• Legal database
Legal database

JUPITERS LIMITED v DFC of T

Judges:
Dowsett J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2001] FCA 1869

Judgment date: 21 December 2001

Dowsett J

The appeal

1. The applicant operates casinos at the Gold Coast and in Brisbane. The Brisbane casino is located in a building commonly known as the ``Old Treasury Building'' and other nearby buildings, all owned by the State of Queensland (the ``State'') and collectively described hereafter as the ``Treasury Buildings''. The applicant occupies these buildings as lessee from the State. It holds a casino licence and a liquor licence in connection with them. The contractual arrangements in force between the State and the applicant oblige the latter to make ten annual payments of $7 million to the State, the first of which was made in the 1994-1995 tax year. It has claimed such payments as deductions in the tax years ending 30 June 1995 to 30 June 1999 inclusive. The respondent has

ATC 4024

disallowed these deductions. The applicant appeals from that decision.

Introduction

2. Although resolution of the appeal depends primarily upon a proper characterization of the contractual arrangements in force between the State and the applicant, a considerable amount of material has been tendered which demonstrates the circumstances in which the applicant acquired the Brisbane casino licence and associated assets. There is some dispute between the parties as to the relevance of these anterior circumstances for present purposes, but that question can be left for determination at a later stage.

Background

3. In April 1991 the State invited interested parties to make submissions for:

``... the total delivery of pre-design investigations, design, construction, fit-out, commissioning, financing and operation of proposed hotel-casino facilities.''

4. This casino was to be in Brisbane, and the operator was to enjoy a monopoly. Interested parties were advised that:

``The concept of `exclusivity' in terms of this document... may be defined simply as an agreement in which the State warrants that no other casino facility (as defined by the Casino Control Act) will be permitted within the area designated until the end of that exclusivity period.

Applicants are requested to undertake their feasibility studies on a period of exclusivity which they consider will be the absolute minimum period to establish a viable operation. The minimum period determined by the applicant in this respect should be clearly stated in the submission. The maximum ranges and periods of exclusivity that the Government intends to award have been identified in Part B of the Brief. These maximum exclusivity ranges and periods have been determined taking the two existing casino exclusivity arrangements into account.''

5. The existing casinos were in Townsville and on the Gold Coast, the latter being conducted by the applicant. The State had in mind three possible locations for the Brisbane casino. One involved the Treasury Buildings; the second was described as the ``Queensland Place'' site, situated between George Street and Roma Street, on the north side of the river and relatively close to the Treasury Buildings, both sites being in or near to the central business district. The third was the ``Southbank'' site, situated on the southern side of the river and away from the CBD. Part B of the invitation for submissions was in three parts, each relating to one of the three identified sites. I have been provided only with that part relating to the Treasury Buildings, the site eventually chosen. In that document, under the heading ``Tender'', the following passage appears:

``The Government has decided that the funds derived from the `up front' payment for the lease of the nominated site and the sale of the casino licence would be used to establish the Southbank Convention and Exhibition Centre. Although significant weight will be given to a submission with an offer for a high `up front' payment, Applicants should be cognisant of the other competing objectives enunciated in the General Requirements (ie Part A of the Brief to Applicants).''

6. Clearly, interested parties were to tender for a ``package'' which would include the right to occupy the chosen site, acquisition of an appropriate casino licence (and presumably a liquor licence) and a form of ``exclusivity'' or monopoly. The maximum period and range of exclusive operation was to be ten years for a distance of sixty kilometres from the chosen site which would be leased to the successful applicant for a maximum term of seventy-five years. The applicant, then called Jupiters Development Limited, submitted proposals with respect to all three sites. Its proposal for the Treasury Buildings included the following financial terms:

``Jupiters Development Limited is pleased to offer to the Government net cash payments totalling $105 million during the proposed exclusivity period of ten years following commencement of operations of the hotel/casino. This amount includes initial cash payments totalling $70 million. These payments would comprise: 

                

Premium for the lease                  $30 million (inclusive of all
                                       government duties and charges)
                                       to be paid upon the
                                       commencement of construction
                                       on site.

Security Deposit                       $40 million non-interest bearing
                                       deposit to be paid by Jupiters on
                                       commencement of construction
                                       on site and to be repaid by the
                                       Government in equal annual
                                       instalments over the ten year
                                       exclusivity period.

Ground rent                            $1 million per year for the 75
                                       year term.

Special rent                           $6 million per year for the first
                                       ten years.

Stamp duty on lease rentals @ 3.5%     $4.7 million

...

The special rent would be payable during the 10 year period of exclusivity and represents the additional value that the lease has to Jupiters Development Limited during the period of exclusivity. Both the ground rent and the special rent would commence on the date of commencement of operations (expected to be 1 July 1994).

The security deposit of $40 million is offered as a performance guarantee against the payment of the special and ground rentals by Jupiters Development Limited. The deposit would be non interest-bearing but would be repayable at the rate of $4 million per annum over the 10 years of exclusivity. These funds would be immediately available to the Government for use in funding the convention centre. It is proposed that for administrative ease, the timing of the payments coincide with the timing of the annul ground rental and special rental payments by Jupiters, thereby resulting in a net annual payment of $3 million being made to the Government.

The initial payment of $70 million, stamp duty of $4.7 million and net annual rentals (after repayment of the instalment on the security deposit) payable to the Government, could be applied to cover much of the development costs of the convention centre (excluding financing costs). Interest and other financing costs of the convention centre could be adequately funded from the gaming tax paid by the Brisbane casino estimated at $250 million in the first 5 years of operations.

As an alternative, Jupiters would be pleased to offer to the Government a `one-off' premium of $85 million inclusive of all Government charges and duties to be paid on commencement of construction works on site. Following this payment Jupiters would be awarded the lease of the site rent-free or at a nominal rental for the 75 year term.''

7. According to the submission:

  • ``Note: Rent to Government The net annual rental to be paid to the Government is $3 million and is calculated as follows: 
    - Ground Rent --    A rent of $1 million per annum for the lease of the site
                    will be payable annually to the Government over the 75
                    year term of the lease.

- Special Rent --   The special rental recognizes the additional value
                    which the proposed 10 year exclusivity provision would
                    bring to the lease. This rental has been quantified in
                    Jupiters offer at $6 million. The rent has been reduced
                    by the amount of the annual reduction to be made to the
                    $40 million security deposit, ie, $4 million per annum.
                    Thus the special rental is $2 million per annum.''

8. In the course of subsequent negotiations, the amounts offered under these various headings were increased, but the structure of the applicant's offer remained the same and was reflected in the agreement eventually entered into with the State. In the book which accompanied the submission, the following passage appears under the heading ``Exclusivity'':

``In framing our financial offer we have taken cognisance of the desire of Government for:

  • • a landmark property; and
  • • a substantial premium to assist the financing of a Brisbane convention and exhibition centre.

These two requirements compete as key elements of the total development cost.

Thus the success of the Brisbane casino for both the Government and the casino owner will be dependent on the balance between the:

  • • abovementioned total development cost;
  • • gaming elements within the development; and
  • • casino tax rate.

...

Against this background and to achieve the objectives of Government for a landmark property and a substantial premium, it will be necessary to assume no further casinos within the Sunshine-Gold Coast corridor over a 10 year period. Without such an assumption it is impossible to make meaningful revenue forecasts and to justify the development cost (including premium) to underwriters and bankers. Accordingly we have made reference to the wording in Section 2 of the Jupiters Casino Agreement Act, 1983 -

`Brisbane region' - means that area of the State of Queensland which is within a radius in any direction of one hundred and twenty (120) kilometres from the site, but excluding that area within the Gold Coast region.

In conclusion we propose that the exclusivity area be 120 kilometres from the Brisbane site, excluding Jupiters Casino on the Gold Coast. Assuming Brisbane operations commence in 1994, one year before Jupiters' Gold Coast 10 year exclusivity expires November (1994), JDL would upon the awarding of the Brisbane Casino licence, give consent to the above arrangement.''

9. As I have already observed the State's invitation for submissions stipulated a range of sixty kilometres. The applicant subsequently indicated that it was agreeable to that proposal. It made similarly structured submissions with respect to both Queensland Place and Southbank. The actual documents do not appear in the material, but there are drafts amongst the applicant's Board papers. Details of the Queensland Place offer were: 

``Premium for the lease  $35 million
Security deposit         $35 million
Ground rent              $1 million per year for the 75 year term
Special rent             $5 million per year for the first 10 years
Stamp duty on lease      $4.4 million''
rentals at 3.5%

ATC 4027

For Southbank the figures were: 

``Premium for the lease   $30 million
Security deposit          $20 million
Ground rent               $1 million per year for the 75 year term
Special rent              $3 million per year for the first 10 years
Stamp duty on lease       $3.7 million''
rentals at 3.5%

10. There were also one-off ``up front'' offers for both sites. I should point out that all proposals necessarily involved substantial redevelopment costs as well as the proposed payments to the State. The State was also to derive income from relevant taxes on the casino operation.

11. The submitting parties were subsequently asked to consider the impact on their offers of a period of exclusivity other than ten years ``say seven years or twelve years''. The applicant replied:

``Our financial offer to the Government has been determined by considering the potential earnings of the property during the exclusivity period, capitalising those earnings and discounting the resultant cash flow. This calculation does not incorporate the likelihood of a second casino opening in Brisbane immediately following the ten year exclusivity period. In determining the Offer to Government our presumption is that the Government would not contemplate the introduction of another casino into Brisbane unless unsatisfied demand for the casino product was so significant as to support the premise of another casino at that time. This condition is not supported by our market projection study.

On this basis we do not consider therefore that an increase in the exclusivity period would justify an increase in our Offer to Government.

If the intention of Government is to introduce a new casino into Brisbane at the conclusion of the 10 year exclusivity period, regardless of the size of the available market, the extension of the exclusivity period would have some value. However, if this were the intention, Jupiters' current Offer to Government would be materially reduced as a new Brisbane casino, unsupported by market demand, would have a substantial detrimental impact on the existing Brisbane casino.

Regarding a reduction in the exclusivity period from ten to seven years, as stated earlier, our market projections do not conclude that the Brisbane casino gaming market will support a second casino in that city for some time after the conclusion of the original ten year exclusivity period.

Therefore, a second casino introduced after seven years would materially impact the profitability of the original Brisbane casino and would result in the reduction of the offer which Jupiters Limited is able to make to Government.''

12. On 10 February 1992 the applicant was advised that its Treasury Buildings and Southbank submissions had been included on the short list for further consideration. The Queensland Place submission had not been so included. In the course of subsequent negotiations the applicant raised the amounts of the payments proposed for both sites. It seems that the Treasury Buildings proposal was expected to be the more profitable of the two. (AB 1228-9) The applicant was anxious to appear to be willing to proceed with either proposal, whilst demonstrating a preference for the Treasury Buildings. In May 1992 the relevant inter-departmental committee adopted the applicant's Treasury Buildings submission as the preferred proposal. By this time, the offer was relevantly as follows: 

``Premium for the lease   $45 million
Security deposit          $50 million
Ground rent               $1 million
Special rent              $7 million
Stamp duty                $5.1 million''

Negotiations continued, and drafting of documentation commenced.

ATC 4028

Board minutes, papers, correspondence and other non- contractual documents

13. Board minutes and supporting papers give some indication of the approach taken by the applicant in framing its offers. Minutes of a meeting on 26 September 1991 disclose that the criteria by which the offer for each site was assessed were:

  • ``• Internal rate of return not appreciably less than 25%;
  • • Earnings per share Jupiters Limited, whilst falling in the first year of operations at Brisbane, to approximate the pre-Brisbane EPS (earnings per share) level by the second year;
  • • The NPV (net present value) of the cash flows to the Government expressed as at 1 July, 1991 to exceed $50 million.''

I have inserted my understanding of the meanings of the abbreviations ``EPS'' and ``NPV''. In a Board paper dated 18 September 1991, it was observed that:

``The Offer to Government has been structured as follows:

  • • A lease premium (inclusive of all Government duties and charges) in the form of a one-off cash payment to be paid upon the commencement of construction on site.
  • • A non-interest bearing deposit to be paid to the Government as security for the ground and special rentals listed below. The deposit would be paid upon the commencement of construction on site. The deposit would be repayable by the Government in equal annual instalments over the 10 year exclusivity period. It would be proposed to the Government that deposit repayments be timed to coincide with the annual ground and special rental payment by Jupiters so that only a net rental is paid.
  • • A ground rent of $1 million per year for the 75 year lease term commencing on the date of commencement of operations.
  • • A special rent payable during the period of exclusivity which represents the additional value that the lease has to Jupiters during the period of exclusivity. Rental payments would commence on the date of commencement of operations.

The specific amounts of lease premium, security deposit and special rent will vary depending on the site. An analysis of the offer for each site is attached with the analysis of profitability....''

14. There was then a comparison of the appropriate ``Accounting Treatment'' and ``Tax Treatment'' of the various outgoings. It was suggested that the payment of the security deposit should, for accounting purposes, be amortised over 75 years. The net amounts of special rent (ie after offset of the refund) were to be treated for accounting purposes, as expense items. The gross amount of each annual instalment of special rent (before offset) was to be treated as deductible for tax purposes. Amongst the briefing papers for a meeting on 16 March 1992 is a background paper which describes the ``Rationale behind the structure of the Offer'' as follows:

  • ``• The offer was structured in the above manner in order to provide the maximum return to Government for the minimum cost to Jupiters. The rental payments will be tax deductible to Jupiters whilst the expense will be recorded in the books of Jupiters net of repayment of the security deposit. The security deposit will be capitalized into the total cost of the development for accounting purposes.
  • • The alternative cash offer was pitched at a level which provided the government with approximately the same NPV as the detailed offer and with only minor reductions in Jupiters earnings per share (EPS).
  • • The offer for each of the three sites was similarly structured although the quantum for the premium, deposits and rentals varied depending on the profitability of each project.''

15. In a letter dated 2 September 1999 from the applicant to the respondent, the applicant responded to an inquiry as to the different treatment of the security deposit and the special rental for accounting and tax purposes. The writer said of an advice received from accountants, Arthur Andersen:

``Enclosed is a copy of the only external taxation advice received by Jupiters in respect of the structure of the Brisbane Casino bid. We note that this document is subject to professional adviser's privilege. We have elected to waive this privilege to

ATC 4029

dispel the misconception you appear to have that the bid arose out of a `tax effective structure' developed by Arthur Andersen. The advice was obtained after Jupiters had developed the two proposals focusing on its expected pre-tax rates of return. These proposals had been put before the State Government prior to the receipt of the advice and it was obtained merely to clarify the correct tax treatment of each of the proposals before the bid was finalized. Although one of the bid alternatives was more favourable from Jupiters' tax perspective than the other, the decision as to which proposal was accepted was a matter for the State Government and was not in any way influenced by Jupiters' tax position.''

16. It was also said that:

``... the security deposit has been capitalized as deferred expenditure (ie an asset) on the basis that this payment formed part of Jupiters' overall submission to the Government that resulted in Jupiters' being awarded the Brisbane casino licence. As the benefits under the Brisbane casino licence will be derived over the term of that licence, the security deposit is being amortised to the profit and loss account over a period of 75 years.''

17. The letter disclosed that for tax purposes:

``The payment of the security deposit has been regarded as a payment of a capital nature and therefore, not deductible. Similarly, repayments by the Government of the security deposit are regarded as non- assessable receipts.''

18. I should mention one other matter. The applicant issued a prospectus dated 18 May 1993. In that document, the effect of the applicant's contractual relations with the State was outlined. At page 26 of that document, it was reported that the amount of $50 million was ``payable in respect of the Exclusivity Arrangements''. This was clearly a reference to the special rental. It is also of some importance that the proposed share issue was to fund the applicant's submission. (AB 201)

The contractual documentation

19. The State and the applicant entered into the ``Brisbane Casino Agreement'' (the ``agreement'') which has force of law pursuant to s 5 of the Brisbane Casino Agreement Act 1992 (Qld). That agreement contemplated a number of other documents being executed, including a financial agreement. It also contemplated the issue to the applicant of a permit to occupy the Treasury Buildings during the construction period, a special lease for the occupation of those premises thereafter, a casino licence and a special facility licence under the Liquor Act 1992 (Qld). It is presently relevant to draw attention to cl 75 which is the ``exclusivity'' provision, effectively providing the applicant with a gaming monopoly for ten years within a distance of sixty kilometres from the Treasury Building. Clauses 81, 82, 83 and 84 are also relevant. They deal with termination of the agreement, the permit to occupy and the special lease. Clause 74 fixes the rent payable pursuant to the special lease at $50 per annum ``and as otherwise prescribed under the Financial Agreement''.

20. As contemplated in the agreement, the applicant and the State entered into a financial agreement (the ``financial agreement''). It provides for the payment of the premium, the security deposit, the ground rental and the special rental, together with a payment in lieu of stamp duty. Relevant terms are defined as follows:

```Exclusivity Arrangements' means the exclusivity granted to Jupiters pursuant to clause 75 of the Brisbane Casino Agreement.

`Premium' means the sum of $45,100,000 payable by Jupiters to the State in connection with the issue of the Special Lease, the Casino Licence and the Special Facility Licence.

`Security Deposit' means the sum of $50,000,000 payable by Jupiters to the State on the terms of this agreement as security for payments to be made by Jupiters to the State hereunder.

`Special Rental' means the sum of $7 million per annum.''

21. Clause 2 provides for payment of the premium, and cl 3 provides for its refund in certain circumstances. In effect, the premium is to be refundable, in whole or in part, if the arrangements between the parties is terminated other than by way of valid termination by the State. In the latter case, the premium is presumably forfeited to the State. Clause 5 provides for the payment of the annual rental of

ATC 4030

$1 million ``in respect of the complex'', and clauses 6 and 7 provides as follows: 
``6. (a) In addition to the Annual Rental, Jupiters shall pay to the State
     the Special Rental in respect of each of the first 10 Rental Years
     of the term of the Special Lease. The Special Rental shall be
     paid by Jupiters to the State on the first day of each of the first
     10 Rental Years of the term of the Special Lease.

     (b) If the Exclusivity Arrangements cease to be valid and binding
     obligations of the State capable of being enforced by Jupiters
     against the State in accordance with their terms, at any time
     during the first 10 years of the Special Lease then the Special
     Rental shall no longer be payable and any instalment of Special
     Rental paid to the State in respect of the Rental Year in which
     the Exclusivity Arrangements cease to be valid and binding
     obligations of the State capable of being enforced by Jupiters
     against the State in accordance with their terms shall be
     refunded on a pro-rata basis by the State to Jupiters.

7. If the Special Lease is terminated for any reason whatsoever then the
obligation of Jupiters to pay the Annual Rental and the Special Rental
shall also be terminated with effect from the date of termination of the
Special Lease.''

22. Clauses 8 to 13 deal with the security deposit as follows:

``8. SECURITY DEPOSIT

Jupiters shall pay the Security Deposit to the State on the same day that the payment referred to in clause 2(b) is made to the State. The State acknowledges and agrees that it will at all times hold and deal with the Security Deposit in accordance with the provisions of this agreement.

9. SECURITY DEPOSIT NOT TO BEAR INTEREST

The Security Deposit shall not bear interest.

10. PERIODIC REFUND OF SECURITY DEPOSIT

The State shall, subject to clause 12, refund the Security Deposit to Jupiters by 10 instalments of $5,000,000 per annum. Such instalments shall be paid to Jupiters on the first day of each of the first 10 Rental Years of the term of the Special Lease.

11. SET OFF

Either party shall be entitled to set-off any amount payable by that party pursuant to this agreement on the first day of each Rental Year against any amount receivable by that party pursuant to this agreement on such date.

12. REFUND OF SECURITY DEPOSIT IF EXCLUSIVITY CEASED

If the Exclusivity Arrangements cease to be valid and binding obligations of the State capable of being enforced by Jupiters against the State in accordance with their terms, the State shall, subject to clause 13, refund to Jupiters an amount equivalent to the Security Deposit less any moneys previously paid to Jupiters by the State under clause 10.

13. NO OBLIGATION TO REFUND IN CERTAIN CIRCUMSTANCES

Notwithstanding any other provision of this Financial Agreement to the contrary, if:

  • (a) the Brisbane Casino Agreement, the Special Lease or the Casino Licence is validly terminated or cancelled by the State in accordance with the terms of the Brisbane Casino Agreement, the Special Lease or the Casino Control Act 1982; or
  • (b) the Permit to Occupy is validly terminated as a result of a breach of its terms by Jupiters,
  • ...

then the obligation of the State to refund the Security Deposit in accordance with clauses 10 and 12 hereof shall cease and the Security Deposit or so much thereof as shall not at the time of such termination or cancellation has (sic) been repaid by the State to Jupiters shall be retained by the State for its own use and benefit.''

23. The effect of clauses 6 and 7 is that the special rental is only payable for as long as:

  • • the exclusivity arrangements are enforceable; and
  • • the special lease is on foot.

24. The effect of clauses 10 to 12 is that the security deposit will only be refundable:

ATC 4031

  • • by scheduled repayments pursuant to cl 10; or
  • • if the exclusivity arrangements cease to be valid pursuant to cl 12.

25. Pursuant to cl 13, if the State validly terminates the agreement, the special lease or the casino licence, or if the permit to occupy is terminated for default by Jupiters, any unrefunded part of the security deposit is forfeited to the State. Whether this amounts to a penalty may be a matter for debate, particularly given the statutory nature of at least some of the contractual arrangements. However it suggests that the security deposit is more than security for payment of the annual and special rentals. Further, there is no provision for refund in the event of valid termination by the applicant. It may be, however, that such an eventuality cannot arise. Arguably, clauses 81 to 84 of the agreement deal exhaustively with termination. If so, termination by the applicant is only possible in the limited circumstances contemplated by clause 82, and those circumstances cannot now arise.

Oral evidence

26. Mr Carsley is the chief financial officer and company secretary of the applicant. He said that in practice, the amount of $8 million per year payable over the first ten years of the lease (annual rental $1 million, special rental $7 million) has been ``expensed through the profit and loss account in the amount of $3.7 million with the balance of $4.3 million being `capitalized' in recognition of the enduring benefit that the special rent provided to Jupiters.'' These amounts are approximate.

27. Mark John Corgat is the group finance manager of the applicant. He also gave evidence concerning the accounting treatment of the payments of annual and special rental, pointing out that the two ``extremes'' of treatment would be to apportion the total amount of all payments over the total seventy- five years of the lease or alternatively, to apply the amounts as provided by the financial agreement, that is $8 million per annum for each of the first ten years and $1 million per annum for the other sixty-five years of the term. He considered that neither of these extremes would

``... adequately give effect to accounting standard AASB1008 and the requirement to expense the rent payments to reflect the pattern of use of the relevant economic benefits. In any given situation, the assessment of the pattern of use of the relevant economic benefits is a matter for professional judgement dependent on the particular facts and circumstances and expectations about future events.''

28. He said that the applicant had adopted an accounting method which apportioned annual and special rental as follows:

  • For the first 10 years - $3.67 million per annum - $36.7 million
  • For the remaining 65 years - $1.67 million per annum - $108.3 million

29. Again, the figures are approximate. They total $145 million, the total of annual rental and special rental payable under the financial agreement. In effect, so much of the special rental as was paid in advance has been amortised over the whole period of the lease at the rate of approximately $.67 million per annum. The annual rental and so much of the special rental as was actually paid in each year (after set off of the refund) have been attributed to the year in question. Mr Corgat had no independent knowledge of how the figures were calculated. He said of the ten year exclusivity period that there would be greater use by Jupiters

``... of the economic benefits of the Special Lease in the first 10 years than in the subsequent years. This arises from the State's undertaking... not to issue another casino licence within 60 kilometres of the Brisbane property during that 10 year period. The 10 year exclusivity period gives Jupiters an opportunity to establish and consolidate a reputation as a quality provider of gaming, hospitality and entertainment services... which would continue to give it an advantage over any new operator after the exclusivity period expired. This approach justifies a higher rental expense being recognised in the initial 10 year period together with some continuing recognition over the remaining period of the Special Lease.''

The assessments

30. In each of the relevant tax years the applicant has claimed as a deduction, the $7 million paid as special rental. The respondent has disallowed these claims. For the tax years ending 30 June 1995, 1996 and 1997 the

ATC 4032

claimed deduction was pursuant to subs 51(1) of the 1936 Act. For the years ending 30 June 1998 and 1999, the claims were pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth). It is common ground that notwithstanding differences in expression, the provisions have similar meanings. Subsection 51(1) provides:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

31. Section 8-1 provides:

``(1) You can deduct from your assessable income any loss or outgoing to the extent that:

  • (a) it is incurred in gaining or producing your assessable income; or
  • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

  • (a) it is a loss or outgoing of capital, or of a capital nature; or
  • (b) it is a loss or outgoing of a private or domestic nature; or
  • (c) it is incurred in relation to gaining or producing your exempt income; or
  • (d) a provision of this Act prevents you from deducting it.

(3) A loss or outgoing that you can deduct under this section is called a general deduction .''

32. The relevant question is whether or not each claimed deduction was an allowable deduction for the purposes of subs 51(1) or a general deduction for the purposes of s 8-1. The applicant has submitted that the claims are for amounts paid as rental for commercial premises and that, according to general principles, such payments are deductible. The respondent has submitted that the payments were not relevantly deductible for two reasons, namely:

  • ``(a) the `special rent' is in reality akin to a compulsory extraction proposed by the Queensland Government to extract a share of the applicant's profits made rather than a cost incurred in the process of derivation of income; or
  • (b) the `special rent' is an outgoing of a capital nature in that:
    • (i) it is paid for advantage of exclusivity or freedom from competition; and
    • (ii) the `special rent' of $7,000,000 is paid as to $5,000,000 in each of the ten years of exclusivity granted to the Applicant pursuant to clause 75 of the Brisbane Casino Agreement as part of the security deposit of $50,000,000 payable up front pursuant to clause 8 of the Financial Agreement between the State of Queensland the Applicant made the 6th day of May 1993.''

33. It is fair to say, however, that the respondent has focussed in argument upon the second of these reasons.

Conclusiveness of contractual characterization of payments

34. The test prescribed by subs 51(1) and s 8-1 involves two aspects. The first is that the particular loss or outgoing be incurred in gaining or producing assessable income or be necessarily incurred in carrying on a business for the purpose of gaining or producing such income. The second test relevantly requires that the loss or outgoing not be of capital or of a capital nature. The applicant argued that because the respondent has not sought to allege fiscal sham or to rely upon the tax avoidance provisions of the legislation, it necessarily follows that as the parties to the financial agreement characterized the payments as ``special rental'', they should be treated as such for tax purposes. It was asserted that authority for this proposition is to be found in the decisions of the Full Court of this Court in
FC of T v Broken Hill Pty Co Ltd 2000 ATC 4659 at 4667 [31-32]; (2000) 179 ALR 593 at pars 31 and 32 (per Hill J) and in
JB Chandler Investment Co Ltd & Anor v FC of T 93 ATC 5182; (1993) 47 FCR 588. In the former case, Hill J made it clear that there may be cases in which it will be necessary to go outside contractual rights and obligations in order to

ATC 4033

``find the true character of the outgoing'' (ATC 4667 [31]; ALR par 31). As to JB Chandler the point in issue there was the effect of an earlier decision of the Court in
FC of T v Cooling 90 ATC 4472; (1990) 22 FCR 42. In Cooling, Hill J had said at ATC 4482; FCR 53:

``When one looks at the entire context in which the payment was made... his Honour was, in my view, entitled to find as he did that the payment was an incentive to the firm to cause it to move rather than a payment for services to be rendered by the firm. This being the case, the character of the payment as income is not to be determined by focusing upon the words of (a particular letter) to the exclusion of all the circumstances surrounding the payment which provide the real context in which the task of characterisation is to be assayed.''

35. In JB Chandler, Gummow J said of that proposition (at ATC 5184; FCR 591):

``What was decided in Cooling is no support for the proposition that where the circumstances show that what appears to be a formal written agreement between the parties represents a bargain hammered out in negotiations, the terms of the agreement are to be disregarded in determining the revenue or other character of payments made pursuant to the agreement. In the present case, the surrounding circumstances supported rather than gainsaid the proposition that, as indicated on its face, cl 19 represented that which the parties were prepared to accept as their bargain.''

36. Hill J said (at ATC 5189-5191; FCR 598-599):

``... In (Cooling), upon which the appellants relied, I expressed the view that the decision of the House of Lords in
IRC v Duke of Westminster [1936] AC 1, did not require the conclusion that in determining the legal effect of a contract between parties and the characterisation of payments made under such a contract as being income or capital, regard could not be had to the whole factual matrix of which the contract formed part. The context in which that view was expressed was a submission by counsel for the taxpayer that the trial judge in Cooling had not been entitled to hold on the facts of that case that a payment made by a property developer to a firm of solicitors was a payment by way of incentive to the firm to move to new premises.

...

... But to accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in the case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intentions of the parties to it.

...

I would, with respect, adopt..., what was said by Brennan J in Federal Coke, in a passage approved by this Court in
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365 at 4369-4370; (1989) 26 FCR 288 at 309:

`When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received.'''

37. Apparently contradicting the applicant's submission is the decision of the Full Court in
Rotherwood Pty Ltd v FC of T 96 ATC 4203 at 4212-4213; (1996) 64 FCR 313 at 324, where Lee J said:

``Where a sum paid or received is described as the consideration for a contract, the description applied to the sum by the parties to the contract is to be given some weight but it does not follow that the character of the payment as made by the payer, or as

ATC 4034

received by the payee, is determined by that description....

That is not to say that the process of characterisation permits documents recording or describing the payment made or received to be disregarded as if the transaction recorded therein were a sham. What is said is that the Court is required to look at the circumstances as a whole and not restrict itself to consideration of the form of a document in which the payment is recorded or the words chosen by the parties to describe the payment....''

38. A number of other cases to which I will refer seem to adopt the approach adopted by Lee J. Careful reading of JB Chandler discloses no inconsistency of approach. Gummow J said only that the terms of the agreement between the parties were not to be ``disregarded'' in determining the revenue or other character of payments made pursuant to an agreement. Hill J said that parties negotiating at arm's length who reach agreement as to the consideration for a particular payment cannot be gainsaid by reference to surrounding circumstances, save where the agreement is a sham. In the present case the respondent does not challenge the assertion that the special rental was payable for the exclusivity arrangements as appears both from the financial agreement and from the extraneous documentation to which I have referred. The respondent rather challenges the assertion that, because the payments are described as rental and are payable annually over the first ten years of the lease, they should be treated for tax purposes as being of a revenue nature.

39. The legislation prescribes the relevant test. It does not look to the way in which the relevant parties have chosen to construct their dealings. It rather compels an inquiry as to whether losses or outgoings were incurred in gaining or producing the assessable income (a question of fact) and whether or not the relevant loss or outgoing was of a capital nature or otherwise (a question to be determined by reference to the facts of the case, including the terms of any agreement pursuant to which the loss or outgoing was incurred). The cases to which I will now refer demonstrate the proper approach.

The cases

40. It is convenient to commence my consideration of the authorities with the decision of Fullagar J (Kitto and Taylor JJ concurring) in
Colonial Mutual Life Assurance Society Limited v FC of T (1953) 10 ATD 274 at 283; (1953) 89 CLR 428 at 454. In that case the Just brothers had agreed to transfer to the appellant a piece of land adjoining other land already owned by it, in consideration of a promise by the appellant to pay to them, for a period of fifty years, an amount equal to 90 per cent of all rents, as and when received, from lessees or tenants of shops and a basement in a building to be erected on both blocks. A question arose as to whether or not payments so made by the appellant were deductible for tax purposes. At ATD 282; CLR 452 Fullagar J said:

``... But all that seems to me to matter for present purposes is that the moneys which the company has undertaken to pay are simply the price of the land which the company is purchasing from Just Brothers. This is made very clear by both documents, and whether the indebtedness of the company, as it accrues from time to time, is secured or unsecured seems irrelevant for present purposes.''

41. At ATD 283; CLR 454 his Honour continued:

``... The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. It does not indeed seem to me to be possible to say that they are incurred in the relevant sense in gaining or producing assessable income or in carrying on a business - any more than payment of a lump sum would have been so incurred if the purchase price had been a lump sum payable on transfer. The questions which commonly arise in this type of case are (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?''

ATC 4035

42. In
Sun Newspapers Limited and Associated Newspapers Limited v FC of T (1938) 61 CLR 337 the Court was concerned with an agreement whereby the taxpayers, Associated Newspapers Limited and Sun Newspapers Limited, paid a substantial sum to those proposing to produce a new newspaper, using assets previously used in publishing a newspaper which had been in competition with that published by the taxpayers. There was also a ``restraint of trade'' clause, restraining the relevant persons from being involved in the publication of a newspaper in Sydney or within 300 miles thereof for a period of three years. Certain plant was to be made available for use by the taxpayers if requested. A number of employees were to be taken over or provision made for them. The taxpayers claimed the amount paid as an allowable deduction but at first instance, Rich J held it to be an outgoing of a capital nature. On appeal Dixon J (as his Honour then was) said at 359 et seq:

``The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.... As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. But the practical application of such general notions is another matter. The basal difficulty in applying them lies in the fact that the extent, condition and efficiency of the profit- yielding subject is often as much the product of the course of operations as it is of a clear and definable outlay of work or money by way of establishment, replacement or enlargement. In the case of machinery, plant and other material objects, this is illustrated by the commonplace difficulty of saying what is maintenance and what are renewals to be referred to capital. But for the same or a like reason it is even harder to maintain the distinction in relation to the intangible elements forming so important a part of many profit-yielding subjects. For example, a profitable enterprise such as the sale of a patent medicine may depend almost entirely on advertisement. In the beginning the goodwill may have been established by a great initial outlay upon a widespread advertising campaign carried out upon a scale which it was not intended to maintain or repeat. The outlay might properly be considered to be of a capital nature. On the other hand the goodwill may have been gradually established by continual advertisement over a period of years growing in extent as it proved successful. In that case the expenditure upon advertising might be regarded as an ordinary business outgoing on account of revenue. More often than not an outlay of capital in establishing an organization or obtaining an asset of an intangible nature does not produce a permanent condition or advantage. Its effects are exhausted over a period of time. In such cases the commercial practice of writing off the expenditure against revenue over a term of years or making a reserve to replace exhausted capital lessens the importance of the contrast. But in the assessment of income for taxation purposes severe limitations are placed upon the application of such a practice, the allowance of which is exceptional.

In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made `once for all', and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a

ATC 4036

fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization or system or `profit-earning subject'. It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital.

...

But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison. As to the first it has been said it is not a question of recurring every year or every accounting period; but `the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all'.... By this I understand that the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.... Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure.

Again, the lasting character of the advantage is not necessarily a determining factor....

Again, the cases which distinguish between capital sums payable by instalments and periodical payments analogous to rent payable on revenue account illustrate the fact that rights and advantages of the same duration and nature may be the subject of recurrent payments which are referable to capital expenditure or income expenditure according to the true character of the consideration given, that is, whether on the one hand it is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing....

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 a periodical 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.''

43. His Honour then considered the facts of the case, observing at 364:

``In these circumstances I think that in principle the transaction must be regarded as strengthening and preserving the business organization or entity, the profit-yielding subject, and affecting the capital structure.''

44. Dixon J again considered this matter in
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190; (1946) 72 CLR 634. Although his Honour dissented in that case, his observations were clearly intended to be a restatement of those made in Sun Newspapers. They were referred to with apparent approval in
FC of T v South Australian Battery Makers Pty Ltd 78 ATC 4412 at 4419 and 4420-4421; (1977-1978) 140 CLR 645 at 659 and 661-662. Hallstroms concerned a claim to deduct legal costs and expenses incurred by the taxpayer in opposing an application by a trade competitor for renewal of a patent. In anticipation of its expiry, the taxpayer had incurred substantial expenditure in re-organization of its operation. At ATD 194; CLR 646-647 Dixon J said:

``... The truth is that, in excluding as deductions losses and outgoings of capital or of a capital nature, the income tax law took for its purposes a very general conception of accountancy, perhaps of economics, and left the particular application to be worked out, a thing which it thus became the business of the courts of law to do. The courts have proceeded with the task without, it is true, any very conspicuous attempt at analysis, but rather in the traditional way of stating what positive factor or factors in each given case led to a decision assigning the expenditure to capital or to income as the case might be. It is one thing to say that the presence among the circumstances of a case of a particular factor places the case within a specific legal category. It is another thing to infer that the absence of the same factor from some other case necessarily places that case outside the category and gives it an

ATC 4037

opposite description. But towards that kind of fallacy human reasoning constantly tends, and the decisions upon matters of capital and income contain much reasoning that is quite human. My own opinions, upon the question I have attempted to explain in Sun Newspapers... and I shall not restate them. I shall treat the passage to which I refer as incorporated in this judgment. Once more, however, I shall endeavour to apply what I conceive to be the principles that determine whether an outgoing is on account of capital or of revenue. As a prefatory remark it may be useful to recall the general consideration that the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.''

45. At ATD 196; CLR 648-649 his Honour continued:

``... What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The fact that, on the defeat of the application of the patentee for an extension, it was open to others as well as the company to set up as manufacturers of refrigerators embodying the invention was, compar- atively speaking, of little moment to the company. At worst it meant the risk of possible future competition with some additional manufacturer. What did matter was that the company should be enabled to place its business on a fresh foundation, by turning over to the production of a refrigerator according to the invention, and thus compete with the proprietor of the expired or expiring patent. It was for that purpose that the expenditure was incurred.''

46. In Battery Makers, the High Court was concerned with an agreement between the South Australian Housing Trust and a company associated with the taxpayer, pursuant to which the Trust agreed to construct a factory and office building on land owned by it, the company undertaking to lease the premises for a period of sixteen years. The agreement provided that the company should have an option to purchase the premises at any time during the term and that it might nominate any associated company to pay the price and take the transfer. The rent had been calculated by reference to the capital cost of the land and buildings. Shortly after executing the agreement the company assigned its interest in the lease to the taxpayer and caused the Trust to grant the option to purchase to another associated company. The taxpayer became lessee under a memorandum of lease and subsequently claimed rental payments as allowable deductions, which claim the Commissioner disallowed on the ground that such payments were, in part, outgoings of a capital nature. The Commissioner purported to apportion them. Gibbs ACJ referred to the judgment of Dixon CJ in Sun Newspapers and continued at 655:

``The real problem in the case is not to determine the character of the advantage sought, once it has been identified, but to decide what was the advantage sought by the taxpayer by making the payments. If the only advantage sought was the right to possession under the lease, and what was called `rent' really answered that description, clearly the outgoings were entirely of a revenue nature. If on the other hand one advantage sought by the outgoings was the acquisition of a capital asset (the land and buildings), the fact that the payments were called `rent' and were made periodically, would not necessarily prevent them from being in part outgoings of a capital nature...''

47. At 656-657 his Honour continued:

``I have said that in deciding whether outgoings made by a taxpayer are of a revenue or of a capital nature, it is necessary to consider `the character of the advantage sought'. In my opinion, in principle, that must mean the character of the advantage sought by the taxpayer for himself by making the outgoings. Of course, as I have already indicated, a taxpayer may derive an advantage if someone else, such as a subsidiary, acquires an asset. But the fact that someone else incidentally derives an advantage of a capital kind in which the

ATC 4038

taxpayer does not share is not enough to give the outgoings the character of capital.''

48. At 659 his Honour referred to Hallstrom and observed:

``In Hallstrom's case... it was known that advantage was sought by the taxpayer from the expenditure, and the question was whether an expenditure made to secure an advantage of that kind had the character of capital or income. In other words the question in dispute was not `What was the expenditure for?', but `Was the advantage, known to be sought by the expenditure of a capital or a revenue nature?'. It was held that in answering that question the nature of the advantage from a practical and business point of view had to be considered.''

49. Finally, at 660, Gibbs ACJ observed, concerning the case in question:

``The outgoings in the present case were genuinely made in payment of rent. The only advantage that the taxpayer sought or gained for itself by making the payments was that which it obtained as lessee under the lease.... That advantage was of a revenue character, namely the interest of a lessee, it was to be enjoyed in the ordinary way that such an interest is enjoyed, and it was to be obtained by periodical payments. The outgoings were not of a capital nature.''

50. I should also refer to a more recent decision of the High Court in
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413; (1989-1990) 170 CLR 124. That case primarily concerned the characterization of a receipt rather than an outgoing, but the Court observed, concerning outgoings (at ATC 4419-4420; CLR 137-138):

``The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid:...

... To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The factors relevant to the ascertainment of the character of a receipt of money are not necessarily the same as the factors relevant to the ascertainment of the character of its payment.''

51. In FC of T v Broken Hill Pty Co Ltd (supra), Hill J summarized the relevant test as follows (at ATC 4666 [27]; ALR par 27):

``In determining whether an outgoing falls for deductibility under s 51(1), it will be critical to determine what the outgoing is paid for. The significance of that question, which is directed to ascertaining the advantage sought to be obtained, is essential to the determination of the true characterisation of an outgoing....''

52. After referring to the decisions in Colonial Mutual and Hallstrom, his Honour referred to the decision in Battery Makers and observed (at par 30):

``... Gibbs CJ pointed out that two different questions were involved: the first, as in Colonial Mutual, was what the expenditure was for; the second, as in Hallstroms, once the first question had been answered, was whether the advantage sought by the expenditure was of a revenue nature. In the resolution of this second question, regard is often had to the oft-cited tests of Dixon J in Sun Newspapers....

There are cases, and the present in my opinion is such a case, where the question what the payment was for falls to be determined by reference to the legal obligations or rights for which it is paid, that is to say, the question can be answered by reference to the agreement which operates to create the obligation to pay.... There may be other cases where it is necessary to go outside the contractual rights and obligations acquired to find the true character of the outgoing....''

The present case

53. The applicant wished to extend its existing casino operation by acquiring the proposed Brisbane licence and associated assets. The State had indicated that the proposed new casino would be located upon

ATC 4039

one of three State-owned sites. Thus it was necessary that the applicant obtain the right to occupy one of those sites. The State invited proposals for an overall ``package'', including the right to occupy a relevant site and appropriate licences. In effect, interested parties were invited to tender for these assets which would be used in conjunction for a period of seventy-five years. They were also offered exclusivity for a period of up to ten years for a distance of sixty kilometres from the relevant site. The State indicated that it was particularly interested in obtaining a substantial ``up front'' payment to assist it in financing the construction of a convention centre.

54. The applicant appears to have formulated its offer by identifying the maximum amount it could afford to pay for the package without reducing earnings per share, other than in the short term. There was no question of valuing the individual assets in the conventional sense. It rather seems to have valued the overall package, having regard to its anticipated profitability. It was even willing to pay cash ``up front'' for the whole undertaking, with only nominal payments thereafter. The State rejected that option. Nevertheless, the applicant paid a substantial ``up front'' amount. All of this might suggest that the true nature of the transaction was simply a purchase of assets, with part of the price to be paid by instalments. However the respondent has not put its case in that way. It has rather focussed upon the special rental payable at the rate of $7 million per annum for the first ten years of the seventy- five year lease, which was in addition to the annual rental of $1 million and the further sum of $50 per annum payable pursuant to clause 74 of the agreement.

55. It is the applicant's case that the special rental should simply be treated as rent for commercial premises. The financial agreement does not expressly prescribe that special rental is payable in connection with the lease, other than to the extent that as much is inherent in the use of the word ``rental''. On the other hand, it expressly provides that the annual rental is payable ``in respect of the complex''. Nonetheless, cl 6 provides that special rental is to be paid ``in addition to the Annual Rental'' and ``in respect of each of the first ten rental years of the term of the special lease''. It is also true that pursuant to cl 7, termination of the special lease will terminate the obligation to pay special rental. Paragraph 6(b) stipulates that termination of the exclusivity arrangements will also result in cessation of the obligation to pay special rental and partial refund of the amount already paid.

56. The applicant submitted that the special rental represented ``the additional value that the lease has to Jupiters Development Limited during the period of exclusivity''. This submission assumes that the casino licence is peculiar to the site and that the site is therefore, in some way, unique. In a sense, this is true in that the agreement does not contemplate the possibility that the casino might be conducted elsewhere. However there was never any suggestion that the applicant might acquire the lease without the other assets, nor was there any suggestion that the ``rental'' (annual or special) was the subject of bargaining of the kind suggested by Gummow and Hill JJ in JB Chandler. It is clear that the special rental was consideration for the exclusivity arrangements. No doubt those arrangements increased the potential value to the applicant of all durable assets used in conducting the casino, including the lease. In the language used in the cases, the special rental was paid for the exclusivity arrangements. Any increase in the value of the special lease or any other asset was merely the result of the acquisition of the benefit of those arrangements.

57. I turn to the question of the nature of the exclusivity arrangements. There are two aspects of the evidence which are of special significance for present purposes. Firstly, it is clear that the applicant considered that it was likely to derive an ongoing benefit from the ten year exclusivity period, which benefit would extend beyond that period. This was the applicant's meaning when it observed that its offer was based upon the assumption that:

``The Government would not contemplate the introduction of another casino into Brisbane unless unsatisfied demand for the casino product was so significant as to support the premise of another casino at that time. This condition is not supported by our market projection study.

On this basis we do not consider therefore that an increase in the exclusivity period would justify an increase in our Offer to Government.

ATC 4040

If the intention of Government is to introduce a new casino into Brisbane at the conclusion of the 10 year exclusivity period, regardless of the size of the available market, the extension of the exclusivity period would have some value.''

58. It seems that the applicant expected to enjoy de facto exclusivity after the expiry of the ten year period, no doubt because its established position would make it difficult for a competitor to establish itself, given the perceived limit to the size of the market. The second relevant aspect, which really reflects the first, is the applicant's initial intention to treat the special rental for accounting purposes as being properly amortised over the full seventy- five year period of the lease, coupled with the actual treatment of that part which was paid in advance as the security deposit. This treatment suggests a belief that the exclusivity period would be of long-term benefit in the applicant's business. The exclusivity arrangements were not, in any sense, to be acquired or consumed on an annual basis over the ten year term. Strategic decisions were no doubt made, taking account of the certainty that there would be no competition for ten years and the expectation that there would be none for some time thereafter.

59. The price for acquisition of the rights associated with the exclusivity arrangements was substantially paid in advance. The mechanism for ``refunds'' to be ``set off'' against ``special rental'' does not conceal that fact. Even accepting at face value the assertion that those arrangements enhanced the value to the applicant of the leased premises, the fact still remains that the payments were made in order to acquire these rights. They no doubt enhanced the value of the applicant's undertaking. At the same time, the so-called security deposit was, for all practical purposes, lost to the applicant. These facts suggest the acquisition of a capital asset. That the acquisition of these assets was primarily financed by a share issue re-inforces that view.

60. As Dixon J said in Sun Newspapers at 364:

``In these circumstances I think that in principle the transaction must be regarded as strengthening and preserving the business organization or entity, the profit-yielding subject, and affecting the capital structure.''

61. I should add that I see no reason to treat the annual payments of the balance of the special rental as being in any way different for present purposes from the amount paid in advance. The appeal should be dismissed. I will hear submissions as to costs.

THE COURT ORDERS THAT:

1. The appeal be dismissed.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.