Ron Jorgensen and Nicholas Dodds

Bad news for Victorian gaming operators – tax deduction for Gaming Machine Entitlement expenditure denied

Ron Jorgensen and Nicholas Dodds

October 16, 2019


The High Court has delivered bad news for Victorian gaming operators, today overturning previous decisions of the Administrative Appeals Tribunal and Federal Court that fees paid for gaming machine entitlements (GMEs) are a general deduction in full in the income year incurred, or, alternatively, able to be written off over 5 years as capital expenditure.


Prior to 13 July 2016, the ATO accepted that GME fees were a capital write off over 5 years, but 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 arising from the 2010 allocation of those GMEs.

The Administrative Appeals Tribunal in Sharpcan P/L v FCT [2017] AATA 2948 decided that the GME payments were deductible in full in the income year incurred, or, alternatively, over 5 years as capital expenditure write-off. 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 treatment.

High Court Decision

On 16 October 2019, the High Court in FCT v Sharpcan P/L [2019] HCA 36 unanimously held that GME payments were a capital asset and not deductible in the year incurred, nor over 5 years under the capital expenditure write-off in s 40-880 of the Income Tax Assessment Act 1997.

In doing so, the High Court has read down comments in BP Australia Ltd v FCT [1965] UKPCHCA 2 as ‘problematic’ and limited deductions to payments for a licence to use capital assets, rather than payments for acquisition of an ownership right.

Where to from here?

While the High Court’s decision denies gaming operators a deduction up front or over five years, gaming operators are nonetheless entitled to a capital loss on transfer or expiry of the 2010 allocation of GMEs on 16 August 2022. However, gaming operators may experience difficulties in utilising the capital loss against future capital gains without careful planning.

Those gaming operators that claimed the payments as a general tax deduction or 5 year capital expenditure write-off without a valid private ruling may have to repay those deductions, if the Commissioner is in time to amend their income tax returns.

Additionally, from 16 August 2022, GMEs for a 20-year term have been allocated. The 2022 GME payments arise under an amended process in the Gambling Regulation Amendment (Gaming Machine Arrangements) Act 2017 (Vic) and the Entitlement-Related Agreement. However, the fees incurred in acquiring 2022 GMEs retain the same capital characteristics, being payment to acquire a GME ownership right. With no change in the character of the rights, the High Court’s decision in Sharpcan will therefore apply to the allocated 2022 GMEs.

Gaming operators will therefore be unlikely to be entitled to a general tax deduction or 5 year capital expenditure write-off, but will be entitled to a capital loss on transfer or expiry of the 2022 GME on 15 August 2042.

However, given the fees paid to acquire the GMEs, this will represent a significant cash-flow issue for some gaming operators.

While the High Court decision concerned the tax treatment of the fees paid for Victorian GMEs, and is the product of the High Court’s consideration of the particular facts, law and arguments before the Court, there are similar GME regimes in other jurisdictions around Australia. Gaming operators in other jurisdictions should therefore consider the nature of the entitlements they have to conduct gaming activities, and, if necessary, seek appropriate legal advice.

The full text of the judgment is available here.