The recent Full Federal Court decision in Commissioner of Taxation v Sharpcan Pty Ltd  FCAFC 163, which considered the tax treatment of payments made for Victorian gaming machine entitlements (GMEs) raises a number of fascinating issues (at least to those, like me, who like to consider the wider implications).
Firstly, the decision will be of particular interest to those taxpayers who may be directly affected i.e. owners of gaming venues in Victoria.
Secondly, the implications of this case may have broader relevance to other taxpayers, specifically where taxpayers have had deductions denied, but a later court case shows that the ATO should have allowed the deduction.
This article provides a summary of Sharpcan’s case, as well as considering the possible implications of the decision for both gaming venue owners and other taxpayers.
History of GMEs and Sharpcan
For those unfamiliar with GMEs and the historical regulatory changes that led to this case, the licenses that existed before GMEs were created were owned by Tattersalls and TabCorp, with gaming venue owners receiving a fee from Tatts or Tabcorp for having the machines in their venues – this fee was a fixed percentage of the net return from a machine.
The then Victorian State Government subsequently caused these licences to end and auctioned the GMEs directly to pubs, clubs and other venue operators. Under this structure, the venues bid for the GMEs (which provided the holders rights for ten years), which entitled them to all of the net return derived from the machines, but also resulted in an increased number of expenses being incurred to earn that return.
Given the limited amount of GMEs available, venue operators paid significant monies to buy the GMEs, which allowed them to continue to have poker machines installed in their venues. This then led to a question of how the cost of the GMEs should be treated for tax purposes.
Various answers were received when taxpayers approached the ATO for the Commissioner’s opinion. Some were allowed an outright deduction for the cost, others were allowed to treat the cost as black-hole expenditure and deduct the cost over five years. However, anecdotally it seems that the majority of taxpayers were not allowed any deduction on the basis that the Commissioner believed that the GMEs are CGT assets. On this basis, taxpayers would only be permitted to claim a capital loss for the cost at the end of the ten years when each GME expired. Should venue operators purchase another ten-year GME, then a second capital loss would arise ten further years down the track.
In Sharpcan, the taxpayer sought to claim an outright deduction for the expenditure, with the Commissioner disallowing the deduction on the basis that the amount was capital in nature. In the first instance, the Adminstrative Appeals Tribunal (AAT) found in favour of the taxpayer.
On appeal to the Full Federal Court, the decision was again in favour of the taxpayer, indicating that the GME acquisition cost was fully deductible as from 10 May 2010 when the auction was held.
Ramifications for taxpayers
As a result of the Sharpcan decision (and pending any appeal which might be made by the Commissioner), venue operators with similar fact patterns should have been entitled to a deduction for their GME acquisition costs in their FY2010 tax returns.
For taxpayers who did not claim such a deduction, a question arises regarding what rights of appeal they now have.
Generally, taxpayers have between two and four years from assessment following the lodgement of a return to request an amended assessment. So is this a pyrrhic victory? Can the Commissioner merely ignore it as a curious outcome with no revenue ramifications as most taxpayers would be out of time to amend or object? Can he go even further now and deny the capital losses that taxpayers thought that they would get in August 2022 when the GMEs end?
The Commissioner’s Practice Statement on late requests for objection only directs ATO officers to consider allowing a late objection where (inter alia) ‘… the taxpayer thought that lodging an objection was futile until a court decision – or a change in legislation or a public ruling – delivered shortly after the time limit expired made the objection reasonable…’.
According to the Full Federal Court, the deduction arose in FY2010. These returns were due at latest by May 2011. As that was well over seven years ago, taxpayers can hardly argue that the court decision arose shortly after their objection time limit expired. The Commissioner’s Practice Statement does not provide confidence that the Commissioner would favourably consider granting an out of time objection request for affected taxpayers.
The same risks apply to taxpayers who find themselves out of time to object in other situations.
In referencing the Commissioner’s Practice Statement, we acknowledge that there are other factors that the Commissioner must consider – and we are not suggesting that he would use the above factor as a reason to use his administration powers to get the outcome he argued for and failed to obtain in the Court.
However, the objection and appeals system can move slowly. Throw in an AAT case and an appeal and even more time passes. This is not the only situation where clarity about the law has arisen well after other affected taxpayers are out of time to object. If the Commissioner seeks special leave to appeal to the High Court even more time will pass before a final outcome is known.
So where does that leave taxpayers now?
From a technical perspective, still out of time and reliant upon the Commissioner to treat an objection as being within time. However, we hope the Commissioner will consider and clarify how his discretion should be exercised when case decisions that are contrary to his previously stated position are handed down well after taxpayers become out of time to object.
We suggest that the Commissioner’s approach (and the practice statement) should more clearly recognise that obtaining certainty through the court system can take longer than two or four years and that he will be practical and will not artificially try to limit amendments just because a case took too long.
Surely it is important for all taxpayers to have confidence that they will have the law apply to them in the same way as it has been applied to the similar taxpayer in the next suburb or town?