Taxation Theory, Practice and Law - Case 1

Material Facts of The Case

Mr. John has an approved license to operate a casino in Melbourne, The Casino East. He has received 10-year license and approval for Casino’s building for a period of 90 Years. He has paid $180 million for the approved casino’s license and $80 million as prepaid rent covering the first 10 years of casino’s rental as instructed by Government agency. He has negotiated to pay $400,000 rental per year for the remaining 80 years of the lease.

Issues on Appeal

Mr. John wants to know whether casinos prepaid rent of Rs. $ 80 Million shall be considered a revenue expense or a capital expense. 

Relevant Case Law

STAR CITY PTY LTD v FC of T, Federal Court of Australia, 09 November 2007

Analysis of Legal Issue

  • If Revenue Expense

If the prepayment of $ 80 million is considered as expense from revenue A/c and was not an outgoing of capital or of a capital nature, then it would be deductible under Section 8-1 of ITAA 1997 which says:-

One can deduct expense or outgoing only to the extent it is

  • Done in gaining or obtaining i.e. producing that assessable income against which we want to claim it (Amount)
  • Incurred to carry out operations of the same business from which assessable income is coming (Relevant)

However, one cannot deduct an expenses or outgoing to the extent

  • Any loss of outgoing which is capital expense or have capital nature
  • Any loss occurred or outgoing from any personal or private or domestic source
  • Anything which is incurred in relation to gain or produce “ Exempt Income or Non –Assessable nonexempt income
  • Or may a provision of this Act itself prevents it to be clamed

Pt IVA of the Income Tax Assessment Act 1936 also does not operate to deny the deductions claimed by Mr. John in respect of the prepayment of rent.

The rent was paid in lump sum to secure the use of the premises for the period to which the payment related and it formed part of the consideration for the grant of the casino license and the purpose of obtaining a lease for the permanent casino site and an exclusive license in the first 10 years of the operation of the casino.

It does not secure any enduring asset. The prepayment of rent for first 10 years is an obligation for Mr John to get the license approved under Casino Control Act, 1984 and this is regarded as a pre requisite to obtain the approvals for the related government authority. The payment of rent shall be recurring in nature and not one time.

(B) If It Is a Capital in Nature

If the prepayment is on capital account, then deduction shall not be allowed.

Applying the test for resolving the distinction between capital and revenue in Sun Newspapers Limited v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363, the prepayment:

There are three matters to be considered:-

(a) the character of the advantage sought- Long Term lease of Casino for 90 Years

(b) the manner in which it is to be used, relied upon or enjoyed- Yearly rental of $ 4,00,000 per annum for 80 years with lump sum payment of $ 80 Million for 10 years that is $ 80,00,000 per annum for 10 years.

(c) the means adopted to obtain it; that is, by providing a periodical 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.- Periodical payment of Rent per annum.

The advantage sought by Mr. John was not the quiet enjoyment of the relevant premises but rather was consideration for the grant of the license and the right of exclusivity for the operation of the casino for 90 years. 

It’s required to emphasize that the substance of a transaction will always be considered in characterizing the character of the advantage which is sought to be obtained in determining whether an outgoing is on revenue account or whether as on capital account. Sometimes its necessary to go outside the contractual rights and obligations in order to find the true character of the transaction.

Conclusion

It is inferred that the pre-payment of rent was capital in nature in regard to the practicality and business point of view, the payment secures exclusive right to conduct a casino for 90 years in total. Considering the fact that, the parties had to agree that the rent paid in advance shall be refundable in very limited circumstances and only if the parties mutually agreed to terminate the lease. In regard to the lump sum pre-payment of rent for 10 years, there is a significant disparity between $ 80,00,000 per annum rental for each of the first 10 years as against $4,00,000 per annum for each year of the remaining 80 years of the lease.

The period of exclusivity for the operation of a casino obtained by Mr. John by virtue of the pre-payment was a most significant indicator of a capital payment concluding that the special rent was consideration for the exclusivity arrangement between the parties and as such was paid for the acquisition of a capital asset.

The money is really paid for obtaining the casino license as prepayment of advance rent for 10 years was demanded by the government authority to issue the license and the site for which, the payment was made is Casino, i.e. a capital asset by which the revenue shall be generated for a longer period i.e. 90 years.

Accordingly, it is concluded that the prepayment of rent of first 10 Years amounting to $ 80 Million made by Mr. John is on Capital Account, and is not deductible under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act and s 82KZM of the 1936 Act.

The conclusion may differ on the basis of documentation/agreements entered between Mr. John and Government Authority from time to time like construction agreement, agreement for permanent Site Lease, Casino Duty and Community Benefit Levy Agreement, occupational License Agreement, etc.

Taxation Theory, Practice and Law - Case 2

Material Facts of The Case

Mr. Alex Kingsford works as a mechanical engineering in ABC Engineering, Melbourne. He also runs a home-based catering services at owned property in Dandenong, Victorian which his place of residence also. Catering business is well structured and he works 15 days a month and earns substantial income from catering business. He travels from his workshop of ABC to his home-based catering business by car.

Issues on Appeal

Mr. Alex seeking advice that whether his travelling expenses between his place of employment- ABC Engineering workshop in Melbourne and his homebased catering business in Dandenong, Victorian is an allowable deduction.

Relevant Case Law

FC of T v PAYNE, Federal Court of Australia, Full Court, 30 March 1999

Analysis of Legal Issue

  • Deduction Allowed

Travelling between two unrelated places of work is an allowable deduction under s 51(1) of the Income Tax Assessment Act 1936 or Section 8-1 of Income Tax Assessment Act 1997 in determining the taxable income of the taxpayer. As per Income Tax Act, Travel expenses are deductible because it travel between place of work to his home (which may be another place of work in this)

Section 8-1 of ITAA 1997 says:-

One can deduct expense or outgoing only to the extent it is 

  • Done in gaining or obtaining i.e. producing that assessable income against which we want to claim it (Amount)
  • Incurred to carry out operations of the same business from which assessable income is coming (Relevant)

To claim a work-related deduction:

  • It must be spent from out of pocket
  • It should have incurred to derive the assessable income directly
  • Enough proof or evidence is available to prove it
  • Expenses if incurred partly for business and partly for private use , then it should be easy to segregate it with defined and clear logics.

(B) Deduction Disallowed

There was a similar case for PAYNE where is was affirmed that the travel cost between work place and home is not deductible stating that this cost is a pre requirement to earn the assessable income. Moreover it is also important, that the High Court has for the first time decided that expenses on travel between two places of income derivation which are unrelated places is not deductible from either of the activities because it an obvious and pre requisite expense to do that activity to earn from it.

Another Case of Vogt, A professional musician , he was allowed deductions for expenses related to motor vehicle spent by him in traveling between his home to different places where he used to go to perform. As per Waddell J. in the Supreme Court of New South Wales it was decided that any necessary type of expenses incurred was such that if it can be regarded as that it was done to gain or produce the assessable income then it is deductible from the assessable income..

Expenditure of this nature is neither for any business purpose, nor it has any relation in gaining or producing the assessable income like acquisition of better knowledge of a skilled profession as illustrated in Federal Commissioner of Taxation v Finn. It is a necessary consequence of living in one place and working in another.

Conclusion

The travel is between two places of unrelated income derivation, the expense cannot be said to be incurred “in the course of” deriving income from either activity’. Mr. Alex’s travel occurred before he began to perform his duties as an Engineer, or after he had fulfilled those duties similarly with respect to the catering business. And the travel occurred in the intervals between his two income-producing activities. The travel did not occur while the taxpayer was engaged in either activity. These travel expense outgoings were occasioned by the need to be in a position where the taxpayer could set about the tasks by which assessable income would be derived. In this respect they were no different from expenses incurred in travelling from home to work.

Because the travel occurred during intervals between the catering service station and place of job i.e. taxpayer’s income earning activities rather than when he was engaged in either of those activities, it was therefore regarded as preparatory to the taxpayer undertaking each of the separate activities (along the lines of travel from the taxpayer’s home to his work). Consequently, there was insufficient connection between the outgoing and the gaining of assessable income.

Therefore, travel expenses from workplace to the place of residence, where the taxpayer also runs a business, shall be considered as travel expenses incurred from workplace to home.

Accordingly, the travelling expense from the workshop to Mr. Alex’s Catering business place where he resides as well, is not an allowable deduction as per the Income Tax Act taking the reference of Payne Case.

References List Citations for Taxation Theory, Practice and Law

Commissioner of Taxation v Payne [1999] FCA 320

Lunney v Federal Commissioner of Taxation [1958] HCA 5

Commissioner of Taxation v Finn [1961] HCA 61; 106 CLR 60

FC of T v PAYNE, Federal Court of Australia, Full Court, [1999]

Broken Hill Pty Co Ltd v Federal Commissioner of Taxation [2000] 43 ATR 204 

Federal Commissioner of Taxation v Broken Hill Pty Co Ltd [2001] 179 ALR 593

Sun Newspapers Limited v Federal Commissioner of Taxation [1938] 61 CLR 337

Colonial Mutual Life Assurance Society Limited v Federal Commissioner of Taxation [1953] 89 CLR 428

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Taxation Law Assignment Help

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