• Internal Code :
  • Subject Code : HI6028
  • University : Holmes Institute
  • Subject Name : Taxation Law and Practice

Case-1 John - Casino Case

Information about the case

Mr. John with an approved license to operate a casino in Melbourne by the name of “The Casino East”. He has received a 10-year license and approval for 90 years of casino building. He has paid $180 million for the approval of casino license and $80 million as prepaid rent covering the first 10 years of casino’s rental as instructed by Government agency. He also agreed to pay approx rental/annum of $400000 for the rest of 80 years as lease charges.

Issues

Now, Mr. John wants to know whether casinos prepaid amount of rent of Rs. $ 80 Million shall be treated under revenue expenditure or capital expenditure.

Case Law Applicable

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

Analysis of Legal Issue

(A) Whether Revenue Expense

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

1. You can deduct from your assessable income any loss or outgoing to the extent that:

  1. Which is incurred in obtaining or producing the assessable income

  2. Which is required to be incurred to carry on the business to gain or produce that assessable income

2. But it is not possible to deduct a loss or any outgoing to the extent that, for this section:-

  1. which is a loss or capital nature expense

  2. any loss or outgoing related to private or domestic nature

  3. a provision of this act prevents from deducting it

  4. Which is incurred in relation to gaining or producing exempted income

Point IVA of the Income Tax Assessment Act 1936 also, will not apply here which denies the deductions claimed by Mr. John against Rent paid.

The rent was paid in a lump sum to secure the use of the premise for the period to which the payment related and it was paid towards getting the grant of a 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.

Prepayment of rent for the 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 prerequisite to obtaining the approvals for the related government authority. The payment of rent shall be recurring in nature and not one time.

B) Whether to Treat It as Capital Expenditure

In case we apply the test for resolving the difference capital nature or revenue nature in Sun Newspapers Limited v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363, the prepayment.

If the payment is to be treated under capital nature then it is not deductible under income tax.

Following three things can be seen:-

  1. The nature of the transaction that expense is done to sought- Long Term lease of Casino for 90 Years

  2. It is also important to see how the expense is used, relied upon or enjoyed- Yearly rental of $ 4,00,000 per annum for 80 years with a lump-sum payment of $ 80 Million for 10 years that is $ 80,00,000 per annum for 10 years.

  3. What is the source of that income that how it is obtained 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 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.

We have to mention here that it is very important to know the actual use of that cost or expense to the real character of the transaction and what will be the outcome of that transaction which actually helps in determining the real nature of expenses whether we can treat as capital or revenue nature.

Many times it is important to think out of the box and think beyond to understand the true nature of the transaction.

Conclusion

So, by analyzing that the pre-payment of rent was capital in nature in regards 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 advance rent paid 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 and rest of the 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 including 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 a 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 based on 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.

CASE-2 Alex - Travel Expenses Deduction

Material Facts of The Case

Mr. Alex Kingsford works as mechanical engineering in ABC Engineering, Melbourne. He also runs home-based catering services at an owned property in Dandenong, Victorian which his place of residence also. His catering business is structured properly and he works for 15 days in a month and earns a good amount from this business.Mr. Alex travels daily from his workshop to his business i.e. 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 home-based 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

(A) 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. Travel expenses were deductible on the basis that his travel was between a place of business and a place of employment as per the Income Tax Act 1997.

According to section 8-1 of ITAA 1997:-

1. one can deduct any expense, loss or outgoing to the extent

  1. if it is done to gain or produce that assessable income

  2. if it is required to carry out for the purpose of doing that business from which the assessable income is gained.

If we wish to claim that it is work-related expenses it has to be,

  1. Out of pocket expenses with genuine proof or record of it

  2. Any expenses done for the purpose towards personal gain should be deducted from the total expenses and cannot be claimed

  3. Money should be spent to earn the income

B) Case discussion where the deductions which were disallowed

As per one of the important case cited as below:-

The Payne case has affirmed that commuting costs between home and work, as decided in Lunney, are not deductible because they are a ‘prerequisite’ to earning the income. More significantly, the High Court has for the first time determined that expenditure on travel between two unrelated places of income derivation or income-producing activity is not deductible as it is a ‘prerequisite’ to each income-earning activity. This result is independent of whether or not the taxpayer resides at either place.

In Luney v Commissioner of Taxation (1958) 100 CLR 478 case, it was referred that a taxpayer will not satisfy the first limb of s.51 of ITAA 1936 or S 8-1 of ITAA, 1997 by merely demonstrating a causal connection between the expenditure and the derivation of assessable income. The expenditure on travel should be incurred in the course of gaining assessable income.

This type of expense which is neither for any business purpose nor does it have any relation in gaining or producing the assessable income like the 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

In this case, travel is between two different places of unrelated income sources, so the expenses cannot be termed as to be incurred “ in the course” of deriving the income from either of the activities. Neither Alex's employment with ABC engineering as an engineer nor the conduct of his catering business occasioned the outgoings for travel expenses. This travel expense was done so that he can perform his tasks at both the places to get the assessable income.

In this respect, they were no different from the expenses incurred in travelling from home to work.

In this case, the travel happened between the catering service station and place of job and income is assessable income is generated from both the place but because it was liable to get the travel allowance from his place of work to his home, which in this case is a place of catering business. Therefore it is treated as preparatory to the taxpayer undertaking each of the separate activities (along the lines of travel from the taxpayer’s home to his work). Resulting, there was an insufficient connection between the outgoing and the gaining of assessable income.

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

So, 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

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

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]

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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