when incurred, because it was more like a revenue fee paid for the regular conduct of a business than the acquisition of a permanent or enduring capital asset, had no intrinsic economic value other than the income stream expected from its use which reimbursed and justified the outlay, was diminished in value over time to nil and gave no exclusive rights (sec. 8-1 ITAA 1997 at [13] and [29]); or
  2. were not a capital deduction over 5 years, because the amount enhanced (and did not merely preserve) the value of goodwill by extending the length of the rights by 10 years and was not solely attributable to the effect that right had on goodwill, since the licence also effected the income stream expected to be derived from the conduct of the business (sec. 40-880(6) ITAA 1997 at [27] and [28]).

On appeal, the Full Federal Court in FCT v Sharpcan P/L [2018] FCAFC 163 (Greenwood ACJ and McKerracher J, with Thawley J dissenting) confirmed that gaming machine entitlement fees were allowable as a general deduction in full in the income year incurred, or alternatively were a capital deduction over 5 years.

There were factors which suggested the outgoing was in the nature of capital, but the facts that the outgoing was incurred in relation to an ongoing integrated hotel business including gaming, and to preserve revenues from gaming and the contribution of gaming activities on the revenue of other aspects of the hotel business, lead to the conclusion the outgoings are on revenue account and therefore allowable as general deductions under sec. 8-1 ITAA 1997 (at [185], [187] and [192]).

Alternatively, the outgoings were allowable as a capital deduction over 5 years because the capital expenditure was to preserve (but not enhance) the value of goodwill (as a composite phrase rather than disqualifying test) and was, contrary to the Tribunal decision, solely attributed to the effect that right had on goodwill (at [219], [220] and [254]).

The Commissioner subsequently sought, and on 20 March 2019 obtained, special leave to appeal to the High Court.

It is unclear whether the ATO will seek to limit the decision to gaming operators of an integrated hotel gaming business or gaming operators that did not increase the number of gaming machine entitlements in the event it is unsuccessful in its appeal to the High Court.

Next steps for gaming operators

In light of the grant of special leave to the ATO to appeal to the High Court of Australia, gaming operators may wish to amend or object to the 30 June 2012 income tax return to claim a general deduction for gaming machine entitlement fees and preserve their positions pending the outcome of the proceedings before the High Court, which are yet to be listed for final hearing.

If necessary, we consider the ATO (or the Tribunal) will, on application, likely extend the 4 year amendment or objection period (sec. 14ZX TAA 1953; PSLA 2003/7 at [1] & [4] – [5]; PSLA 2008/19 at [4]).