The Administrative Appeal Tribunal has clarified the tax treatment of gaming machine entitlement fees expenditure deciding the amounts constitute a general deduction in the income year incurred.
Gaming operators should consider amending or objecting to or extending time to amend or object to their assessments to preserve any rights for a tax deduction for game machine entitlement fee expenditure pending any appeal by the Commissioner.
Legislative references are to the Gaming Regulation Act 2003 (Vic) (GRAV 2003), the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Taxation Administration Act 1953 (Cth) (TAA 1953).
Commencing 16 August 2012, transferable 10 year non-exclusive gaming machine entitlements were allocated to current venue operators through an auction process under the GRAV 2003.
It has been unclear whether gaming machine entitlement fee expenditure constituted:
- a general deduction in the year incurred (sec. 8-1 ITAA 1997);
- a capital deduction over 5 years from the date of grant under the capital expenditure rules (sec. 40-880 ITAA 1997); or
- a capital loss in the year of transfer or expiry of the entitlements (sec. 104-10 ITAA 1997: CGT event A1 disposal of CGT asset; sec. 104-25 ITAA 1997: CGT event C2 Cancellation of CGT asset).
Some gaming operators have deducted the gaming machine entitlement fee expenditure as a general deduction in the year incurred (sec. 8-1 ITAA 1997).
The Commissioner had historically treated the gaming machine entitlement fees expenditure as deductible over 5 years from the date of grant under the capital expenditure rules (sec. 40-880 ITAA 1997; e.g. PBR 1012929236599).
However, during 2016, the Commissioner subsequently treated the expenditure as non-deductible capital payments resulting in a capital loss on transfer or expiry of the entitlement (sec. 104-10 ITAA 1997; sec. 104-25 ITAA 1997; TR 2011/6A1; e.g. PBR 11012710418185; PBR 1013034803181).
Accordingly, gaming operators may have incorrectly claimed a tax deduction.
On 14 December 2017, Sharpcan P/L v COT  AATA 2948 clarified the tax treatment of gaming machine entitlement fees expenditure deciding the amounts constitute a general deduction in the income year incurred.
The Tribunal decided that the expenditure was a general deduction in full when incurred, because it was more like a [revenue] fee paid for the regular conduct of a business than the acquisition of a permanent or enduring [capital] asset, had no intrinsic economic value other than the income stream expected from its use which reimbursed and justified the outlay, was diminished in value over time to nil and gave no exclusive rights (at ) (sec. 8-1 ITAA 1997) (at ).
Although that determination made it unnecessary, the Tribunal considered it desirable to deal with the alternate ground that the expenditure (on the assumption that it was of capital) was deductible over five years commencing in the income year incurred (at  and ).
The Tribunal decided that a deduction over 5 years would not be available because the amount enhanced (and not merely preserved) the value of goodwill by extending the length of the rights by 10 years (at ) and was not solely attributable to the effect that right had on goodwill since the licence also effected the income stream expected to be derived from the conduct of the business (sec. 40-880(6) ITAA 1997) (at ).
The Commissioner has appealed to the Full Federal Court of Australia.
Gaming operators may be entitled to fully deduct the gaming machine entitlement fees expenditure in the 30 June 2012 income year.
Assessments claiming deductions over 5 years may need to be corrected within a reasonable time to avoid penalties for making an inadvertent false or misleading statements (sec. 284-220 TAA 1953; PSLA 2012/5 at  & ).
The venue operator should lodge an objection or, if the 4 years has expired, apply for an extension of time to lodge an objection to preserve any rights to a deduction pending any appeal by the Commissioner.
A taxpayer generally has 4 years from the date of an income tax assessment to amend or object to the assessment (sec. 170(1) (item4) and sec. 175A ITAA 1936; PSLA 2008/19; TR 2011/5).
The Commissioner can extend the date for lodging an objection (sec. 14ZX TAA 1953; PSLA 2003/7), but not an amendment to an assessment (PSLA 2008/19 at ).
The Commissioner will generally not amend an assessment where there is a dispute about the facts or the law (PSLA 2011/5 at ). Accordingly, in these circumstances, the Commissioner is likely to treat an amendment request as an objection (PSLA 2008/19).
Having regard to the change in the Commissioner’s position, we consider the Commissioner (or the Tribunal) is likely to extend time for lodgment of an objection made within a reasonable time of this Tribunal decision (PSLA 2003/7 at [1) &  - ).
The Commissioner may be amenable to holding objection processes in abeyance pending determination of any appeal of the Tribunal’s decision.