Treatment of renewing or lapsing gaming machine entitlements in Victoria

The High Court case of Commissioner of Taxation v Sharpcan ([2019] HCA 36) (‘Sharpcan’) back in 2019 found that gaming machine entitlements (GMEs) are capital assets of the pubs and clubs that own them. The focus of the decision at that time was that there was deduction available (either immediately or over-time) that arose on the monies expended to acquire them (as discussed in our previous newsletter article here). Now that the GMEs issued back in 2012 are reaching the end of their life, attention should turn to the taxation treatment arising upon their expiration.

The original GMEs were issued with a commencement date of 16 August 2012 and had a ten year life. Therefore, these original GMEs cease to exist on 16 August 2022. There was also an auction process run by the Victorian government in 2017 and 2018 whereby further GMEs were sold and allocated. These further GMEs commence on 16 August 2022 and have a 20 year life, with separate amounts payable to the Victorian government for the GME at the commencement of each ten year period. Each owner of an original GME was given the opportunity to acquire the same number of these further GMEs, with any remaining unallocated GMEs being sold via a bidding process. A 10% deposit of the amount payable in respect of the first ten years for all of the further GMEs was required to be paid in February 2018 (irrespective of which process the purchaser acquired them under). The remaining 90% of the purchase price (in respect of the first ten years) is due and payable on 16 August 2022 (as either a single upfront payment or a series of deferred payments over five years with interest being charged on the unpaid balance). The amount payable in respect of the ten years from 2032 to 2042 will be determined closer to 2032.

Given that the High Court decision in Sharpcan was that GMEs are held on capital account, shouldn’t a capital loss arise when they expire on 16 August 2022?  Perhaps…

If a holder of a GME has acquired further GMEs then they need to consider the compulsory CGT rollover under Subdivision 124-C.  This rollover applies to statutory licenses and applies where:

(a)   a taxpayer’s ownership of one statutory license ends, resulting in CGT Event C2 otherwise applying;
(b)   as a result of that CGT event the taxpayer is issued one or more new licences; and
(c)   the new licence authorises substantially similar activity as that authorised under the original licence.

Looking at the above conditions and applying them to the original GMEs, clearly the first and third conditions above are met when the original GMEs expire.  The main question for consideration is whether a further GME is issued as a result of the CGT event causing an original GME to end.

If the answer to this question is yes, then the above CGT rollover automatically applies (i.e. taxpayers cannot choose whether it applies). In this situation no capital loss arises on 16 August 2022 on the original GMEs expiring. Holders of GMEs are required to simply keep adding the costs of buying and owning these replacement entitlements to the CGT cost base of their original GMEs (which will continue to roll-over).

Taxpayers who are not acquiring as many GMES as they originally held (i.e. they are reducing the number of GMES held overall) realise a capital loss in respect of the original GMEs on 16 Aug 2022.

However, impacted taxpayers seeking the capital losses to be realised might want to explore the argument that the new GMEs have been acquired under a separate bidding process in order to allow them to take the view that the second condition above is not met. This view, if correct, would result in a capital loss being realised in respect of all of the original GMEs, such that this loss becomes available to them in FY2022. An analysis of the application process to determine whether a GME holder had an automatic right to a further GME would be fundamental to this argument. Although such an analysis is outside the scope of this article, I note that merely being given the opportunity to bid on the further GMEs because you hold an original GME could be too tenuous a link for the second condition to be met.

Raising awareness of this issue gives affected taxpayers time to work out their tax position (and apply to the ATO for their view if desired) before year end so that FY2023 tax returns can be correctly lodged. After all, if there is a capital loss, then the FY2023 accounts and tax return will need to disclose this.

Finally, a note of caution – there is a windfall gains tax element to the further GMEs. Any owner who sells a further GME before 16 February 2024 is required to forfeit any gain made to the Victorian government. There is an exemption for circumstances where a venue operator is selling their business, however this tax raises similar issues regarding whether such an impost is included in the further GME’s cost base for CGT purposes as the windfall gains tax which the Victorian government is imposing on rezoned land.  If it does not, then a double taxation of such gain may arise.


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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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