Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013073025809

Date of advice: 13 October 2016

Ruling

Subject: Deductibility of gaming machine entitlement expenditure

Question 1

Is Discretionary Trust entitled to claim a deduction under section 40-880 of the ITAA1997 in respect of the gaming machine entitlement (GME) expenditure you incurred in the 20xx income year?

Answer

No.

Question 2

If the answer to Question 1 is 'Yes', does the Commissioner agree that Discretionary Trust has (as appropriate):

in respect of each income year in the Relevant Period (being the period beginning from the start of the 20xx income year through to the end of the 20yy income year) in respect of which the Commissioner has made an assessment?

Answer

Not applicable, as the answer to Question 1 is No.

Question 3

If the answer to both Questions 1 and 2 are 'Yes', does the Commissioner further agree that each (ultimate) beneficiary of Discretionary Trust has included an excessive amount of 'Net Income' in their assessable income for each distribution received during the Relevant Period, pursuant to section 97 of the ITAA 1997?

Answer

Not applicable, as the answer to Question 1 is 'No'.

Question 4

If the answer to Questions 1, 2 and 3 are all 'Yes', will the Commissioner agree to the amendment of either the Assessment (where the relevant period remains open) or Loss Schedule for each affected taxpayer?

Answer

Not applicable, as the answer to Questions 1 is 'No'

Question 5

If the answer to Question 4 is 'Yes' will the Commissioner exercise his discretion pursuant to section 14ZW(2) of the Taxation Administration Act 1953 (Cth)(TAA) to deal with any notice of Objection lodged by a beneficiary in respect of an Assessment raised during the Relevant Period as having been lodged with the Commissioner within the relevant period prescribed by section 14ZW of the TAA?

Answer

Not applicable, as Question 4 is not applicable.

Question 6

If the answer to Questions 1 to 4 are all 'Yes', but for Question 5 the answer is 'No', will the Commissioner allow the “out of time” amounts of the relevant GME deductions as amounts contributing to the cost base of each GME for CGT purposes?

Answer

Not applicable, as the answer to Question 1 is 'No'.

This ruling applies for the following periods:

Year ended 30 June 20VV

Year ended 30 June 20WW

Year ended 30 June 20XX

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commences on:

1 July 20UU.

Relevant facts and circumstances

Family Group runs family owned businesses that operate a number of licensed venues in a particular State.

Two gaming venues within the family group, Hotel A and Hotel B, both located in the particular State are operated by Discretionary Trust.

Discretionary Trust has beneficiaries that are other members of the Family Group.

Revenues from gaming machine operations

During the Relevant Period, of the total revenues generated by Discretionary Trust, the proportion that consisted of revenues associated with gaming machines increased significantly after the GME regime was introduced.

Gaming Machine Entitlements - legislative framework

The Gambling Regulation Act 2003 (X) (and Regulations) (together the Gambling Act) provides the regulatory framework under which gaming machines are permitted to be operated in the relevant state.

Under section 3.4A.1 of the Gambling Act the 'conduct of gaming' in an approved venue is lawful only if the venue operator holds a GME. The 'conduct of gaming' is defined in subsection 3.1.4(1) of the Gambling Act as:

The authority conferred by a GME is specified in section 3.4A.2 of the Gambling Act as follows:

Further, the Gambling Act gives broad powers to the Minister for Consumer Affairs, Gaming and Liquor Regulation and the relevant Commission for Gambling and Liquor Regulation to establish the conditions that must be satisfied in order to acquire GMEs and operate gaming machines.

Currently, to operate a gaming machine in the State, one must:

• hold a current club or hotel venue operator's licence;

• hold a GME;

• have access to approved premises;

• obtain gaming machines and gaming equipment;

• arrange for the gaming machines to be linked to the monitoring system;

• attach GMEs to approved premises;

• comply with all legislative and regulatory requirements.

Other features and restrictions of the GME regime include the following:

• no more than Y gaming machines can be operated in any one venue; and

Transfer of GMEs

Entitlements may be transferred or traded through a transfer scheme. The relevant regulation facilitates the transfer market process through the Entitlement Transfer Market (ETM) set up to allow venue operator licensees to advertise, monitor, request the transfer of entitlements or request amendments to entitlement conditions. Through the ETM, venue operators advertise their wish to transfer or buy one or more GMEs. The transfer of any GME will not be finalised until the relevant Regulation records the transfer on the ETM. Negotiations regarding the transfer may take place between an existing GME holder and an interested party prior to the transfer being finalised.

Discretionary Trust gaming activities before GME regime

Prior to 20xx, the Gambling Act provided that Tatts Group Limited (Tattersall's) and Tabcorp Holdings Limited (Tabcorp) were the sole holders of licences to operate gaming machines in the State.

Each of Tattersall's and Tabcorp held a 'gaming operator's licence' granted under the Gaming Machine Control Act 1991 (X) (Gaming Machine Control Act).

Under section 14 of the Gaming Machine Control Act, a gaming operator's licence authorised the holder:

The 'conduct of gaming' was defined in section 3 of the Gaming Machine Control Act as:

These licences were not transferable to any other person, nor was there an ability to sub-licence. Tabcorp's 'gaming operator's licence' was later replaced by a 'gaming licence' granted under the Gaming and Betting Act 1994 (X) (Gaming and Betting Act). The Gaming Machine Control Act and the Gaming and Betting Act were both later repealed and materially re-enacted in the Gambling Act.

Operators of licensed premises such as Discretionary Trust were able to obtain a 'venue operator's licence' which authorised them to operate an 'approved venue' in which gaming activities conducted by Tattersall's or Tabcorp could take place.

Hotel A

Discretionary Trust held a venue operator's licence which permitted gaming activities to take place at Hotel A. These licences later became Hotel Venue Operator's Licences granted under section 3.4.8 of the Gambling Act.

By way of the Venue Operator's Agreement entered into between Discretionary Trust and Tabcorp Manager Pty Ltd in 20xx gaming machines were installed by Tabcorp Manager Pty Ltd at Hotel A. The venue operator also agreed to collect the proceeds of gaming and deposit them into a trust account for the benefit of Tabcorp Manager Pty Ltd.

Discretionary Trust was entitled to retain X% of the GST exclusive net proceeds from gaming pursuant to section 136 of the Gaming Machine Control Act and the associated Gaming Machine Control (Returns by Gaming Operators) Regulations 2000.

Under the Venue Operator's Agreement, Discretionary Trust did not have the ability to vary the number of gaming machines without the consent of Tabcorp Manager Pty Ltd.

Under this arrangement, Discretionary Trust had a certain number of gaming machines at Hotel A.

Hotel B

On the contract date a contract for sale of business was executed between the Vendor and Discretionary Trust with respect to Hotel B. Completion of this contract was conditional on the Gaming Services Agreement (GSA) between Tabcorp Gaming Solutions Pty Ltd (Tabcorp) and Discretionary Trust being made on the relevant date. This enabled Discretionary Trust to operate a certain number of gaming machines from the completion date of the contract of sale to the license expiry date subsequent to which the GME regime commenced (see below).

For the avoidance of doubt, there was no Vendor's Operator's Agreement between Discretionary Trust and Tabcorp; rather the ability of Discretionary Trust to have gaming activities conducted at Hotel B was enabled by the GSA.

Change to the legislative framework

In 20xx, the Relevant Government announced the new GME regime whereby Tattersall's and Tabcorp would no longer exclusively hold their respective gaming operator's licence and gaming licence. Instead, GMEs would be issued to operators of approved venues permitting them to conduct gaming on approved gaming machines in their own right.

In May 20xx, the Relevant Government instituted a competitive auction process in respect of GMEs corresponding to the number of gaming machines operated state-wide under the gaming / gaming operator's licences then on issue. The existing licences held by Tattersall's and Tabcorp were allowed to expire and new entitlements, called GMEs, were offered with a maximum term of 10 years per GME. At the point in time at which these GMEs will expire, it is anticipated that a further auction process would take place.

Discretionary Trust participated in the auction and was successful in its bid to be allocated a certain number of GMEs for Hotel A and Hotel B.

As the holder of GMEs, venue operators are now entitled to all the proceeds (net of State taxes) of gaming conducted at their venue and are also responsible for the costs associated with the gaming machines.

Discretionary Trust acquired an additional number of GMEs in respect of the business carried on at Hotel B on 31 July 2015.

Discretionary Trust GME expenditure

In order to acquire GMEs in the May 20xx auction process, Discretionary Trust entered into an agreement with the State under which it was obliged to make certain payments to the State.

Payment terms for the GMEs were agreed to in an agreement which Discretionary Trust entered into with the Minister of the relevant State department on 1 June 20xx.

Under Clause 4.1 of the GME Payment Agreement, the venue operator must pay to the State all 'Allocation Amounts' which consist of a specified amount payable for each GME identified (as detailed in Schedule 1 of the said agreement) and represents the cost of each specific GME. The total 'Allocation Amounts' which must be paid to the State by Discretionary Trust are as follows:

Hotel A - $X

Hotel B - $Y

The total expenditure of $Z by Discretionary Trust is therefore an aggregation of the amount payable for each of the GMEs acquired by Hotel A and Hotel B.

Payment of the 'Allocation Amounts' were to be made in instalments. Under clause 4.1 of the GME Payment Agreement, 10% of the cost for each GME was payable on or before 5pm on the 28th day after the auction end, with another 10% payable on 16 August 20xx and the balance payable in quarterly instalments thereafter.

Discretionary Trust has not previously claimed any deductions for the expenditure incurred to acquire each GME under any provision of the income tax legislation, whether pursuant to section 40-880 of the ITAA 1997, or section 8-1 of the ITAA 1997, or otherwise

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-880

Income Tax Assessment Act 1997 Subsection 40-880(1)

Income Tax Assessment Act 1997 Subsection 40-880(2)

Income Tax Assessment Act 1997 Subsection 40-880(5)

Income Tax Assessment Act 1997 Paragraph 40-880(5)(a)

Income Tax Assessment Act 1997 Paragraph 40-880(5)(b)

Income Tax Assessment Act 1997 Paragraph 40-880(5)(d)

Income Tax Assessment Act 1997 Paragraph 40-880(5)(f)

Income Tax Assessment Act 1997 Subsection 40-880(6)

Income Tax Assessment Act 1997 Subsection 110-25(5)

Income Tax Assessment Act 1997 Subsection 110-25(5A)

All legislative references are to the ITAA 1997 unless otherwise stated.

Reasons for decision

DEDUCTION FOR BUSINESS RELATED COSTS - SECTION 40-880

Section 40-880

Under section 40-880, taxpayers are entitled to deduct certain business related capital expenditure, known as 'black hole' expenditure, provided certain conditions are met.

Subsections 40-880(1) and (2) state the following:

Object

Deduction

Incurred

Discretionary Trust incurred total expenditure of $Z to acquire a certain number of GMEs that it was allocated pursuant to the May 20xx auction process.

In relation to a business

The Commissioner accepts that Discretionary Trust carries on a business for a taxable purpose, comprising owning and operating Hotel A and Hotel B which are venues offering entertainment through gaming machines, liquor and dining.

As explained in paragraph 15 of Taxation Ruling TR 2011/6 Income Tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues, the expression 'in relation to' denotes the proximity required between the expenditure and the former, current or proposed business.

For capital expenditure to be 'in relation to' a business there must be a sufficient and relevant connection between the expenditure and the business. It is clear that the expenditure incurred on each of the GMEs is connected with the ongoing operation of the business of Hotel A and Hotel B. Therefore the Commissioner accepts that the expenditure was incurred 'in relation to' each business.

Capital expenditure

Expenditure is only deductible under section 40-880 if it is capital expenditure.

The primary authority in determining whether an amount of expenditure is capital in nature is Dixon J's statement in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 (the Sun Newspapers case) at 363:

Upon consideration of the factors in the Sun Newspapers case, the Commissioner considers the expenditure on the acquisition of each GME to be capital expenditure for the following reasons:

Character of advantage sought

According to paragraph 67 of TR 2011/6, the character of the advantage sought provides important direction and is the best guidance as to the nature of the expenditure as it says the most about the essential character of the expenditure itself. If the expenditure produces some asset or advantage of a lasting character for the benefit of the business it will be considered to be capital expenditure (British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 at 213-214).

The Commissioner considers that the essential character of the expenditure incurred to acquire each GME by Discretionary Trust secured an enduring benefit to its business; namely, for each GME, the right to operate a gaming machine in an approved venue for 10 years.

As to whether the GME is an enduring asset, the term 'enduring' was referred to by Rich J at page 547 in Herring v. FCT (1946) 72 CLR 543, who stated that:

The essential character of this advantage is structural and goes to the profit-yielding structure of the business, rather than the profit-making process. Each GME is part of the structure that is necessary for the earning of profit, and not the operation of the process to obtain regular returns by means of a regular outlay (as per Dixon, J in the Sun Newspapers case at CLR 359). This takes into account the fact that the rights secured by each GME are new additional rights Discretionary Trust did not possess before.

Prior to the acquisition of GMEs, Discretionary Trust was merely a venue operator which ran approved venues at which gaming was conducted. The gaming operator was in the case of Discretionary Trust, Tabcorp which along with Tattersall's were the only entities entitled to conduct gaming and receive gaming receipts.

As holders of the GMEs acquired in the 20xx income year, Discretionary Trust is now authorised to conduct gaming activities in their own right and directly receive gaming receipts. Without holding a GME, Discretionary Trust could not legally operate a gaming machine at its premises. Each GME held by Discretionary Trust enables it to operate one machine (and preclude someone else from holding that GME) and there are statutory caps on the number of GMEs that are issued to an operator of any given venue and to operators within a geographical region.

Discretionary Trust is now also free to vary the number of gaming machines they operate by way of sale or acquisition of one or more GMEs through the transfer scheme, subject to statutory limitations; this is another right Discretionary Trust previously did not possess. This right was exercised when Discretionary Trust acquired an additional number of GMEs in respect of the business carried on at Hotel B.

In consideration of the new rights and advantages now enjoyed by Discretionary Trust, the Commissioner considers that the expenditure goes to the profit-yielding structure of the business and is therefore capital expenditure.

Although an enduring benefit does not require that the taxpayer obtain an actual asset, the Commissioner considers that the expenditure here did in fact secure structural assets in the form of entitlements to operate gaming machines which are transferable - this is discussed in further detail as part of the exclusions to section 40-880 which follows after this section of the ruling.

The manner in which it is to be used

Each GME is a prerequisite for the operation of a gaming machine but is not actually used up in the operation of such activity (i.e. is part of the fixed, and not circulating capital). This indicates a relationship to the profit-yielding structure of the business (comprising the operation of a collection of gaming machines) and that the expenditure is capital.

The means adopted to obtain it

Each GME was obtained through a one-off auction in 20xx, involved the payment of money and secured an advantage lasting 10 years. After the initial incurrence of the expenditure to acquire a GME, no further expenditure will be incurred in relation to the continued holding of, and enjoyment of the privileges and rights conferred by, each GME.

Therefore, the outlay is in essence a once-off payment rather than periodical and supports the view that the expenditure is capital.

Summary of factors

In summary, the indicators discussed in the Sun Newspapers case point to the conclusion that the expenditure incurred on acquiring each GME is capital in nature.

The expenditure incurred in the 20xx income year in relation to each GME may be deductible under section 40-880 unless one of the exclusions in subsection 40-880(5) applies.

EXCLUSIONS TO DEDUCTIBLITY UNDER SECTION 40-880

Subsection 40-880(5) states as follows:

Depreciating asset exclusion - subsection 40-880(5)(a)

Under paragraph 40-880(5)(a), you cannot deduct expenditure under section 40-880 if it forms part of the cost base of a depreciating asset.

A depreciating asset is defined under subsection 40-30(1) as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. The definition excludes, amongst others, intangible assets except for those listed in subsection 40-30(2): paragraph 40-30(1)(c).

The Macquarie Dictionary Online defines an 'intangible asset' as follows:

The GME is considered to be an intangible asset as it has no physical form but it can be identified and given monetary value. However, GMEs are not intangible assets listed in subsection 40-30(2) and therefore are not depreciating assets as defined in subsection 40-30(1).

Therefore, the exclusion under paragraph 40-880(5)(a) does not apply and that subsection does not prevent the expenditure incurred on acquiring each GME from being deductible under section 40-880.

Deductible under a provision of this Act other than this section exclusion - paragraph 40-880(5)(b)

Under paragraph 40-880(5)(b), you cannot deduct expenditure under section 40-880 if it is deductible under a provision of the Act (which includes both the ITAA 1997 and the ITAA 1936) other than section 40-880. As the Commissioner has determined above, the expenditure incurred on acquiring each GME is capital in nature and so is excluded from the general deduction under section 8-1. The Commissioner considers there is no other provision of this Act under which the expenditure could be deductible, apart from section 40-880.

Therefore, the exclusion under paragraph 40-880(5)(b) does not apply and that subsection does not prevent the expenditure incurred on acquiring each GME from being deductible under section 40-880.

Lease or other legal/equitable right exclusion - paragraph 40-880(5)(d)

Under paragraph 40-880(5)(d), you cannot deduct expenditure under section 40-880 if it is 'in relation to a lease or other legal or equitable right'.

The expression 'in relation to a lease or other legal or equitable right' or any part of the expression is not defined in the legislation. Paragraph 40-880(5)(d) replicates the former paragraph 40-880(3)(d) that is now repealed.

In respect of paragraph 40-880(5)(d), paragraph 2.68 of the Explanatory Memorandum (EM) to Tax Laws Amendment (2006 Measures No. 1) Bill 2006 states:

Since that paragraph states that the exclusion contained in paragraph 40-880(5)(d) replicates that found in the repealed section 40-880, it is relevant to consider the repealed paragraph 40-880(3)(d). In discussing that exclusion, paragraph 3.67 of the EM to the Taxation Laws Amendment Bill (No. 5) 2002 stated:

It is therefore relevant to consider what 'leases and rights' were contemplated in the recommendations of the Review of Business Taxation in order to determine the intended scope of the phrase 'in relation to a lease or other legal or equitable right' in paragraph 40-880(5)(d) and former paragraph 40-880(3)(d).

The proposed review of the taxation of 'leases and rights' was discussed at pages 217-280 of the Review of Business Taxation, A Platform for Consultation, Discussion Paper 2 Volume I, February 1999. Specifically, at paragraph 8.1 on page 217, the following is stated:

What is a lease or right?

patents, copyright, and industrial designs;

• indefeasible rights of use over assets, such as telecommunication cables;

• contracts for services;

• restrictive covenants; and

• rights to receivables arising from 'rights' contracts, for example, lease receivables.

Paragraph 8.2 of the Discussion Paper then states that the paper deals with the following broad category of rights:

i) rights granted over the use of physical and intangible business assets;

ii) rights under financial transactions; and

iii) rights that are trading stock, such as software produced or developed for sale.

The broad categories together with the examples set out above indicate that relevant rights are proprietary rights, whether they are of, or against, the grantor of the right.

Therefore, it is expected that leases and rights of the sorts outlined above in the Discussion Paper would be excluded from deductibility under paragraph 40-880(5)(d).

The Commissioner notes that Discretionary Trust have conceded that paragraph 40-880(5)(d) could apply. The Commissioner considers that GMEs are rights which may come within the 'leases and or other legal or equitable rights' that were considered by the Review of Business Taxation. Specifically, the rights attached to a GME cover the use of a physical asset in the form of a gaming machine. Consequently, expenditure incurred on acquiring each GME is in relation to a lease or other legal or equitable right that is excluded from a deduction under section 40-880, pursuant to the exclusion in paragraph 40-880(5)(d).

In the alternative, the Commissioner considers that the expenditure incurred on acquiring each GME would be excluded from being deductible under section 40-880 by the exclusion in paragraph 40-880(5)(f) as explained further below.

Taken into account in working out the amount of a capital gain or capital loss from a CGT event exclusion - paragraph 40-880(5)(f)

Paragraph 40-880(5)(f) excludes expenditure from being deductible under section 40-880 if it could be taken into account in working out a capital gain or loss from any CGT event that may apply. Discretionary Trust concedes that the GME expenditure could also be excluded from deductibility under this paragraph.

Section 100-45 prescribes how to calculate the capital gain or loss for most CGT events. It broadly involves working out your capital proceeds from the CGT event and subtracting the cost base for the CGT asset from the capital proceeds. If the proceeds exceed the cost base, the difference is your capital gain. Otherwise, your capital loss is the excess of the reduced cost base over the capital proceeds. Therefore, a relevant expenditure could be taken into account in working out a capital gain or loss if it forms part of the cost base or reduced cost base of a CGT asset.

GME is a CGT asset

A 'CGT asset' is broadly defined in section 108-5 as 'any kind of property or a legal or equitable right that is not property'. There are a wide range of CGT events. Section 104-5 provides a summary of all the possible CGT events.

'Property' is not defined in the ITAA 1997 and it instead takes its ordinary legal meaning. The following description of 'property' by the Australian Law Reform Commission (Traditional Rights and Freedons - Encroachments by Commonwealth Laws (ALRC Interim Report 127), 3 August 2015) is a useful starting point:

In Yanner v. Eaton (1999) 201 CLR 351; [1999] HCA 53; (1999) 73 ALJR 1518, the High Court accepted that property refers not to a thing but to a description of a legal relationship with a thing; and, more specifically, to the degree of power that is recognised in law as permissibly exercised over the thing. There is neither a single test nor a single determinative factor for identifying a proprietary right. Courts have emphasised different characteristics in different circumstances. One formulation that has been applied in Australia is the 'Ainsworth test' (National Provincial Bank Ltd v. Ainsworth [1965] AC 1175) - which asks whether a right is definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree.

However, courts have also focused on factors such as excludability (whether it is possible to exclude others from the right in question), commercial value (whether something is treated in commerce as a valuable proprietary right), and enforceability of the right against third parties generally. Accordingly, in determining whether something amounts to property, it is necessary to weigh up a range of factors and to treat none as definitive.

Under Chapter 1 of the Gambling Act, a 'gaming machine entitlement' means an entitlement created under Part 4A of Chapter 3 of the Gambling Act. The authority conferred by a GME is specified in section 3.4A.2 of the Gambling Act. Under subsection 3.4A.2(1) of the Gambling Act, a GME authorises the venue operator that holds the GME to acquire approved gaming equipment and to conduct gaming on one approved gaming machine in an approved venue.

The 'conduct of gaming' is defined in section 3.1.4 of the Gambling Act to include the operation of gaming machines and the use or distribution of proceeds from the conduct of gaming.

GME is 'property'

It is considered that the GME is 'property' for the following reasons:

• definable, identifiable and capable of assumption by third parties: the rights attached to a GME as well as its duration, are defined specifically under the Gambling Act. Each GME is identifiable by a unique ID and each GME is also capable of being assigned or sold to third parties independent of the business, activity or operation conducted in respect of it. The Entitlements Transfer Register (ETR) contains a record of GMEs that have been transferred through the ETM.

• commercial value: based on recorded transfers on the ETR, a GME has commercial value on an active transfer market. The value of each GME is likely to reflect the potential profits that could be earned from acquiring and operating a gaming machine which is one of the rights a GME confers.

• akin to a taxi licence which has been held to be property: in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42; 98 ATC 4585 (Murry), the majority of the High Court (HC) held that a non-exclusive taxi licence is an item of property because it has economic potential and is capable of being sold or leased for reward to a third party independently of any business conducted in respect of it. The majority of the HC held that the value of the licence would no doubt reflect the profit that could be earned from commencing a business of the kind which the licence authorised. For similar reasons, it is considered that a GME should also be regarded as property.

GME is still a CGT asset even if it is not 'property'

However, even if the GME is not 'property', the GME is still a 'CGT asset' if it is a 'legal or equitable right that is not property' pursuant to section 108-5. There is little doubt that the GME is a statutory right that confers on the holder a bundle of legal rights including the right to conduct gaming (as defined in subsection 3.1.4(1) of the Gambling Act) on one gaming machine, albeit subject to meeting other conditions. The GME is therefore a 'legal or equitable right' and a CGT asset.

GMEs are not Goodwill but are a separate CGT asset

Goodwill is not defined in the ITAA 1997. In TR 1999/16: Income tax: capital gains: goodwill of a business, the Commissioner provides his view on what is meant by the goodwill of a business, based on the legal definition of goodwill as explained by the High Court in the Murry case.

Paragraph 12 of TR 1999/16 provides a useful summation of the meaning of goodwill:

The Commissioner considers that the expenditure incurred on acquiring the GMEs was not incurred to acquire goodwill but to acquire each individual GME. A mere right to enter a market was held in Murry [at 68] not to be goodwill or even a source of goodwill.

(emphasis added)

As explained in paragraphs 27 and 126 of TR 1999/16:

(emphasis added)

Therefore expenditure incurred on acquiring each GME did not result in the acquisition of goodwill; instead the expenditure will be included in the cost base of the GME as a separate CGT asset of the business carried on by Discretionary Trust.

CGT events that could happen to the GME

The relevant CGT events that can happen in relation to a GME are CGT event A1 and CGT event C2.

It must be noted that paragraph 40-880(5)(f) refers to expenditures that 'could' be taken into account. Paragraph 2.73 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 makes it clear that a capital gain or loss that has not yet been realised or is disregarded is still caught under the exclusion under paragraph 40-880(5)(f) such that the expenditure 'could…be taken into account in working out the amount of a capital gain or capital loss' from a CGT event.

Paragraph 2.73 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 states as follows:

(emphasis added)

Therefore, the expenditure to acquire the GME is capable of being taken into account under CGT events A1 or C2 and prima facie excluded under paragraph 40-880(5)(f), even though no GME has expired or been sold by Discretionary Trust to date.

CGT event A1 - disposal of a GME

Each GME is tradeable on the ETM. When a GME is traded, CGT event A1 'Disposal of a CGT asset' happens under section 104-10 as a result of the change of ownership that occurs from you to another entity. Under subsection 104-10(4), you make a capital gain from CGT event A1 if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Under section 110-25, the cost base of an asset consists of 5 elements. Under section 110-55, the reduced cost base of a CGT asset consists of the same 5 elements as the cost base (except the third one), but does not include the indexation of those elements.

Under subsection 110-25(2), the first element of the cost base is the total of the money you paid, or are required to pay, in respect of acquiring the CGT asset and the market value of any other property you gave, or are required to give, in respect of acquiring the CGT asset.

The 'Allocation Amount' that must be paid to the State in respect of each GME acquired is included in the first element of the cost base/reduced cost base of each GME. Therefore, the expenditure incurred to acquire each GME can be taken into account in working the capital gain or loss from any future disposal of the GME and as such will be excluded from being deductible under section 40-880 pursuant to paragraph 40-880(5)(f).

CGT event C2 - expiry of a GME

Alternatively, upon the expiry of each GME after the 10 year period, CGT event C2 'Cancellation, surrender and similar endings' happens under paragraph 104-25(1)(c).

Under subsection 104-25(1), CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a convertible interest - being converted.

(emphasis added)

As discussed above, GMEs are intangible assets. Given the GME has a specified life, CGT event C2 will happen to the GME at expiry, assuming it is not sold or forfeited earlier.

Under subsection 104-25(3), you make a capital gain from CGT event C2 if the capital proceeds from the ending of the intangible asset are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

As discussed above, the 'Allocation Amount' that must be paid to the State in respect of each GME acquired is included in the first element of the cost base and reduced cost base of each GME. Accordingly, the expenditure incurred to acquire each GME can be taken into account in working out the capital gain/loss from the expiry of each GME. Accordingly, expenditure incurred on acquiring each GME will be excluded from a deduction under section 40-880 pursuant to the exclusion in paragraph 40-880(5)(f).

Subsection 40-880(6) - an exception to the exclusions in subsection 40-880(5)

Subsection 40-880(6) states as follows:

Therefore, the exception in subsection 40-880(6) is satisfied if the following conditions are satisfied:

In relation to a legal or equitable right

As already discussed, in accordance with section 3.4A.2 of the Gambling Act, each GME confers (amongst other rights) the legal right to operate one gaming machine in an approved venue in the State. Therefore, the expenditure incurred on acquiring each GME is in relation to the acquisition of a legal or equitable right. Therefore condition (a) is satisfied.

Preserving, but not enhancing, the value of goodwill

To satisfy subsection 40-880(6), the essential character of the expenditure must be to preserve the value of goodwill and have that effect - this is clear because the expenditure cannot have the effect of enhancing goodwill and expenditure which has nothing to do with the value of goodwill will not satisfy subsection 40-880(6).

The test in subsection 40-880(6) is whether objectively, the essential character of the expenditure is to preserve the value of goodwill. The essential character test is appropriate given the context and objects of section 40-880 and the construction of subsection 40-880(6) the scope of which is intended to apply to expenditure of a very limited, prescribed nature.

While the ability to continue the businesses of Discretionary Trust depended, in part, on acquiring the GMEs, this does mean that the value of goodwill is preserved merely by the incurrence of the expenditure to acquire the GMEs; to do so would ignore the substance of the expenditure and the important rights inherent in the GMEs themselves. Taking a broad interpretation would permit effectively any business expenditure to fall within the scope of subsection 40-880(6), no matter how remote, since all business expenditure has a connection to the goodwill of the business ultimately. This is contrary to the provision's object which serves to relieve expenditure that does nothing else apart from preserving the value of goodwill of a business.

In the context of the character of the rights enjoyed by Discretionary Trust as a result of acquiring and holding each GME and how vastly different this is to rights they previously had before acquiring the GME, the Commissioner considers that the essential character of the relevant expenditure was directed at acquiring new assets in the form of GMEs, rather than being in relation to preserving the goodwill value of the Discretionary Trust's business. The expenditure was not directed at simply preserving the value of goodwill that emanated from combining the use of all the existing assets of the business. Rather it was expenditure that gave rise to a new set of rights and assets which Discretionary Trust did not previously own or enjoy.

Discretionary Trust makes the following contentions:

New and additional benefits under a GME

Firstly, the Commissioner would like to address these specific contentions:

The Commissioner's review of the legislative scheme that operated in the State's gaming industry prior to the introduction of the GME regime established that venue operators such as Discretionary Trust were not gaming operators but merely operators of approved gaming venues under a venue operator's licence. The gaming operator was instead Tattersall's or Tabcorp who were the only entities entitled to conduct gaming and receive gaming receipts.

As holders of the GMEs acquired in the 20xx income year, Discretionary Trust is now authorised to conduct gaming activities in their own right and directly receive gaming receipts. Without holding a GME, Discretionary Trust could not legally operate a gaming machine at its premises. Each GME confers the authority to Discretionary Trust to conduct gaming in its own venue and in its own right. The bundle of rights held by Discretionary Trust from holding its respective GMEs are substantially different to the limited rights it enjoyed under their prior contractual arrangement with Tabcorp.

As essentially the operators of gaming activities rather than merely the operators of a gaming venue at which someone else conducts gaming activities (as was the case prior to the GME regime commencing), Discretionary Trust became entitled (once the GME regime commenced) to all of the actual proceeds of gaming (net of State charges) rather than merely receiving a specified retained amount. As reflected in the amount of gaming revenues before and after the GME regime was introduced, revenues from gaming at Hotel A has increased significantly, albeit with rises in associated costs of the gaming equipment.

Critically, the GMEs are clearly severable and can each be individually traded and dealt with (they each have a unique serial number and price) and Discretionary Trust is (subject to statutory restrictions on the number of GMEs that can be held by any venue operator) at complete liberty to acquire additional gaming machines or reduce the number of gaming machines at their respective venue by acquiring or disposing of one or more GMEs. In contrast, under the Venue Operator's Agreement with respect to Hotel A, Discretionary Trust could only vary the number of machines with the consent of Tabcorp. An example of Discretionary Trust exercising this additional new right is its acquisition of an additional number of GMEs for Hotel B.

The Commissioner does not agree with Discretionary Trust's contentions that there has been no change to the day-to-day operations of the gaming business, and more importantly the contention that the GME did not confer any new or additional benefits to Discretionary Trust; on the contrary, it is clear that Discretionary Trust now holds in the form of a GME, a bundle of valuable rights they previously did not enjoy as mere holders of a venue operator's licence. Furthermore, the Commissioner does not accept that Discretionary Trust has satisfied the remaining condition in subsection 40-880(6) concerning the value of the right being solely attributable to the effect the right has on preserving goodwill value (if indeed any).

Solely attributable to the effect the right has on preserving goodwill

The Commissioner believes the words 'attributable' involves a relationship of cause and effect, similar to the interpretation of that word in Commissioner of Taxation v. Sun Alliance Pty Ltd (in liq) (2005) 225 CLR 488; [2005] HCA 70; ATC 4955; ATR 560.

The existence of the word 'solely' before 'attributable' requires a narrow nexus between the subject matters [the value of the right and the effect of the right on goodwill value]. The reference to 'solely attributable' implies that there can be no other objective reason, effect or purpose in incurring the expenditure and no other value attached to the right other than its effect on preserving goodwill value.

Therefore, the words 'solely attributable' preclude rights which have an inherent value. Support for this is found in the following extracts of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 which include clear references to the distinct objective or inherent value of the right.

(emphasis added)

This view is consistent with the view expressed in paragraph 317 of TR 2011/6:

(emphasis added)

The GME confers valuable statutory rights to the holder and are tradeable, if the holder so chooses, in a regulated transfer scheme. As discussed, the Commissioner considers that a GME is property, and if not property, then at least a valuable right that is not property. The Commissioner considers that the GME is an asset with an inherent value (reflecting the net present value of the expected future profits that can be derived from operating a gaming machine which the GME authorises for 10 years) which precludes it from being a right whose value is solely attributable to the effect the right has on preserving the goodwill value of a business. As a result, a deduction is not allowable for the cost of acquiring this distinct and valuable asset under section 40-880 as a business related cost since the expenditure does not represent a loss to the taxpayer.

Therefore the requirements in subsection 40-880(6) are not satisfied.

This is further confirmed by the addendum to TR 2011/6 on 13 July 2016 in which example 40A was inserted after paragraph 318 to illustrate the application of subsection 40-880(6) of the ITAA 1997 to an analogous factual scenario.

Example 40A

Subsections 110-25(5) and 110-25(5A)

Subsection 110-25(5) includes in the fourth element of the cost base of an asset capital expenditure incurred for the purpose or the expected effect of increasing or preserving the value of an asset.

However, subsection 110-25(5A) states that the fourth element of the cost base of an asset does not apply to 'capital expenditure incurred in relation to goodwill.'

Therefore, subsection 110-25(5A) operates to exclude from the fourth element of the cost base of an asset expenditure that has the purpose or the expected effect of increasing or preserving the value of goodwill.

Discretionary Trust contends that subsection 110-25(5A) supports their view that expenditure on acquiring the GMEs is deductible under section 40-880 because of the effect that subsection 110-25(5A) has in removing expenditure in relation to goodwill from the fourth element of the cost base, thereby mitigating the exclusion under paragraph 40-880(5)(f) that could otherwise apply to deny the deduction under section 40-880. Discretionary Trust contends that this treatment is supported by the subsection 40-880(6) exclusion.

Discretionary Trust has submitted that the expenditures on the GMEs were incurred in relation to preserving the goodwill of the businesses it operates. This is on the basis that its gaming related activities could not be carried on without acquiring the GMEs.

The Commissioner does not consider that the proper characterisation of the expenditure incurred on the acquisition of each GME resulted in the acquisition of any goodwill (as already discussed) or was in relation to preserving the goodwill of Discretionary Trust. Rather, it was expenditure incurred for the purpose of acquiring each GME which gave Discretionary Trust the right to conduct an activity (i.e. gaming) that it previously did not conduct. This right is in the form of a GME - a specifically identifiable asset with its own acquisition cost such that the expenditure incurred to acquire this right properly forms part of the first element of the cost base of this asset.

Therefore, neither subsections 110-25(5) nor 110-25(5A) can be relevantly engaged.

Black hole deductions - measure of last resort

The expenditure incurred on acquiring each GME will form part of the cost base of the GME as a CGT asset, upon either their disposal or expiration as the case may be. This result is consistent with the policy that the deduction under section 40-880 is for business capital expenditure that is not recognised in some way elsewhere in the tax law. This is reflected in both the objects of section 40-880 and throughout the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006:

The objects of section 40-880, as stated in subsection 40-880(1):

Paragraph 2.9 and 2.17 of the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 states:

(emphasis added)

Section 40-880 is a provision of last resort and priority is given to the treatment in other provisions of the tax law, as reflected in the list of exclusions under subsection 40-880(5). Accordingly, since the expenditure to acquire each GME is taken into account by the CGT provisions, a deduction under section 40-880 is not allowable.

Question 2

Summary

Not applicable, as the answer to Question 1 is No.

Question 3

Summary

Not applicable, as the answer to Question 1 is 'No'.

Question 4

Summary

Not applicable, as the answer to Questions 1 is 'No'

Question 5

Summary

Not applicable, as Question 4 is not applicable.

Question 6

Summary

Not applicable, as the answer to Question 1 is 'No'.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).