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This edited version has been archived due to the length of time since original publication.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: 1013034803181

Date of advice: 16 June 2016

Ruling

Subject: INCOME TAX- DEDUCTIONS - BLACK HOLE EXPENDITURE - SECTION 40-880

Question 1

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

Answer

No.

Question 2

If the answer to Question 1 is 'Yes', does the Commissioner agree that Family Trust and Unit Trust have (as appropriate):

a. calculated an excessive amount of 'Net Income', for the purposes of section 95 of the Income Tax Assessment Act 1936 (ITAA 1936); or

b. calculated a shortfall in respect of their carry forward taxation losses, for the purposes of Schedule 2F of the ITAA 1936,

in respect of each income year during the Relevant Period (being the period beginning from the start of the 20xx income year through to the end of the 20yy income year).

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 beneficiary of both Unit Trust and Family 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 1936?

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 relevant income tax assessment (where the relevant review period remains open) or the applicable losses schedule for each affected taxpayer?

Answer

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

Question 5

Alternatively, if the answer to Question 1 is 'No', is Family Trust and Unit Trust entitled to deduct their GME expenditure incurred in the 20xx income year from their assessable income, pursuant to section 8-1?

Answer

No.

Question 6

If the answer to Question 5 is 'Yes', does the Commissioner agree that Family Trust and Unit Trust have calculated an excessive amount of 'Net Income', for the purposes of section 95 of the ITAA 36, in respect of the 20xx income year?

Answer

Not applicable, as the answer to Question 5 is No.

Question 7

If the answer to both Questions 5 and 6 are 'Yes', does the Commissioner further agree that each beneficiary of both Unit Trust and Family Trust has included an excessive amount of 'Net Income' in their assessable income for each distribution received in the 20xx income year, pursuant to section 97 of the ITAA 1936?

Answer

Not applicable, as the answer to Question 5 is No.

Question 8

If the answer to Questions 5, 6 and 7 are all 'Yes', will the Commissioner agree to amend either the relevant income tax assessment (where the relevant review period remains open) or the applicable losses schedule for each affected taxpayer?

Answer

Not applicable, as the answer to Question 5 is No.

Question 9

If the answers to all of Questions 1 to 8 are 'No', is Family Trust and Unit Trust entitled to deduct their GME expenditure incurred in the 20xx income year under any other provision of the income taxation laws?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

Family Group runs family owned businesses that operate a number of licenced venues in a particular State. Each venue has been owned and operated by Family Group from prior to the 20xx income year to the present day.

The venues each operate a significant number of gaming machines. The operation of each gaming machine requires, among others, the relevant venue's operating entity to hold a valid GME issued by the relevant Government.

Family Trust is a discretionary trust that owns and operates the ABC Hotel, a venue consisting of hospitality, TAB, gaming machine, motel and reception centre operations.

Unit Trust is a unit trust that owns and operates the XYZ Tavern, a venue also consisting of hospitality, gaming machine, TAB and bottle shop operations.

The sole unit holder of XYZ Tavern is the ABC Trust which is a discretionary trust. The potential beneficiaries of ABC Trust include certain natural person members of the Family Group. The potential beneficiaries of Family Trust include other trusts within the Family Group, related companies and members of the Family Group family.

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:

(a) the management, use, supervision and operation of gaming equipment; and

(b) the sale, redemption or use of gaming tokens; and

(d) the use or distribution of proceeds from the conduct of gaming; and

(e) accounting, banking, storage and other acts in connection with or related or incidental to gaming and the conduct of gaming.

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

(1) A gaming machine entitlement authorises the venue operator that holds the entitlement, subject to this Act, any related agreement referred to in section 3.4A.6 or 3.4A.6A and any conditions to which the entitlement is subject-

(a) to acquire approved gaming machines and restricted components; and

(b) to conduct gaming on one approved gaming machine in an approved venue operated by the venue operator; and

(2) A gaming machine entitlement does not authorise the entitlement holder to engage in any business by way of-

(a) manufacture of gaming machines or restricted components; or

(b) supply of approved gaming machines or restricted components to any person; or

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;

• employ staff who hold valid Gaming Industry Employee licences to perform the prescribed duties; and

• comply with all legislative and regulatory requirements.

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

• the total number of gaming machines that can be operated in the State is 27,500. Therefore up to 27,500 GMEs in total can be made available to venue operators;

• no more than 105 gaming machines can be operated in any one venue; and

• each GME authorises a venue operator to operate one gaming machine for a period of 10 years.

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.

Family Group gaming activities before GME regime

Prior to May 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 to:

(a) to obtain……approved gaming machines and restricted components; and

(b) to manufacture approved gaming machines and restricted components; and

(d) to conduct gaming at an approved venue; and

(e) to sell or dispose of gaming equipment with the approval of the Commission; and

(f) to service, repair or maintain gaming equipment through the services of licenced technicians; and

(g) to do all things necessarily incidental to carrying on the activities authorised by this section.

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

(a) the management, use, supervision and operation of gaming equipment; and

(b) the sale, redemption or use of gaming tokens; and

(d) the use or distribution of proceeds from the conduct of gaming; and

(e) accounting, banking, storage and other acts in connection with or related or incidental to gaming and the conduct of gaming.

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 Family Trust and Unit 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. The trustee of each of Family Trust and Unit Trust held a venue operator's licence which permitted gaming activities to take place at their respective venues. These licences later became Hotel Venue Operator's Licences granted under section 3.4.8 of the Gambling Act.

By way of the respective Venue Operator's Agreement entered into with Tattersall's in 19zz (in respect of the XYZ Tavern) and 19vv (in respect of the ABC Hotel), gaming machines were installed at both venues. The venue operators also agreed to collect the proceeds of gaming and deposit them into a trust account for the benefit of Tattersall's. As part of the arrangement, venue operators were entitled to retain 25% 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, neither the XYZ Tavern nor the ABC Hotel had the ability to vary the number of gaming machines without the consent of Tattersall's.

Under this arrangement, Unit Trust had a certain number of gaming machines operating at its XYZ Tavern while Family Trust had a certain number of gaming machines at its ABC Hotel.

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.

Family Trust and Unit Trust were successful in their bids to be allocated a GME for each of the gaming machines already operating at their respective venues in accordance with their respective Venue Operator's Agreement.

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.

No GME has been acquired or disposed of since that time by the Family Group.

Family Group GME expenditure

In order to acquire the GMEs in the May 20xx auction process, Family Trust and Unit Trust each entered into agreements with the State under which they were obliged to make certain payments to the State.

Payment terms for the GMEs were agreed to in an agreement under which Unit Trust and Family Trust each entered into with the Minister for Gaming of Relevant in May 20xx.

Under Clause 4.1 of each GME Payment Agreement, each 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 each of the Trusts is as follows:

• Family Trust - $X; and

• Unit Trust -$Y.

The total expenditure of $Z by the Family Group is therefore an aggregation of the amount payable for each of the GMEs acquired by Family Trust and Unit Trust.

Payments 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 28^th day after the auction end, with another 10% payable at a later date and the balance payable in quarterly instalments thereafter.

Family Trust and Unit Trust have 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.

Family Trust and Unit Trust have both recorded GMEs as intangible assets in their financial statements and amortised the assets over their effective lives for accounting purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2)

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)

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

40-880(1) The object of this section is to make certain business capital expenditure deductible over 5 years if:

(a) the expenditure is not otherwise taken into account;

(b) a deduction is not denied by some other provision; and

Deduction

40-880(2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur:

(a) in relation to your business; or

(b) in relation to a business that used to be carried on; or

(d) to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.

(emphasis added)

Incurred

The Commissioner accepts that the expenditure in relation to the GMEs was incurred in the 20xx income year. In Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions, the Commissioner's view of the meaning of the term 'incurred' is set out. Under paragraph 5 of the ruling, you broadly incur an outgoing at the time you owe a present money debt that you cannot escape. The Commissioner accepts that based on the following agreements entered into by the Trusts with the Relevant Government, an obligation to pay for the GMEs was created late May 20xx (the date the contracts were executed):

• Entitlement Related Agreement for Venues; and

• Entitlement Related Agreement for Payment (Hotel Entitlements).

Therefore, the following expenditure in relation to the GMEs was incurred in the 20xx income year, notwithstanding that the payments were allowed to be made in instalments extending beyond the 20xx income year:

• Family Trust: $X; and

• Unit Trust: $Y.

In relation to a business

The Commissioner also accepts that each of the Trusts carry on a business for a taxable purpose, comprising owning and operating the ABC Hotel and XYZ Tavern which are venues offering hospitality (including food, drink and accommodation where relevant), TAB and gaming machines.

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 intimately connected with the ongoing operation of the business of the ABC Hotel and XYZ Tavern. 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:

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 periodic 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.

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 the Trusts secured an enduring benefit to their businesses; 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:

by enduring it is not meant that the asset or advantage should last forever. It is a matter of degree and only one element to be considered.

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 the Trusts did not possess before.

Prior to the acquisition of GMEs, the Trusts were merely venue operators who ran approved venues at which gaming was conducted. The gaming operator was in the case of the Trusts, Tattersall's who, along with Tabcorp, were the only entities entitled to conduct gaming and receive gaming receipts. As holders of the GMEs acquired in the 20xx income year, the Trusts are now authorised to conduct gaming activities in their own right and directly receive gaming receipts. Without holding a GME, neither Trust could legally operate a gaming machine at their premises.

Each GME held by the Trusts enables the holder 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. The Trusts are 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 the Trusts previously did not possess. In consideration of the new rights and advantages now enjoyed by the Trusts, 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 a significant amount 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 (even though it is paid in instalments) 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:

You cannot deduct anything under this section for an amount of expenditure you incur to the extent that:

(a) It forms part of the cost of a depreciating asset that you hold, used to hold or will hold; or

(b) You can deduct an amount for it under a provision of this Act other than this section; or

(d) It is in relation to a lease or other legal or equitable right; or

(e) Not relevant

(f) It could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event

(g) Not relevant

(h) Not relevant

(i) Not relevant

(j) Not relevant

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). 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:

This exclusion replicates that found in the repealed section 40-880, having been added in 2002 in the context of the Government's review of the treatment of expenditure incurred on leases or other legal or equitable rights. The 2005-06 Budget announced that the Government would take a case-by-case approach in relation to the taxation of rights.

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:

The Government is reviewing the treatment of expenditure incurred in relation to leases or other legal or equitable rights as part of the consideration of the recommendations of the Review of Business Taxation. The appropriate income tax treatment of capital expenditure incurred in relation to these leases and rights will be determined as part of that review. Consequently, capital expenditure on leases or other legal or equitable rights will be excluded from deduction under section 40-880. For example, expenditure representing lease surrender payments incurred in closing down your business will not be deductible under section 40-880.

(emphasis added)

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?

Leases and rights are essentially arrangements for transferring some or all of the benefits of ownership of an asset from the owner to the recipient of the lease or right. The following kinds of rights contracts are covered by the discussion:

• leasing and similar contracts which provide rights over physical assets, for example, leases of equipment;

• contracts giving rights over intangible assets, such as spectrum licences and rights in films, patents, copyright, and industrial designs;

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

• profits á prendre, that is, a right to take a product such as standing timber from another person's land;

• 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 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, and also constitute intangible business assets that are similar in nature to the contracts giving rights over intangible assets identified in the Discussion Paper. 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.

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.

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

'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 Freedoms - Encroachments by Commonwealth Laws (ALRC Interim Report 127), 3 August 2015)) is a useful starting point:

The term 'property' is used in common and some legal parlance to describe types of property that is both real and personal. 'Real' property encompasses interests in land and fixtures or structures upon the land. 'Personal' property encompasses tangible or 'corporeal' things-chattels or goods. It also includes certain intangible or 'incorporeal' legal rights, also known in law as 'choses in action', such as copyright and other intellectual property rights, shares in a corporation, beneficial rights in trust property, rights in superannuation and some contractual rights, including, for example, many debts. Intangible rights are created by law. Tangible things exist independently of law but law governs rights of ownership and possession in them-including whether they can be 'owned' at all.

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.

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:

Where an amount can be taken into account in working out a capital gain or loss from a CGT event, it is not deductible. A capital gain or loss that has not yet been realised or where the capital gain or loss is disregarded (eg, because it is a pre-CGT asset) or reduced is excluded from deduction under section 40-880 by paragraph 40-880(5)(f). An amount is not taken into account in working out a capital gain or loss if the expenditure cannot be included in the cost base or reduced cost base of the asset (eg, expenses related to the sale of a CGT asset that falls through)……

(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 the Trusts 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

(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)

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

Noun an asset, such as a patent, copyright, brand name, etc., which has no physical properties but which can be identified, given a monetary value, and therefore recorded on a balance sheet

The GME is considered to be an intangible asset as it has no physical form but it can be identified and given monetary value.

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. Therefore, the expenditure incurred to acquire each GME can be taken into account in working out the (likely) capital 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).

Goodwill

Goodwill is a CGT asset that upon disposal can give rise to CGT event A1. Expenditure incurred to acquire goodwill is included in the first element of the cost base of goodwill.

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 199/16 provides a useful summation of the meaning of goodwill:

…goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible item of property that is legally distinct from the sources from which it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated.

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.

"…a licence that authorises the conduct of a business is not a source of goodwill….A taxi licence therefore is simply an item of property whose value is not dependent on the present existence of a business. It is not and does not contain any element of goodwill."

(emphasis added)

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

27: Goodwill is one CGT asset separate and distinct from other assets of the business such as plant, licences (whether exclusive or non-exclusive), statutory permits, quotas, entitlements, valuable contractual rights and items of intellectual property (for example, a trademark, patent, copyright or registered design).

126: The cost base of goodwill does not include the cost base of other assets of a business…

(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 each of the Trusts.

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.

The Family Group have submitted that the expenditures on the GMEs were incurred in relation to preserving the goodwill of the businesses operated by the Trusts. This is on the basis that their gaming related activities could not be carried on without acquiring the GMEs. The Family Group contend 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.

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 the Trusts. Rather, it was expenditure incurred for the purpose of acquiring each GME which gave the Trusts 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.

This is also the appropriate characterisation of the expenditure under the underlying asset approach (see TR 95/35: income tax: capital gains: treatment of compensation receipts). Under this approach, the relevant underlying asset here is the GME (together with the rights embodied in the GME), not goodwill, and the essential character of the expenditure in question here is expenditure incurred to acquire the GME, not expenditure to increase or preserve goodwill value. Therefore, neither subsections 110-25(5) nor 110-25(5A) can be relevantly engaged.

Further, subsection 110-25(5A) does not have the effect of preventing expenditure to acquire a CGT asset from forming part of the first element of the cost base of an asset (and consequently being excluded from deductibility under section 40-880 by paragraph 40-880(5)(f)); it merely prevents expenditure incurred in relation to goodwill from forming part of the fourth element of the cost base of an asset in order to ensure the expenditure is still eligible for the more concessional treatment under section 40-880. However, this is always subject to the condition that the expenditure is otherwise deductible under section 40-880 which is made clear in the EM to Tax Laws Amendment (2006 Measures No.1) Bill 2006 which introduced subsection 110-25(5A), at paragraph 2.144 where it states:

The fourth change is that the element does not apply to capital expenditure incurred in relation to goodwill. A consequence of this exclusion is that expenditure in relation to goodwill already attracting deductibility over five years does not receive less generous CGT treatment by reason of the enlargement of the fourth element.

(emphasis added)

This means that the interaction between subsection 110-25(5A) and section 40-880 allows a section 40-880 relief for a prescribed type of expenditure, being expenditure that preserves the value of goodwill, where the other conditions of 40-880 are otherwise satisfied (or in other words, where no other limb of section 40-880 otherwise operates to deny a section 40-880 deduction).

Therefore, the types of expenditures contemplated by subsection 110-25(5A) are those that merely preserve goodwill value and are not prevented from being deductible because of another condition elsewhere in section 40-880. This would exclude instances where other valuable CGT assets are acquired, the acquisition cost of which is a CGT first element cost base which is in fact excluded in accordance with paragraph 40-880(5)(f).

Therefore on the basis that expenditure incurred on acquiring each GME forms part of the first element of the cost base of the GME, it is not deductible under section 40-880 and subsections 110-25(5) and accordingly, 110-25(5A), are not relevant.

The expenditure is then only deductible if the exception under subsection 40-880(6) applies.

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

Subsection 40-880(6) states as follows:

The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill.

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

(a) the expenditure is in relation to a legal or equitable right;

(b) the expenditure is incurred to preserve, but not enhance, the value of goodwill; and

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

The Family Group makes the following contentions:

• the GME only provides for the continuity of its gaming businesses;

• there has been no change to the day-to-day operations of the gaming businesses;

• obtaining the GMEs did not confer any new or additional benefit to the Trusts or their businesses;

• the GME expenditure was for the sole purpose of preserving the value of the goodwill of its gaming businesses;

• but for the successful acquisition of the GME, the Trusts could not carry on their gaming businesses and all goodwill referable to the gaming businesses would be lost; and

• the GME expenditure has not enhanced the value of the goodwill of the gaming businesses in any way.

New and additional benefits under a GME

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

• that the GME only provides for the continuity of its gaming businesses;

• that there has been no change to the day-to-day operations of the gaming businesses; and

• that obtaining the GMEs did not confer any new or additional benefit to the Trusts or their businesses.

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 Family Trust and Unit Trust were not gaming operators but were merely operators of approved gaming venues under a venue operator's licence.

The specific Venue Operator's Agreements between Tattersall's and the Trusts, as gaming operators and venue operators respectively, did not create a relationship of agency nor was there a sub-licensing of the gaming licence which in any event appears not permissible under the prevailing legislation. Rather, the agreements simply provided for an arrangement for the installation of gaming machines at the venues and the collection of gaming receipts on behalf of Tattersall's.

Each GME confers the authority to the respective holder Trust to conduct gaming in its own venue and in its own right. The bundle of rights held by the Trusts from holding their respective GMEs are substantially different to the limited rights the Trusts enjoyed under their prior contractual arrangement with Tattersall's.

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), the Trusts 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. Revenues from gaming in both venues have 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 the Trusts are (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 Agreements, the Trusts could only vary the number of machines with the consent of Tattersall's.

Upon the acquisition of the GME, the venue operators effectively became gaming operators, authorised to conduct gaming at their own venues, including accessing the direct receipt of gaming proceeds. Therefore, the Commissioner does not agree with the Family Group'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 the respective holder Trust; on the contrary, it is clear that the respective 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.

Preserving the value of goodwill

The concept and meaning of goodwill has briefly been discussed in the context of subsection 110-25(5A). 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. It is also consistent with the 'underlying asset' approach (see TR 95/35: income tax: capital gains: treatment of compensation receipts) which focuses on the substance/reality of the relevant matter or transaction. The Commissioner considers that the expenditure on each GME was incurred to acquire a specific identifiable asset i.e. the right to operate a gaming machine, and not to preserve the value of goodwill (being the attractive force of custom arising from carrying on the business as a whole).

While the ability to continue the businesses of the Trusts 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 each 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 Trusts' respective business. The expenditure simply was not directed at preserving the value of goodwill that emanated from combining the use of all the existing assets of the business of the Trusts, rather it was expenditure that gave rise to a new set of rights and assets which each Trust did not previously own or enjoy.

There is no evidence that the respective Trust paid the State a single undivided amount to ensure that it was granted entitlements to the same total number of gaming machines at its venue; rather, the total expenditure incurred by each Trust is an aggregation of the individual cost to acquire each GME. The expenditure reflected the number of entitlements and machines the Trusts wanted to acquire and operate as gaming operators in their own right, rather than being expenditure directed at continuing its existing business which was only as a venue operator.

In summary, the Commissioner does not accept that the essential character of the expenditure is directed solely at preserving the value of the goodwill of the Trusts. Furthermore, the Commissioner does not accept that the Trusts have each 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). This is explained further below.

The value to you of the right is solely attributable to the effect that the right has on goodwill

For the exception under subsection 40-880(6) to apply, the Commissioner must also be satisfied that the 'value to you of the right is solely attributable to the effect that the right has on goodwill.' When read in its context, the effect that the right has can only be to preserve the value of goodwill, if the operation of subsection 40-880(6) is to be engaged.

The 'you' referred to in subsection 40-880(6) refers to each of the Trusts which have incurred the expenditure.

The Commissioner believes that there are two components to this last requirement in subsection 40-880(6), namely:

(a) what is the value of a right to a taxpayer; and

(b) is the value of the right to the taxpayer solely attributable to the effect the right has on preserving goodwill.

Value to you of the right

In considering the value of a right to a taxpayer, the Commissioner considers that this involves a consideration of the objective value of the right, rather than the subjective value of the right in the mind of the taxpayer. While the Commissioner accepts that the 'value to you' concept has regard to your intention of how you will realise that value, in this case, through holding the GME in order to operate a gaming machine in your own right, rather than through selling it, the meaning of 'value to you' cannot be completely devoid of all objectivity. Nor does 'value to you' preclude the consideration of market value if there is one. A GME confers the right to operate a gaming machine and has a value to you (through use as opposed to through sale) that reflects the net present value of the future profits that you expect to derive from operating the gaming machine as authorised by the GME for the life of the entitlement (this is consistent with what the High Court held in Murry as cited earlier).

The Commissioner does not regard the words 'value to you' in section 40-898(6) as having the effect that the value of the right can only be subjectively determined by the taxpayer. 'Value to you' is not to be interpreted as 'value according to you', 'value in your mind' or 'value to you and you alone' but rather 'value to you or someone in a similar situation to you'.

The expression 'value to you' is required in the context of subsection 40-880(6) because rights which merely preserve the goodwill value attaching to a taxpayer's business can only ever have value to the taxpayer carrying on the business and no one else. They are rights that have no distinct or inherent value other than preserving the goodwill value of a business. Therefore, the term 'value to you' is used essentially to overcome the limitation of the absence of a market for the type of right that falls within the scope of subsection 40-880(6).

The Commissioner notes that the expression 'value to you' is used in section 15-2 of the ITAA 1997 and in the former paragraph 26(e) of the ITAA 1936. However, the use of the expression in that particular instance is of limited significance to the interpretation of subsection 40-880(6) which is worded differently and arises in a completely different context. Whereas the former paragraph 26(e) relates to the determination of whether there is a benefit given, granted or allowed to the taxpayer whose value has to be determined, subsection 40-880(6) is about providing relief as a black hole deduction for certain expenditures that do no more than preserve the value of the goodwill of a business. The context is entirely different and adopting the interpretation under one provision for the purpose of interpreting another is inappropriate and is of limited practical use.

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 which include clear references to the distinct objective or inherent value of the right.

2.70 Expenditure is deductible where it is incurred in relation to a least or other legal or equitable right, and the value of the expenditure to the taxpayer arises solely from the effect that the right has in preserving, but not enhancing, the value of goodwill. For example, capital expenditure may be incurred in relation to a right that is both unlimited in duration, and which merely prevents goodwill from being damaged. Such a right has no distinct value in itself. Its value lies in the effect its existence has upon the value of the goodwill. Such expenditure represents in substance a black hole expense even though it is in relation to an asset.

2.71 Where a taxpayer incurs an expense in relation to a right and that right enhances the value of the goodwill, or has an inherent value in itself then it would not be appropriate to allow a deduction as a business related cost as the expenditure does not represent a loss to the taxpayer.

(emphasis added)

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

The subsection ensures that expenditure in relation to a right which has no value of itself and does not increase the value of goodwill from what it was before the expenditure took effect is not excluded from deduction under section 40-880.

(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.

Black hole deductions - measure of last resort

Instead, 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):

The object of this section is to make certain business capital expenditure deductible over 5 years if:

(a) the expenditure is not otherwise taken into account;

(b) a deduction is not denied by some other provision; and

(emphasis added)

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

2.9 This measure provides treatment for business capital expenditure not recognised in some way elsewhere in the tax law….

2.17 There are a number of exceptions which require, in effect, that the expenditure must not be taken into account in some way elsewhere in the income tax law. This means that the expenditure would not already be deductible, capitalised, amortised or capped in some way under another provision. The expenditure must also not be denied a deduction, including by limiting or capping the deduction, elsewhere in the tax law.

(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

If the answer to Question 1 is 'Yes', does the Commissioner agree that Family Trust and Unit Trust have (as appropriate):

a. calculated an excessive amount of 'Net Income', for the purposes of section 95 of the ITAA 1936; or

b. calculated a shortfall in respect of their carry forward taxation losses, for the purposes of Schedule 2F of the ITAA 1936,

in respect of each income year during the Relevant Period.

Summary

This question is no longer relevant given the Commissioner's response to Question 1.

Question 3

Summary

This question is no longer relevant given the Commissioner's response to Question 1.

Question 4

Summary

This question is no longer relevant given the Commissioner's response to Question 1.

Question 5

Summary

No. The expenditure to acquire each GME is of capital or of a capital nature, which prevents it from being deductible as a general deduction under section 8-1.

Detailed reasoning

Subsection 8-1(1) states the following:

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.

Subsection 8-1(2) provides that:

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

(d) a provision of this Act prevents you from deducting it.

Section 8-1 - Positive limb

As discussed, the Trusts 'incurred' expenditure to acquire each GME in the 20xx income year.

The term 'incurred in gaining or producing your assessable income', is to be read as meaning 'incurred in the course of gaining or producing your assessable income'. In Amalgamated Zinc (De Bavay's) Ltd v FC of T (1935) 54 CLR 295 at p 303, Dixon J said:

The expression 'in gaining or producing' has the force of 'in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself.

The courts have held that for there to be a deduction under section 8-1 of the ITAA 1997 there must be a sufficient connection between the loss or outgoing and the production of assessable income. The loss or outgoing must be incidental and relevant to the earning of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236)

The businesses of Family Trust and Unit Trust

In order to determine the deductibility of the expenditure, we must consider the nature of the business activities conducted by the Trusts at the time of the expenditure.

Each Trust carries on the business of owning and operating licenced premises which derives the majority of its income in connection with gaming machines and other income from the sale of food and drink, and where relevant, the provision of accommodation.

Prior to May 20xx, the Gambling Act provided that Tattersall's and Tabcorp were the sole holders of licences to operate gaming machines in the State.

The trustee of each of Family Trust and Unit Trust held a venue operator's licence which permitted gaming activities to take place at their respective venues.

By way of the respective Venue Operator's Agreement entered into with Tattersall's in 1995 (in respect of the XYZ Tavern) and 1998 (in respect of the ABC Hotel), gaming machines were installed by Tattersall's at both venues. The venue operators also agreed to collect the proceeds of gaming and deposit them into a trust account for the benefit of Tattersall's. As part of the arrangement, venue operators were entitled to retain 25% of the GST-exclusive net proceeds from gaming pursuant to section 136 of the Gaming Machine Control Act and the associated regulations.

Under this arrangement, Unit Trust had a certain number of gaming machines operating at its XYZ Tavern while Family Trust had a certain number of gaming machines at its ABC Hotel.

In 2008, the Relevant Government announced the new GME regime whereby Tattersall's and Tabcorp would no longer hold their licences exclusively. Instead, GMEs are available for issue via an auction process to any venue operator permitting them to conduct gaming on approved gaming machines. Each GME entitlement authorises the holder to operate one gaming machine for a period of 10 years commencing from 16 August 2012. Unit Trust and Family Trust successfully bid for and were allocated their GMEs on 25 June 20xx.

Incurred

For the reasons explained above in the Commissioner's answer to Question 1 of this ruling, the Commissioner accepts that the expenditure in relation to acquiring each GME was incurred in the 20xx income year.

Necessarily incurred in carrying on a business

The Commissioner accepts that on the facts, the expenditure incurred on acquiring each of the GMEs was necessarily incurred in the course of carrying on the respective business of each Trust; there is a sufficient connection between the expenditure on acquiring the GME and the respective business of each of the Trusts comprising of the operation of their gaming venue along with other hospitality services. This takes into account the expenditure was incurred as part of the change in the legislation in the gambling industry in the State whereby venue operators like the Trusts were afforded the opportunity to become holders of entitlements to conduct gaming activities in their own right as part of the operation of their gaming venues. The expenditure on the entitlement has a sufficient connection with the expanded activities the Trusts now engages in and the assessable income they now derive by way of gaming receipts.

Section 8-1 - Negative Limb

Expenditure will not be deductible under section 8-1 if it is capital or of a capital nature. The Commissioner considers that the Family Trust and Unit Trust's expenditure on acquiring each GME is capital expenditure and refers to the reasoning provided in answer to Question 1 of this ruling under 'capital expenditure'.

Therefore, the expenditure is not deductible under section 8-1.

Question 6

Summary

This question is no longer relevant given the Commissioner's response to Question 5.

Question 7

Summary

This question is no longer relevant given the Commissioner's response to Question 5.

Question 8

Summary

This question is no longer relevant given the Commissioner's response to Question 5.

Question 9

Summary

No, the expenditure is not deductible under any other provision of either the ITAA 1997 or ITAA 1936.

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