Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCATrans 152 (9 August 2019)

Last Updated: 9 August 2019

[2019] HCATrans 152

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M52 of 2019

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

SHARPCAN PTY LTD

Respondent

KIEFEL CJ
BELL J
GAGELER J
NETTLE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 9 AUGUST 2019, AT 9.45 AM

Copyright in the High Court of Australia
MR G.J. DAVIES, QC: If the Court pleases, I appear with my learned friends, MS J.E. JAQUES and MR L.J.S. MOLESWORTH, for the appellant. (instructed by the Australian Government Solicitor)

MR D.H. BLOOM, QC: May it please the Court, I appear with MR T.P. MURPHY, QC, MR D.J. McINERNEY and MS C.M. HORAN, for the respondent. (instructed by Rigby Cooke Lawyers)

KIEFEL CJ: I should advise the parties that it has been drawn to our attention that there have been seven books of authorities filed. These cases involving these issues are not unfamiliar to this Court. The Court is familiar with the principles and with the principal authorities, and the parties ought make their argument on that basis.

MR BLOOM: If your Honour pleases.

KIEFEL CJ: Mr Davies.

MR DAVIES: If the Court pleases. On 10 May 2010, the sum of $600,300 was incurred by Spazor Pty Ltd as trustee of the Daylesford Royal Hotel Trust for the acquisition of 18 gaming machine entitlements that were created and allocated to it under the Gambling Regulation Act 2003 (Vic). I will refer to the gaming machine entitlement as GME, if the Court pleases.

There are two issues. The first is whether that expenditure or outgoing was deductible under section 8‑1 of the 1997 Act and that issue turns on the question as to whether the outgoing was of a capital nature, or was on revenue account.

The second issue is that if it was capital expenditure, the issue is whether it is deductible over five years under section 40‑880 of the 1997 Act and that issue turns upon whether subsection (6) of that section applied to the expenditure.

KIEFEL CJ: Is it your submission that Justice Thawley was correct on each issue?

MR DAVIES: Yes, your Honour. I am about to come to that.

KIEFEL CJ: Do you depart from his reasoning in any significant way?

MR DAVIES: Not at all. I was going to say, your Honour, we respectfully adopt what his Honour said; it accords with authority, in our submission. It is unlikely, your Honour, that I can improve on his Honour’s reasons. I will attempt to do so, but we do respectfully adopt them.

KIEFEL CJ: Yes.

MR DAVIES: Might I say, in relation to our case, there are three points that might be succinctly put in our case. The first is that the outgoing was incurred for the acquisition of GMEs. The second point is that in the hands of the trustee, the GMEs were capital assets, which secured for the trustee an enduring asset for its trade – sorry, an enduring advantage for the purposes of its trade. That advantage, your Honours, was the authority the GMEs conferred upon the trustee to conduct lawful gaming for a period of 10 years.

The third point to state as being our case is that, in fact, the trustee used the GMEs for the authority they conferred on it to conduct light gaming. The GMEs were not acquired or used by the trustee for the purposes of being turned over as part of the income‑producing activities of the business. Ultimately, the trustee sold the GMEs when it sold its business in 2015.

In our submission, those three factors compel the conclusion that first the expenditure was on capital account and, secondly, that section 40‑880(6) does not apply because of two reasons. First of all, the expenditure was not to preserve – not enhance the value of goodwill and the second reason is that the value to the trustee of the GMEs was not solely attributable to any effect that the GMEs had on the goodwill of the business.

GORDON J: You do not need both, do you?

MR DAVIES: We do not need both, no, your Honour. Your Honours, the material facts are set out in the paragraphs of our submissions and the AAT reasons and the Full Court reasons that we have referred to in paragraph 3 of our outline of oral argument. I perhaps should elaborate on those facts a little, your Honours.

The first is that at the time the relevant outgoing was incurred the trustee was carrying on an integrated hotel business at the Daylesford Hotel, known as the Royal Hotel, which included the provision of gaming on 18 gaming machines. At the time – indeed, as it still is – the provision on gaming machines at hotels was governed and regulated by the Gambling Regulation Act 2003 (Vic). At the time the expenditure was incurred, the right to conduct gambling required, amongst other things, the holding of a gaming operator’s licence.

Prior to 16 August 2012, the gaming operator’s licence in respect of which the gaming was conducted at the Royal Hotel was, in fact, held by Tattersalls, not by the trustee. Tattersalls, in fact, I think was the only entity to which a gaming operator’s licence had been issued prior to 16 August 2012. Another entity, Tabcorp, held a right in respect of wagering. And, I think, it held what was called a gaming licence that was issued under another part of the 2003 Gambling Act.

The licence held by Tattersalls was of limited duration and was due to expire on 15 August 2012. In April 2008, the Premier of Victoria announced that the State would introduce a new structure for Victoria’s gaming industry that would fundamentally reshape the industry as part of a broader reform of all gaming and wagering in Victoria.

The consequence was that the gaming operator’s licence issued to Tattersalls would not be renewed. The new structure was introduced in respect of gaming through amendments to the Gaming Act in 2009 and a central object of the legislative changes was to remove the duopoly which Tattersalls as a gaming operator and Tabcorp as a wagering operator held.

Your Honours will find that this Court has discussed the history of those changes in Victoria v Tatts Group Ltd [2016] HCA 5; 328 ALR 564 and the relevant passages are at paragraphs 38 to 42. That authority is behind tab 29 of volume 7 of the Court authorities.

The central changes to the legislation were achieved by the introduction of Part 4A into the Gambling Regulation Act and the material features of the legislation were as follows: the first was that section 3.4A.5 provided for the creation and allocation of gaming machine entitlements. I should take the Court to the provisions of the Act that deal with the GMEs, found at volume 3, tab 4.

I should also explain at this stage, if the Court pleases, that what is copied into the joint book of authorities behind tab 3 is a version that incorporates amendments as at 1 January 2010. Those amendments are said by the Act to include amendments that have been made to the Act by the Gambling Regulation Further Amendment Act 2009, No. 58 of 2009. That amendment Act has been reproduced behind tab 34 of volume 8.

The Further Amendment Act, No. 58 of 2009, made provision for different sections to come into operation at different times. The version that has been photocopied, behind tab 4 of volume 3, is a version that includes only those provisions of the 2009 amendment Act that had been proclaimed to commence before 1 January 2010.

There are some relevant provisions of the amendment Act behind tab 34 that concern and relate to the GMEs that the trustee acquired but not found themselves into the photocopy behind tab 4 because, as at the beginning of 2010, they had not been proclaimed to commence. In fact, they commenced at the same date that the GMEs acquired by the trustee were to commence, which was 16 August.

KIEFEL J: Are we working from the 1 January 2010 version or is that problematic?

MR DAVIES: I think what I am saying, your Honours, is that it is problematic. Could I ask your Honours to look at that version and see whether it contains a section 3.4A.27A?

GORDON J: No.

MR DAVIES: Then, in that case ‑ ‑ ‑

KIEFEL CJ: So, where do we find that?

MR DAVIES: So, you will find that behind – if your Honours go to volume 8 at tab 34 in the joint book of authorities.

GAGELER J: What version should we be looking at?

MR DAVIES: Your Honours should be looking at a version that has – includes in it all of the amendments that were made to the Act by this 2009 further amendment Act.

GORDON J: Can I ask a different question? Of those provisions set out in this further amendment Act, which ones are relevant to issues in this appeal which require to be taken into account to the Act as at January 2010?

MR DAVIES: Your Honours, there is – if I can go to – I think your Honours should note section 44 ‑ ‑ ‑

GORDON J: Of the amendment Act?

MR DAVIES: I think, your Honours, through to 52.

GORDON J: What are the relevant provisions ‑ ‑ ‑

MR DAVIES: What this Act does as part of the amendments that were introduced in 2009, it made a number of amendments, many of which found their way into the version that your Honours have. Some provisions did not. Those provisions include a provision for buy back of the GMEs. So the sections that I have just referred to deal with the entitlement of the State to buy back the GMEs.

KIEFEL CJ: That is a factor but it is not a huge feature.

MR DAVIES: It is not a huge feature. I mention it, your Honours, because, in our submissions, we have pointed out at several occasions, and I opened with it, that the GMEs conferred upon the trustee the entitlement to carry out, conduct gaming for a period of 10 years.

GORDON J: So, that is one. Second is, I understood, they can be bought, they are bought, they could be sold, they could be transferred and they could be bought back.

MR DAVIES: Yes, I was just coming to that. We apprehend, your Honours, that my learned friends will say, well, the entitlement to buy back – the entitlement to conduct gaming for 10 years has to be read subject to the compulsory buy‑back provisions. For our purposes, your Honour, we see that it makes no difference to the characterisation of the expenditure or the characterisation of the GMEs.

KIEFEL CJ: So apart from those provisions of the 2009 amendment, we can work from the other ‑ ‑ ‑

MR DAVIES: Yes, your Honour, from the 2010 version.

GAGELER J: These amendments in the 2009 amendment Act, were they enacted but not in force at the relevant time or were they enacted ‑ ‑ ‑

MR DAVIES: Yes, your Honour.

GAGELER J: Enacted but not in force?

MR DAVIES: Enacted but not in force, your Honour. So enacted, so that the Act, if your Honours see on page 3311, it was the Act was assented to on 21 October 2009 and then section 2 deals with the commencement, saying that:

this Act comes into operation on a day or days to be proclaimed.

Then if your Honours go to behind tabs 38 and 39, and they set out the days upon which the relevant sections came into operation. So behind tab 38, the proclamation there states the particular provisions that came into operation on 21 October 2009 and it was those provisions that have been replicated in the 2010 consolidation that your Honours have.

The other provisions are behind tab 39. So tab 38 identifies the sections that did not come into operation on 21 October 2009. Behind tab 39 there is the further proclamation that they will come into operation on 16 August 2012.

GAGELER J: Was there anything in the Act that required these provisions to come into operation? Like was there a default date on which they came into operation, if not earlier?

GORDON J: Section 2(2), is it not?

MR DAVIES: Yes, your Honour.

BELL J: Mr Davies, for the purpose of your argument, we see in Justice Thawley’s reasons at core appeal book 64, paragraph 264 and following, a concise account of the change in the legislative arrangements respecting the operation of gaming activities in hotels. Do I understand that his Honour’s account of the legislative scheme suffices, for the purpose of your argument, save for the absence of reference to the possibility of buy‑back of the gaming machine entitlement. Is that the position?

MR DAVIES: Yes.

BELL J: Otherwise we can take his Honour’s account as complete for your purposes?

MR DAVIES: Yes, your Honour.

BELL J: Yes.

MR DAVIES: So if I can return – so I will move on to the facts, your Honours. The gaming machine entitlements were acquired by the trustee at a competitive auction that was conducted by the State of Victoria. That auction set the market price for the GMEs that were to be created and allocated in the geographic region of which Daylesford formed a part. Your Honours will see behind tab 30 in volume 7 of the joint book of authorities the Victorian Government Gazette, dealing with the manner in which the gaming machine entitlements would be allocated and transferred.

Your Honours will note that in paragraph 2 there is a reference to subsection (9) of 3.4A.5, which was the section that empowered the Minister to determine the rules for creating and allotting GMEs. In paragraph 5 it states that:

The primary process for allocation of gaming machine entitlements and for determining the amount that must be paid by a person to whom gaming machine entitlements will be allocated will be an electronic auction, conducted in a series of rounds over two stages.

Over the page, there is a definition of “market”, which is a reference to the geographic – a:

market for gaming machine entitlements comprising 88 geographic –

markets. Then there is a “market price”, which means:

the uniform dollar amount payable for a gaming machine entitlement in a market –

It is calculated by an auction system. And then, an opening bid price, at the top of the next page, which stated there was a:

minimum dollar amount determined by the Minister.

Then, over the page, at section 8, the auction structure, there was an “opening bid price”. It would be “determined by the Minister”. Then, in subparagraph (c) – (b) deals with the first stage of the auction and (c) the second stage of the auction.

If I can then go to page 3161, at item 20 – and the processing by the auction system – and if I can go to paragraph (c):

For each market, the auction system will calculate for each round –

(i) separate market price for gaming machine entitlements; and

(ii) provisionally successful orders.

And, then, more provisions relating to that with (d), (e), (f). If I go to (g):

At the end of each round, the auction system will display –

(i) each market price –

And then, finally, if I could go to item 27, on page 3164 dealing with successful orders, in paragraph (c):

The amount payable for the allocation of a gaming machine entitlement as a result of a successful order shall be the market price for gaming machine entitlements in the relevant market as shown by the auction system.

Now, a great deal of time was spent by the majority of the Full Court in identifying the factors that the trustee took into account in quantifying the maximum amount that the trustee would bid for – the GMEs that it wished to acquire.

What their Honours do not appear to recognise is that, at the end of the day, the amount that the trustee is required to pay for the GMEs is a market price set by reference to a competitive auction. And, it is as a result of that competitive auction that the price of $600,300 is set for the price of the GMEs that the trustee acquires. At the conclusion of that auction, the majority of the Full Court note that the trustee took up the option of paying the acquisition price by quarterly payments under a deferred payment arrangement over six years. Your Honours will see that at paragraph 30 of the majority’s reasons.

What is not noted by the majority but is noted by Justice Thawley at paragraph 269 is that, taking up the option of paying the acquisition price by quarterly payments, involved the trustee in the entering into the agreement with the State of Victoria for that purpose. That agreement, together with section 3.4A.27 and the operation of Division 10 of the Gambling Act, had the effect that if the trustee defaulted in the payment of any of the instalments, the whole sum became immediately due and payable and in default of payment, the GMEs could be forfeited to the State.

KIEFEL CJ: Is the point you are making that this detracts from the recurring nature?

MR DAVIES: The point, actually, I am making, your Honour, is that the sum and payment of the sum as between the trustee and the State is clearly for the acquisition of the GMEs. It is not at all related to the success of the business in deriving income from gaming. It is truly an acquisition price for the GMEs. So, we say the manner of acquisition, the calculation of the price, the fact that it is payable irrespective of the fortunes of the gaming business, all demonstrate that the sum was outlaid for the acquisition of GMEs.

Now, what the GMEs conferred upon the trustee was the authority it required to conduct gaming on approved gaming machines for a period of 10 years commencing on 16 August 2012. A critical fact is that but for that authority, no gaming could be conducted at the Royal Hotel after the licence held by Tattersalls expired on 15 August 2012. A corollary to that is that the trustee acquired something, acquired a right to conduct gaming which but for the acquisition it did not have.

Now, in our submission, that is a critical factor, both in relation to determining whether the GME expenditure was on capital account or revenue account. It is also relevant to the second issue which is was the expenditure designed to preserve but not enhance something? In our submission, it was not incurred in order to preserve but not enhance. It was not preserving any state of affairs. It was incurred in order to create, in order to acquire something that did not exist and it could not have been incurred to preserve the value of existing goodwill because if somehow or other it had an effect on existing goodwill, the value of existing goodwill at the time of the expenditure was a value that could only reflect the fact that gaming could be conducted up to 15 August 2012.

Had the business been sold, together with goodwill at the time immediately before the expenditure was incurred, then the purchase price for the business including the value of goodwill would have reflected the fact that there was no existing entitlement to game after August 2012. What the expenditure did and was designed to do was to create the right to conduct gaming after August 2012.

So, the GMEs, in our submission, conferred on the trustee the authority to conduct gaming for the 10 years, subject, of course, to the possibility of buy‑back. That, in our submission, was clearly an advantage of an enduring nature. In fact, after 16 August 2012, Tattersalls ceased to conduct gaming at the Royal Hotel. The trustee engaged PVS Australia to administer gaming operations at the Royal Hotel by entering into an agreement dated March 2012 in consideration for which a fee per gaming machine was payable to PVS. The agreement required PVS to provide 18 gaming machines that had previously been owned and provided by Tattersalls.

The trustee itself, pursuant to the GMEs, conducted gaming on gaming machines, which the GMEs authorised. The whole of the net income from the gaming was derived by the trustee. Previously, the whole of the net income had been derived by Tattersalls and Tattersalls had paid a commission to the trustee.

The trustee incurred additional obligations and fresh obligations in respect of the gaming. First of all, it was required to pay a recurrent supervision charge under section 3.6.5A of the Gambling Act to the State. It was also required as part of the gaming to make monthly payments of tax to the State, pursuant to section 3.6.6A of the Gambling Act.

GAGELER J: How do those facts bear on the issue before the Court?

MR DAVIES: It bears in the sense, your Honour, to demonstrate that the purchase of the GMEs was to acquire an asset that formed part of the profit‑making structure of the business. It does so because, on the income‑producing side, one could make the observation that the GMEs authorised the conduct of gaming.

It is relevant, in our submission, that the acquisition - the $600,000 that was spent for the acquisition not only conferred an advantage to conduct gaming on the trustee but it carried with it obligations which the trustee had not previously had, those obligations being to account for tax in the gaming. In our submission, that is a factor that supports the conclusion that the GMEs were acquired as part of the profit‑making structure, not acquired as part of the ongoing use of – operation of the trading activities of the trustee. Just in that sense, your Honour. I know that ‑ ‑ ‑

GAGELER J: You could not have pokies without them. It is as simple as that.

MR DAVIES: That is right, yes, your Honour. That is so. Along the same lines, your Honour, in order to conduct gaming the trustee not only had to have the GMEs but because of the obligations imposed on it as the holder of a GME it was required to ensure that the gaming machines were connected to approved monitoring systems. That is under section 3.5.17B.

GORDON J: Is this any more than to say that the terms upon which the GMEs were acquired, when one looks at them they had structural aspects to them which affected the structure of the business.

MR DAVIES: That is so, yes, your Honour.

GORDON J: That is, they had to set them up in a particular way that therefore affected the way in which the business was conducted – structured, conducted.

MR DAVIES: Yes, your Honour, and that the acquisition of the GMEs was not in isolation because the trustee also entered into – terminated its agreement with Tatts, entered into an agreement with PVS for the provision of the gaming machines, entered into an agreement with Intralot for the monitoring of the machines. So it is an acquisition not simply in isolation. Other transactions are occurring at the same time, all of which, in our submission, demonstrate the type of thing that is facing – the subject matter of what was facing the trustee was the manner in which the business was structured.

So if I can turn to – I do not wish to spend a lot of time on the authorities but if one goes to AusNet, which is behind tab 9 of volume 6 and at paragraph 21 the plurality refers to the dicta of Justice Dixon in Sun Newspapers – and, in our submission, that dicta disposes of this case, if one applies it ‑ and notes that his Honour said that:

the distinction between capital and revenue account expenditure corresponded with the distinction between the business entity, structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay.

Your Honour Justice Gageler put it in slightly different terms at paragraph 73 – in our submission, to the same result. Your Honour stated that:

The distinction between expenditure that is an outgoing of a capital nature and expenditure that is an outgoing of a revenue nature is sufficiently stated for present purposes as “the distinction between the acquisition of the means of production and the use of them”. The distinction “depends on what the expenditure is calculated to effect from a practical and business point of view”.

In our submission, the expenditure that we are talking about is concerned with the former, that is, the acquisition of the means of production. It is not concerned with expenditure that arises as a result of the use of the means of production.

Now, the majority of the Full Court came to the conclusion that the expenditure was on revenue account. In our submission, the majority made three principal and related errors. The first was that the majority of the Full Court failed properly to address and identify the nature of the advantage the trustee, from a practical and business point of view, sought to achieve by the expenditure.

As I have submitted, in our submission, the advantage which the trustee sought to achieve by the expenditure from a practical and business point of view was the acquisition of the GMEs. Without them, no gaming could be conducted. Justice Thawley agreed with that conclusion at paragraph 280 and we respectfully adopt his Honour’s reasoning in relation to it.

The majority of the Full Court, however, makes no finding about what it was from a practical and business point of view that the trustee sought to achieve by the expenditure. If I could go to paragraph 143 of the judgment, it is in the core appeal book. So at paragraph 143 to 147, their Honours make observations about the commercial realities that were confronting the trustee. At paragraph 143, the Acting Chief Justice noted that:

It is true that the amount of the outgoing as determined by the auction process . . . does not represent something in the nature of a valuation or crystallisation of an amount which bears a relationship to the precise dollar value of the present or future cash flows generated in the business of the hotel undertaking.

KIEFEL CJ: The point essentially made at paragraph 146 is that the expenditure was to maintain cashflow ‑ to maintain its derivation of income, was that the point?

MR DAVIES: To maintain its derivation of income.

NETTLE J: It is all a big build up to equating it to BP, is it not?

MR DAVIES: I think it is, your Honour, yes. I said the three principal errors ‑ ‑ ‑

GORDON J: Justice Thawley identifies the factual distinctions in respect of why BP is distinguishable.

MR DAVIES: Yes, your Honour, and the interesting thing about BP if one goes to it - that is in volume 6 ‑ ‑ ‑

GORDON J: Do you adopt his reasoning in relation to the distinguishing factors between paragraphs 296 to, I think it is 299, is it not - yes, 299.

MR DAVIES: Yes, your Honour. So, he deals with it between 296 to 299 and we adopt them. But the one thing I did wish to – one further point I wish to make about BP - which I do not think is mentioned by his Honour Justice Thawley -behind tab 11. So, his Honour points out the factual differences and the findings in BP – the relevant findings in BP were the – I will come to it but if one goes to page 398 and we relied, in particular – the discussion about the facts starts on the last paragraph of 397 and then the last sentence of 398 - the top paragraph of 398 is that:

The payment of such sums became part of the regular conduct of the business. It became one of the current necessities of the trade.

Our submission, and Justice Thawley accepted it, was that that is a finding of fact that distinguishes BP from this case.

GORDON J: Put in different terms, it was treated in modern language as a marketing expense as distinct from a structural issue.

MR DAVIES: Yes, your Honour. The next paragraph I wanted to come to because it was a paragraph that Justice Pagone referred to in the AAT and the majority picks up some of the – it is the coming back penny by penny with every order. Your Honours will see:

The test of whether these sums were payable out of fixed or circulating capital, referred to for example in John Smith & Son v. Moore tends in the present case in favour of regarding these payments as revenue expenditure.

So the discussion arises in the context of fixed or circulating capital. Privy Council states:

Fixed capital is prima facie that on which you look to get a return by your trading operations. Circulating capital is that which comes back in your trading operations. The sums in questions were sums which had to come back penny by penny with every order during the period in order to reimburse and justify the particular outlay.

That was a passage that excited both Justice Pagone and the majority in the Full Court. We say that on the facts it is not a passage that justifies the conclusion that expenditure in the present case was on revenue account. But if I can go to the bottom of that paragraph, about five lines up:

Prima facie therefore the lump sums were circulating capital which is turned over and in the process of being turned over yields a profit or loss; they were part of the constant demand which must be answered out of the returns of the trade.

It is the next sentence, your Honours, that is critical:

This however is merely one indication and by no means concludes the matter.

What their Lordships then do is go and consider all the other matters that Sun Newspapers requires us to consider and if one goes, for example, to page 402 at the foot of the page:

In the present case one is dealing with payments made to particular customers to secure their particular custom.

Then, over the page at page 403, at the foot of the page:

Finally were these sums expended on the structure within which the profits were to be earned or were they part of the money earning process?

And, then, over at 405, there is the reference to Henriksen v Grafton Hotel. In the second last paragraph, there is the consideration of the second of the considerations that were suggested by Sir Owen Dixon in some newspapers. Then, the conclusion at the foot of that paragraph:

Thus the agreements merged in and became part of the ordinary process of selling.

Then, the next paragraph deals with the third consideration, namely, the method of payment, and they go on to consider that matter. What the majority did not do in this case, your Honours, is consider all those other matters, at least not in reaching the conclusion that the expenditure was on revenue count.

In fact, your Honours, the opposite seems to have happened. If your Honours go to the majority’s reasons at page 63 of the core appeal book, at paragraph 79 of the judgment of the majority. The majority states, at the last sentence:

The Commissioner says that the outgoing is in the nature of capital because the GMEs exhibit the following characteristics said to be emblematic of capital.

Then, sets out eight matters that I have mentioned, one way or the other, to this Court. Then, if one goes on to paragraph 137, having dealt with – so, if I go to paragraph 137, the majority at 137, accepts:

that the new regime brought into existence a statutory “thing” called a gaming machine entitlement.

Accepts:

that it bears the character of an intangible asset –

Accepts:

that in the absence of such a GME, a statutory prohibition arose upon a person conducting gaming.

Accepts:

that the GME conferred authority . . . to conduct gaming as described for a period of 10 years –

Then, accepts:

that the GMEs are capable of being bought and sold –

Then, at paragraph 139:

These features of a GME are “factors” which “point” in the direction of a capital outgoing –

So, it accepts that they point in the direction of a capital outgoing:

The expenditure on the GMEs as a consequence of the auction process seems to have affinity with expenditures related to the business structure “set up” for earning profits as opposed to an expenditure related to the “process” by which an organisation so set up “operates” or goes about deriving regular returns –

And then states:

However, there are other factors which also point in a different direction.

The only other factor, your Honour, is the grappling hold of BP. It is also, your Honours, not the first time that the question of how expenditure is to be funded, how that issue relates to the process of determining the advantage which is sought from a practical business point of view by the expenditure.

Can I go to AusNet, behind tab 9 of volume 6. I just want your Honours to note that at paragraph 17 the plurality refers to the case of Royal Insurance Co v Watson. That was a case where the expenditure concerned in issue was the payment of salary to an employee. The reason for the reference to Watson is that – in fact, it was determined that the payment occurred pursuant to an obligation imposed upon the payer for the acquisition of the business. So that it was held, stated to be an example where, although the expenditure took the form of the payment of salary it in fact formed part of the consideration for the acquisition of the business.

GORDON J: Is that any more to say than that one factor alone may not be determinative and you have to look at it all?

MR DAVIES: That is true. The relevance of coming to this, though, is that, as found in Atherton’s Case, the payment in Watson’s Case occurred out of profits. I will come to Atherton in a moment, but the relevance is that Atherton is there dealing with circumstances in which the payments were made out of profits and they held that, notwithstanding that they were made out of profits, they were on capital account. That is because what the essential factor that determines the character of the outgoing is not where it has come from but what is sought to be achieved by it.

At paragraph 24 the Court refers to Colonial Mutual Life. I would like to take your Honours to Colonial Mutual Life. It is behind tab 41 in volume 9. It is along the same lines, your Honour. It is an example of a case where the manner in which the outgoing was financed or whether moneys for the expenditure outgoing originated were not matters that determined the character of the outgoing. It was determined by reference to what was achieved by the outgoing.

Your Honours will see from the headnote that the case was about J. Brothers, who agreed to:

transfer to a life assurance company a piece of land adjoining land owned by the company, in consideration of a promise by the company to pay to them, for a period of fifty years, an amount equal to ninety per cent of all rents, as and when received, from lessees or tenants of three shops and a basement in a new building to be erected on both the blocks of land.

The Court held that, notwithstanding that it was a promise to pay an amount equal to 90 per cent of rent, it was a promise that was incurred in order to acquire the land and therefore on capital account.

If I could go to two passages, one of them is Acting Chief Justice Williams that starts at page 439. The particular passage is at 447. At the foot of the page his Honour refers to the fact that the payments were:

dependent upon the appellant receiving rent for the three shops and basement. The Just Brothers are to receive amounts equal to ninety per cent of the whole amount of this rent. It may be that, as a matter of accountancy, the appellant would debit these payments to revenue account. But this does not necessarily make the outgoings of a revenue nature.

Then, over the page, consistent with authority, in our respectful submission, halfway down the first paragraph:

Are the sums in question part of the trader’s working expenses, are they expenditure laid out as part of the process of profit‑earning; or, on the other hand, are they capital outlays, are they expenditure necessary for the acquisition of property or of rights of a permanent character the possession of which is a condition of carrying on the trade at all. The acquisition of land is an acquisition of property of the most permanent character –

Then Justice Fullagar starts at page 449, and the relevant passage that I take the Court to is at page 454. About five lines down from the start of the second paragraph:

For it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature.

In our submission, it is true there that the Court is concerned with a tangible asset and it is in the nature of land. In the present case, the only difference is that we are not concerned with the acquisition of a tangible asset. It is an intangible asset, and as is established by AusNet that dealt with a transmission license, the same principle that relates to tangible assets applies to intangible assets.

We therefore say, your Honour, that the manner in which the trustee, through Mr Canny, calculated the maximum amount that he wished to pay for the GMEs, and his conclusion that they would need to be paid out of the ongoing revenue generated by the gaming, are not matters that support the conclusion that the expenditure for the acquisition of the GMEs was on capital account.

I did mention Atherton’s Case. I should quickly refer to Atherton’s Case, which is also in volume 9. Your Honours, you will see the facts set out in the headnote; that the company established:

a pension fund for its clerical and technical salaried staff.

In order to establish that fund, the company contributed the sum of £31,784:

to form the nucleus of the fund –

The question was whether that contribution was on capital account or revenue account. Their Lordships held that it was on capital account. But the material factor, for our purposes, is what is noted at the foot of the headnote and that is:

The company, having paid the sum . . . out of current profits –

That was a matter that was required to be considered because of the particular provision that was before the House of Lords and it is noted by the Lord Chancellor on page 2010 at the foot of the page. One of the matters precluding the deductibility of the contribution was a matter that if the contribution was on account of any capital withdrawn from the business and there was some - if I can then go to page 212. The Lord Chancellor, in the second‑last paragraph, in the second sentence, notes:

The 31,784l. was not “capital withdrawn” from the trade, for it was not paid out of capital but out of the incomings of the year –

Now, notwithstanding that observation, the House of Lords found that the contribution was one of capital and not deductible and not deductible in calculating profits. Your Honours will see that over the page the Lord Chancellor states at about the third line:

in other words, whether it is in substance a revenue or a capital expenditure.

GAGELER J: Do we really get very much from going through the details of old English case law dealing with different statutory language?

MR DAVIES: No, your Honour, I refer to it in the sense that Atherton is an older case; it is dealing with slightly different statutory language.

GAGELER J: You do not get much better than Justice Fullagar’s statements that you have already read to us.

MR DAVIES: No, that is true, your Honour. I did wish to turn ‑ ‑ ‑

GORDON J: Then you get the warning that was in AusNet that you should not argue by analogy and one just ‑ ‑ ‑

MR DAVIES: It is not by analogy, your Honour. There are examples of cases where, notwithstanding the proposition that – I will not take it any further, although I have already referred to Watson which is referred to in AusNet and the passage that I was relying upon in Atherton about Watson is at pages 217 to 218.

KIEFEL CJ: Have you covered the three errors then?

MR DAVIES: Yes, your Honour.

KIEFEL CJ: Are you moving to the second issue?

MR DAVIES: Yes, your Honour. My learned friend has indicated to me that it is five to eleven. It might be a convenient time to have the 15 minute break.

KIEFEL CJ: Yes, we might have our morning break. Thank you.

AT 10.54 SHORT ADJOURNMENT

UPON RESUMING AT 11:09 AM:

KIEFEL CJ: Yes, Mr Davies.

MR DAVIES: Your Honours, the second issue involves two questions. The first was whether the expenditure was incurred by the trustee to preserve but not enhance the value of goodwill. The second was whether the value to the trustee of the GMEs was solely attributable to the effect they had on goodwill. In our submission, the majority erred in finding that both those requirements were satisfied. We respectfully adopt Justice Thawley’s reasons in dissent, particularly at paragraphs 340 through to 343. Might I commence by making some propositions about the meaning of “goodwill” for the purposes of the application of section 40‑880(6).

KIEFEL CJ: I doubt that you need to do that in any great detail.

MR DAVIES: I will just state them, your Honour. The first is that goodwill is the attractive force that brings in custom and adds to the value of business. The second is that goodwill is an individual item of property that is inseparable from the conduct of a business. The third is that goodwill is an asset that is legally distinct from the sources that create the goodwill, including other assets, both tangible and intangible of the business.

The fourth is that goodwill does not inhere in the other identifiable assets of the business. The fifth is that the value of goodwill is separate and distinct from the use value of an asset of a business. The sixth is the ongoing value of a business is different from and is not to be confused with the value of the goodwill of the business. And, the final one is that an intangible asset that confers the right to trade is not, itself, a source of goodwill. We have set out the particular references to Murry and Placer Dome. It is set out at paragraph 11 of the outline of oral argument.

Might I take the Court to paragraph 242 of the judgment of the Acting Chief Justice and, to the sixth line of paragraph 242? It is at page 99 of the core appeal book. The finding of the Full Court was:

The subjective purpose of Mr Canny in bidding was to obtain the GMEs in order to secure the right to conduct gaming.

In our submission, on that finding, the Court ought to have held that section 40‑800(6) did not apply. And, the error that appears to have been made by the majority becomes apparent in the next two sentences:

However, that was an expenditure obligation incurred as a means to secure the custom and patronage of the business in order to secure revenue and profits. The value to the Trustee (Mr Canny being the guiding mind of the Trustee) of the right to conduct gaming (the critical right attached to a GME), was solely attributable to the effect the right had on the custom, patronage, revenue and profits of the hotel business –

In our submission, having made that observation, again the conclusion should have been that subsection (6) did not apply. But, their Honours then said:

that is, the effect on the goodwill –

When your Honours read the cases about the nature of goodwill, there are – for present purposes – two critical distinctions. The first is that an asset has its own independent and distinct value, apart from any value it has on goodwill. It is referred to as the use value of the asset. It is particularly so with the GMEs where the use value of the GMEs is to enable gaming to be conducted and income to be earned from that gaming. That value is separate and distinct from goodwill.

As the cases indicate, what goodwill is referrable to and what the value of goodwill is referrable to is the attractive force that arises out of the manner in which the asset is used. So in the present case with the trustee, it will be the set‑up, where the machines are placed. It will be the nature of the service given by the people working at the hotel. There will be other items that relate to the manner in which the gaming machines are used that may well have impacted upon whatever it was that was attractive to customers to come in and use those particular gaming machines in contradiction to gaming machines elsewhere but the evidence did show that there were gaming machines in a club nearby and this was a hotel.

That is the first main error that their Honours made. The second main error is to acquaint the business as an ongoing concern with goodwill and the value of the business as an ongoing concern with the value of goodwill, but clearly an error having regard to both Murry and Placer Dome.

GAGELER J: Mr Davies, subsection (6) is a non‑application of exceptions in paragraphs (5)(d) and (f).

MR DAVIES: Yes, your Honour.

GAGELER J: I just do not understand something in your written submissions, paragraph 68, where you say it is paragraph (f) that is relevant and not paragraph (d).

MR DAVIES: Yes, (f), your Honour, in our submission – let me just turn it up.

GAGELER J: There is a footnote that says the parties agree that (d) is not relevant. I just cannot follow that.

MR DAVIES: Paragraph (d), your Honour, relates to – I will just turn up the provision now.

GORDON J: These are in relation to a lease or other legal or equitable right.

MR DAVIES: Yes, equitable right, so that provision is – at least for the purposes of these proceedings, accepted to relate only to a legal or equitable right attaching to land. So it is all realty. That is because of the reference to a lease and the Commissioner has accepted a limitation, at least, for the purpose of these proceedings that other legal or equitable right has to be understood that that particular provision is dealing with outgoings in relation to ‑ ‑ ‑

GAGELER J: I may be wrong but that does not seem to have been the view of, I suppose, Mr Pagone, in the Tribunal. I thought he relied on (d) – paragraph 24 of the Tribunal’s reasons. I do not want to distract you but it just seems at odds with the case you are presenting.

MR DAVIES: Yes, I see. Your Honour, we do not press that finding because of the construction that the Commissioner has accepted in relation to the meaning of lease or equitable right. What we do say, though, is that (f) does apply because the amount of the expenditure would be taken into account in working out whether it was a capital gain or capital loss from a CGT event relating to the GMEs.

GORDON J: That here would arise on the disposal of the business – of itself being disposal of the GME by sale or transfer.

MR DAVIES: That is right. They were transferred, yes, and of course the GMEs were such that they were capable of being bought and sold anyway but it might have been a buy‑back.

GORDON J: Absent sale it would be on termination at the end of 10 or 12 years.

MR DAVIES: Yes, that is so, yes, your Honour. The two errors that we say the majority made in relation to the meaning of goodwill were, firstly, fail to distinguish between the use value of an asset and the value of goodwill and, secondly, fail to distinguish between the value of the business as a going concern with the value of goodwill and both those errors appear to have arisen by the majority because they have conflated the whole concept of custom, patronage, revenue and profits as being matters that are solely attributable to effect on goodwill.

Our first submission is that the expenditure was incurred by the trustee in order to acquire the GMEs, and the legal authority that they conferred to conduct gaming and that does not satisfy the requirement that the expenditure be incurred to preserve but not enhance the value of goodwill.

But the second and related point that we make, your Honour, is that – and I had made it at the start of my submissions - that the intention was not to preserve an existing state of affairs. The intention was to acquire a new right, a new valuable right. So whatever the position, the expenditure could not have satisfied the requirement that it be to preserve and not enhance.

We do refer your Honours to Box, behind tab 10 in volume 6. Your Honours, I am perhaps about to go to an analogy but it is a case where the Court accepted that the expenditure concerned was to enhance. Your Honours will note from the headnote that the case concerned a transaction in which a baker sold his business. As part of the sale of the business, the baker gave the purchaser a restrictive covenant, or a covenant that the baker would not engage in competition, either for a period of time or within a certain distance. The reason for going to the case on this point is at page 394 where the Court, the plurality ‑ ‑ ‑

KIEFEL CJ: Well, restrictive covenants are accepted as a classic example, are they not, in this area?

MR DAVIES: Well, except in so much this, your Honour. It is there recorded that:

such a covenant enhances the value of the goodwill ‑ ‑ ‑

KIEFEL CJ: Yes, clearly.

MR DAVIES: So in that instance, that actually is an instance where subsection (6) would not apply because the purpose was to enhance. In our submission, subsection (6) does not apply in this case because if there be any intention in relation to the value of goodwill it was to enhance.

The final matter, which is whether or not the value to the trustee of the GMEs was solely attributable to the effect they had on goodwill - if your Honours go to 254 of the majority’s reasons, and to line 47:

On the facts of this case at least, the position is that but for the right, the goodwill of the Trustee’s business would have collapsed. That proposition, on the facts, does not seem to be essentially contested by the Commissioner, as described earlier in these reasons. Thus the value to the Trustee of the right is solely attributable to the effect that the right had on the goodwill –

Then over the page at line 9:

It is difficult to see how the business undertaking of the Royal Hotel could have survived at all without the gross contribution to revenue and the net contribution to profit from gaming, an activity entirely dependent upon the “the right”.

Now, on that finding, your Honours, the conclusion, in our submission, ought to have been that subsection (6) was not satisfied. That finding is consistent with the passage that I took the Court to at paragraph 242 where the majority noted that:

The value to the Trustee . . . the right to conduct gaming . . . was solely attributable to the effect the right had on the custom, patronage, revenue and profits –

Once it is accepted that there is a value of the GMEs that includes the value of the right to earn income from gaming then subsection (6) is not satisfied. For that purpose, if I can go to Murry. That is behind tab 15, volume 6. Paragraph 36, the Court states:

The reasoning of his Honour has not been universally accepted.

That is a reference to Justice Hill in Krakos.

With respect, it erroneously identifies the concept of goodwill as property with the sources of the goodwill and does not distinguish between the potential use value of an asset of a business and the goodwill of the business that is derived from the use of that asset.

If I can then go to paragraph 51:

Where the goodwill of a business largely derives from using an identifiable asset or assets, the goodwill of the business, as such, when correctly identified, may be of small value. That is because the earning power of the business will be largely commensurate with the earning power of the asset or assets. If the goodwill of a business largely depends on a trade mark, for example, and the trade mark is fully valued, the real value of goodwill can only reflect a value that is similar to the difference between the business as a going concern and the true value of the net assets of the business including the trade mark. A purchaser of the business will not pay twice for the same source of earning power.

Thus, your Honours, there is a clear distinction between the value of an asset used to derive income and the value of goodwill that arises from the manner in which the asset is used.

GAGELER J: Do you go so far as to say that if an asset has a transfer value – that is, it can be transferred for value – then the value to you of the right cannot be solely attributable to the effect of the right on goodwill?

MR DAVIES: Your Honour, there may be something about the facts that indicates that the transfer value is of no value to the holder. In the absence of that evidence – just hypothetically there might be some – the fact that there is a transfer value must mean, in our submission, it is not solely attributable.

GAGELER J: Yes.

MR DAVIES: Now, Placer Dome, dealing with values, behind tab 13, the same volume, in paragraph [83], which is at page 81 of the report, in the left‑hand column, sixth line down, three lines before the bottom of the page:

the majority cautioned –

that is, the majority with reference to Murry:

against attributing a value to goodwill which actually inhered in an asset which was a source of goodwill. As the majority stated, a purchaser of a business does not wish to pay twice for the same source of earning power.

Then, if I can refer also to the next paragraph, particularly halfway down:

If the business is selling goods and services which are virtually indistinguishable from others sold in that same market, above‑average earnings will be difficult to achieve. But if above‑average earnings are achieved, it suggests the existence of goodwill; it suggests that the business has attracted custom greater than the industry average. The measure of value of that goodwill is how much the earnings exceed the norm. That is, the business is getting more value out of the assets than its competitors because the business is bringing in more custom. That is not the same as going concern value, another concept or approach, which exists as an intangible separate from goodwill even where there is no custom.

Then, if I can go to paragraphs [97] on page 84 of the report, the left‑hand column:

Goodwill for legal purposes is different from, and is not to be confused with, the “going value” or the going concern value of a business. These terms are not separate methods of valuing the same intangible.

If your Honours please.

KIEFEL CJ: Yes, thank you. Yes, Mr Bloom.

MR BLOOM: Your Honours, from August 2005, when it acquired the Royal Hotel business, until the end of the Tattersalls/Tabcorp duopoly in August 2012, the trustee as a venue operator derived income from the conduct by Tattersalls of gaining on its hotel premises. The income derived, which was described by the Tribunal as a commission and by Acting Chief Justice Greenwood as a fee payable by Tattersalls to the trustee was, in fact, as your Honours will see when we go to the legislation, a statutorily mandated percentage of the revenue from each machine’s daily takings which the trustee helped itself to, effectively from the account, which it at all relevant times kept. Your Honours, I will refer you to our written submissions paragraph 13 where the details of that account are set out.

The 18 gaming machines at the Royal Hotel provided what the Acting Chief Justice called an entertainment option to supplement the other activities on offer at the hotel and were a key component of the hotel’s offering to customers. Could I ask your Honours to go to the judgment of the Acting Chief Justice in the core appeal book, firstly at paragraph 17 at page 47:

Although it will be necessary to turn to the evidence in some detail, it is sufficient to note for present purposes that Mr Canny gave evidence, which is not challenged –

and the transcript references to the concession in that regard is in paragraph 44 of page 53:

that the income derived by the Trustee from gaming in the form of payments made to it by Tattersalls was an essential component of the income of the business of the Royal Hotel.

Then, at paragraph 31 at page 50:

The Trustee found itself in a position where, on 9 May 2010, the day before the auction, it was (and would be until 15 August 2012), conducting the business of a hotel deriving “commissions” income from gaming activities onsite and deriving income from all of the other activities conducted at the hotel, made in part at least, more robust by reason of the presence of gaming machines onsite . . . As a result of the auction on 10 May 2010, the Trustee now found itself in a position where it was required to pay $600,300.00 for the 18 new “GMEs” which would enable it to “operate”, now as the gaming operator, from 16 August 2012, the same 18 machines on the same site albeit for a 10 year period commencing on 16 August 2012 under the new regime.

Then, your Honours, at paragraph 50 on page 54, last line on page 54:

He:

Mr Canny:

says that a “key component” of the Royal Hotel’s offering to tourists and, more generally, visitors to the Daylesford area, included gaming machines which provided an entertainment option to supplement the other activities on offer at the hotel.

Your Honours, the change in law presaging the abolition of the duopoly was intended, your Honours will see, to promote a competitive gaming industry – to go away from a duopoly to what was described as competitive industry. It gave venue operators such as the trustee one alternative and one alternative only should they wish to continue to derive income, including associated income, from the conduct of gaming on their premises.

The trustee could have applied for gaming machine entitlements in respect of a number of additional machines which could have then been put into its premises. It did not do so. It sought only gaming machine entitlements in respect of the 18 machines that had always been in its hotel.

KIEFEL CJ: What would have been the position if they had acquired additional machines?

MR BLOOM: They could have got additional gaming machine entitlements and that ‑ ‑ ‑

KIEFEL CJ: But, what would have been the outcome in terms of characterising it as capital or revenue?

MR BLOOM: I would like to say no different but it might point towards somebody seeking gaming machine entitlements for themselves, rather than the advantage being sought – that of continuing to conduct or have conducted on their premises, gaming. So, the alternative that was given to them was to bid at auction for the allocation of one gaming machine entitlement in respect of each machine that they wished to have on their premises.

The auction process is described in the judgment of the Acting Chief Justice at the core appeal book, page 48, and following – and I will refer your Honours without taking you to it to paragraphs 24 to 28. But, if I could ask your Honours to go to page 49, paragraph 29:

Although it will be necessary to explain the factors that informed the thinking of Mr Canny (as the guiding mind of the Trustee) and Mrs Canny (as the nominated bidder), as they entered into the auction process and particularly the formulation of the maximum price they could afford to bid in such an auction for each GME having regard to the profitability of the business of the Royal Hotel, it is sufficient for present purposes to note that Mrs Canny, on behalf of the Trustee, participated in the auction to try and secure 18 GMEs, that is, one GME for each of the 18 machines that had been historically located on the site of the royal Hotel and had, historically, been productive of the gaming income derived by the Trustee in the form of commissions paid by Tattersalls in connection with gaming onsite, as part of the hotel business.

Then, paragraph 30:

In the final round auction conduced on 10 May 2010, the Trustee was successful in its bid for 18 GMEs. The total cost of the 18 GMEs was $600,300.00 including a $10,000.00 non‑refundable bond, or $33,350.00 per GME.

If your Honours would go briefly to the court documents in volume 5 ‑ ‑ ‑

GORDON J: You mean the joint book of authorities?

MR BLOOM: Yes, I am sorry. No, court documents – tab 5 of the court documents. I am sorry, it is not volume 5. I have something called “Court documents” which are the submissions.

KIEFEL CJ: I think that might have been renamed for you, but we do not have such an animal.

GORDON J: I do not think we have that structure.

MR BLOOM: People do that all the more often these days, your Honour.

KIEFEL CJ: They are just trying to confuse you, Mr Bloom.

MR BLOOM: Yes, thank you, your Honour. I am sorry, I do not mean to confuse your Honours. I have a document here called the “Respondent’s Book of Further Material”.

GORDON J: Thank you.

KIEFEL CJ: It just has the one document?

MR BLOOM: Yes, your Honour. And on the page – well, it is actually a letter together with an allocation instrument.

KIEFEL CJ: Yes. Yes, we have it.

MR BLOOM: And the allocation instrument is the one to which I wish to take your Honours. Your Honours will see from the third paragraph, the Minister says:

Under section 3.4A.5(9)(b), I determine that for each Allocated Gaming Machine Entitlement the Venue Operator must pay the corresponding amount set out in column 4 –

Below and then each of them is listed at “$33,350.00” each. And that, of course, is the amount incurred within the authorities in this Court, such as James Flood. So there are 18 outgoings incurred for 18 different gaming machine entitlements, one in respect of each machine.

Your Honours, the trustee’s deferred payment agreement with the State was what was called a related agreement for the purposes of the Gambling Regulation Act, to which I will shortly take your Honours. Importantly, however, a default under that agreement would potentially lead to forfeiture of only that number of allocated GMEs, the cost of which was represented by the outstanding balance. Those that had already been effectively paid for would be retained.

Now, your Honours, it is at this point that we will briefly take the Court to the legislation. May I start, if I may, with volume 3, behind tab 4, and then I will go to the further amending Act. But the purpose of the further amending Act was really to enable the State unilaterally to reduce either State‑wide or regional‑wide the permitted number of gaming machines and entitlements in the State or region and then to have a process of offering to buy them back, allowing them to be transferred outside that geographical region, if it was a regional thing, or, in certain circumstances, they be extinguished and forfeited. When we come to what we call statutory fragility, we would, with respect, like to rely upon that provision, and it is the reason we added it to the court book.

Your Honours, behind tab 4, if I may take your Honours first to section 2.3.1(1)(j), court book 1106 and we rely upon the fact that without the relevant GME you could not conduct gaming. But 2.3.1:

Unlawful games

. . .

(j) any game with cards or other instruments of gaming wherefrom any person derives a percentage or share of the amount –

GORDON J: Sorry, Mr Bloom, to interrupt. Are we in the old Act, rather than the new Act?

MR BLOOM: Yes, behind tab 4, your Honour.

GORDON J: Tab 3, I think, is it?

MR BLOOM: Is it? No, tab 4. Tab 4. Unless they have been doing it to me again, your Honour. Sorry, that is the old Act with the 2009 amendments, except those affected by the further amending Act. So it actually sets out the old Act, as relevantly we need, and it also sets out the amendments made in 2009, but does not set out the further amendments that were made by the further amending Act.

GAGELER J: Are we concerned with Part 4A?

MR BLOOM: Yes, we will be; that is the 2009 amendment. Not Part 4A of the Tax Act, no, your Honour.

GAGELER J: No. I am ahead of you on that one, Mr Bloom.

MR BLOOM: Yes, your Honour. Certainly Part 4A of this Act. But if your Honours will indulge me and go to tab 4, I will take you swiftly through the relevant provisions, and try to make it as painless as I possibly can. So 2.3.1(j), at court book 1106, an unlawful game is:

any game with cards or other instruments of gaming wherefrom any person derives a percentage or share of the amount or amounts wagered –

I just wanted your Honours to see those words, too: “wherefrom any person derives a percentage or share of the amount or amounts wagered” because that was what was happening under the old Act, under the Tattersalls situation under the duopoly, the taxpayer was deriving a share of the income from the conduct of gaming on its premises. In 3.1.1, at court book 1168, your Honours will see the insertion of the 2009 provision and its purpose in 3.1.1:

(1) The purpose of this Chapter is to establish a system for the regulation, supervision and control of gaming machines and gaming equipment with the aims of –

(a) ensuring that gaming on gaming machines is conducted honestly –

(2) The purpose of this Chapter is also to –

(a) provide for the allocation of gaming machine entitlements –

and the allocation of them and:

(b) promote a competitive gaming industry with the aim of providing financial and social benefits to the Victorian community.

Then if your Honours would, please, go to 3.2.1, at court book 1175, that basically recites in a note that:

Part 4A requires a venue operator to hold gaming machine entitlements to conduct gaming in an approved venue on or after a gaming machine entitlement declared day or days –

and that was 16 August 2012, and says, in subsection (1), which was in both the old and new regimes:

The conduct of gaming is lawful when the gaming is conducted, and the gaming equipment is provided, in an approved venue or casino –

and then, in subsection (2), inserted in 2009:

The conduct of gaming in an approved venue or casino in accordance with this Chapter and the conditions of the relevant licences and gaming machine entitlements is not a public or private nuisance.

So it.....but otherwise be, as your Honours have seen, unlawful. Then at court book 1227, in section 3.4.25 there is, for a number of pages, the details of disciplinary action and offences in relation to a venue operator’s licence that can lead to the cancellation or suspension of that licence. Of course you cannot have a gaming machine entitlement unless you have a venue operator’s licence. Then, at page 1318 of the court book 3.4A.1, this is Part 4A, your Honour:

On and after the day declared by the Minister –

16 August 2012:

the conduct of gaming in an approved venue is lawful only if ‑

(a) the venue operator holds a gaming machine entitlement that authorises the conduct of that gaming –

Then 3.4A.2:

A gaming machine entitlement authorises the venue operator that holds the entitlement . . .

(a) to acquire approved gaming machines . . .

(b) to conduct gaming on one approved gaming machine in an approved venue operated by the venue operator –

and do all other necessary things. Then, if your Honours go to 3.4A.5 on 1321. This is the power of the Minister to allocate gaming machine entitlements and he can reallocate, your Honours will see, under (1)(b):

gaming machine entitlements forfeited to the State –

Then subsection (3) which has been changed by the amending Act, the further amending Act which we will go to shortly, allows the Minister, in effect ‑ and it has been slightly enlarged and I will read the words to your Honours:

The Minister, by notice published in the Government Gazette, must specify the maximum number of gaming machine entitlements –

under which gaming may be conducted in the State that:

the Minister will create under subsection (1).

I will take you to the amending section when we get to that. If your Honours would go please to 3.4A.7 at 1325:

A gaming machine entitlement –

(a) takes effect . . .

(b) subject to subsection (2), remains in force for a period of 10 years (whether or not –

it is forfeited or:

allocated to another venue operator –

It:

may be terminated earlier under this Act, or extended under this section for the period determined by the Minister –

Then subsection (4) is the two‑year extension and then an amount is required to be paid for the extension so the 10‑year period does not get you the automatic right to the extension without having to pay for it. Again:

A machine entitlement may be extended only once.

Then, in 3.4A.10 at page 1327:

A venue operator holds a gaming machine entitlement subject to –

(a) the exercise of any power or the performance of any function by or on behalf of the State in relation to that entitlement under this Act; and

(b) any agreement between the Minister, or a nominee of the Minister, and the venue operator –

And then 3.4A.11 there is:

No entitlement to or legitimate expectation of approval of venue

And then subsection (2):

To avoid doubt, a venue operator does not, by reason only that the operator is the holder of a gaming machine entitlement, have any entitlement to, or legitimate expectation of ‑

(a) premises being approved –

or any other approval. Then, if your Honours would go please to 1332 to 3.4A.16. There has been some discussion with respect about transferability but your Honours will see that it is a restricted transferability:

A venue operator must not transfer a gaming machine entitlement to a person who is not a venue operator.

So, they are not freely transferable by any view. And 3.4A.17:

A venue operator must not transfer a gaming machine entitlement the operator holds to another person other than in accordance with this Act and the gaming machine entitlement allocation and transfer rules.

So, it is not exactly freely transferable. Then, if your Honours would turn to Division 6, at 1335 – this is the beginning of forfeiture - over the page, you forfeit effectively if you do not start using them within the relevant holding periods which is six months after allocation, although the holding period can be extended. Division 7, “Forfeiture of gaming machine entitlements following disciplinary action, surrender of licence or expiry”, so:

Gaming machine entitlements forfeited if venue operator’s licence is cancelled, surrendered or not renewed –

I took your Honours earlier to the disciplinary provisions in relation to venue operators’ licences. That was in 3.4.25, at 1227, if you want to put a note next door to it. Then Division 8, 3.4A.27 “Gaming machine entitlements forfeited if venue operator defaults under related agreement”. That, I told your Honours about before. So, the instalment agreement, which is a related agreement for these purposes – if there is a fault under that, you forfeit. But, only to the extent to which what you have not paid covers the number of GMEs outstanding, effectively.

Your Honours, I will take your Honours now to Division 8A which was inserted by the Gambling Regulation Further Amendment Act 2009. That Act is in volume 8, behind tab 34. As my learned friend told your Honours it, relevantly, for our purposes, operates from 16 August 2012 – the same date that everything else, effectively, took place – Tatts went, the new system came in and all of the relevant provisions were operative, the declarations were made, all of that.

So, there is an extract from Hansard, first, if I may take your Honours to that, behind tab 37. At 3545, left‑hand column, three full paragraphs from the bottom:

A number of the provisions of the bill allow for the various licences to be amended which could affect the operation of those licences. One provision provides for buyback procedures –

Then, if you go over the page, right‑hand column, first full paragraph:

This bill introduces a scheme for the government ‘buyback’ of gaming machine entitlements if the decision is taken after 2012 to reduce the regional and municipal limits or the statewide cap of 27 500 gaming machine entitlements. The government does not intend to reduce the number of gaming machines but future governments may wish to exercise this prerogative. The buyback scheme will operate so that before any compulsory action is taken, the first step in the scheme will be a ‘market‑based’ approach whereby the government offers to buy back gaming machine entitlements from willing venue operators who are affected by a reduction in the caps. This scheme will provide certainty to venue operators about the impact of any potential loss of entitlements through regional or statewide caps reductions. In addition to accepting the government’s offer to buy back, venues will also have the option under the buyback scheme to either apply to the Victorian Commission for Gambling Regulation to have the conditions on their entitlements amended so that they may use the entitlements in another geographic area not affected by regional or municipal cap reduction or to transfer their entitlements to another venue operator under the transfer scheme.

Of course, in taking your Honours to this it is all for the purpose of suggesting, with respect to our learned friends, that this is far from an enduring asset in the sense in which the cases have used that term.

So, your Honours, back to tab 34. At court book 3348 – that is the provision dealing with regional municipal limitations – 3.4A.5A. That can be changed by the Commission if it is no longer appropriate. Then at court book 3353, this division likewise applies from 16 August 2012. And this is the State cap, which might reduce the numbers already on offer, and then under E, on 3356:

The Commission must, by written notice, serve on each venue operator that holds gaming machine entitlements an offer of the State to purchase the gaming machine entitlements that contains the following –

And if they have expired, in F, then effectively – and I will not take your Honours through each of them but all the way through, to 20J, if you do not accept the purchase offer or transfer them to another venue operator or seek to transfer them outside your geographical area they are forfeited and extinguished. You can see that from 20I. If there is an extinguishment or a forfeiture from 20J:

No compensation is payable by the State in respect of anything given or anything done under or arising out of anything under this Division.

Then 3.4A.27A deals with similar provisions relating to regional and municipal caps. So if I could then, finally, return to volume 3 and to Division 10, behind tab 4, at page 1340. It now reads, in 3.4A.30, as a result of that amending statute:

This Division applies to all gaming machine entitlements forfeited to the State under Division 6, 7, 8 –

or 8A. 3.4A.31:

No compensation payable because of forfeiture of gaming machine entitlements

If there is forfeiture the amounts owed to the State in relation to gaming machine entitlements become immediately payable under the related agreement. But in certain circumstances – this is 3.4A.33:

The proceeds arising from the allocation of a gaming machine entitlement forfeited under Division 6, 7 or 8 –

or 8A now:

(less any State‑owed amounts) must be paid to the venue operator who forfeited that entitlement under Division 6, 7 or 8 –

or 8A. So, turning from the legislation, your Honours, to the cases, our first proposition is that all of the cases are unanimous on this, that the focus is on the character of the advantage sought by the expenditure, rather than on precisely what was obtained, although you look at what was obtained to inform the question of what was the advantage sought.

So here, the nature of the rights obtained, including their fragility as statutory rights, and their limited transferability, as well as their individual connection to individual machines, coupled with the fact that they were only sought here for the 18 machines, suggests that the advantage sought was not the GMEs for themselves, but rather the continued earning of income, direct and indirect, from the conduct of gaming on the 18 machines already on the premises.

Could I ask your Honours please to go to Citylink, volume 6, at tab 14, and to paragraph 148 in the judgment of Justice Crennan, with whom Chief Justice Gleeson, Justices Gummow, Callinan and Heydon agreed, at 2716:

The characterisation of an outgoing depends on what it “is calculated to effect”, to be judged from “a practical and business point of view”. The character of the advantage sought by the making of the expenditure is critical.

Then there is the reference your Honour Justice Gordon referred to at 151 about no analogy. And then if I could ask your Honours to go to AusNet, which is behind tab 9. In paragraph 22, after referring to the Sun Newspapers tests ‑ this is at page 2528 ‑ the plurality referred to Justice Dixon:

later observed in Hallstroms Pty Ltd v Federal Commissioner of Taxation that the distinction also depends upon “what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process”.

And then at 23:

The real question, as Gibbs A‑CJ identified it in Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd, may be “not to determine the character of the advantage sought, once it has been identified, but to decide what was the advantage sought by the taxpayer by making the payments”.

And that distinction is also made in that case by Justice Jacobs. Then your Honour Justice Gageler at paragraphs to which my learned friend took the Court, 73 and 74. Your Honour says at the end of 73:

The distinction “depends on what the expenditure is calculated to effect from a practical and business point of view”.

To characterise expenditure from a practical and business perspective is not to disregard the legal nature of any liability that is discharged . . . It is not to inquire into whether the expenditure is similar or economically equivalent to expenditure that might have been incurred in some other transaction. It is to have regard to the “whole picture” of the commercial context within which the particular expenditure is made, including most importantly the commercial purpose of the taxpayer in having become subjected to any liability that is discharged by the making of that expenditure. It is, where necessary, to “make both a wide survey and an exact scrutiny of the taxpayer’s activities”.

It is not irrelevant, your Honours, that the gaming machine entitlement relates to one aspect of the business. It is not like the transmission licence in AusNet which was, in effect, the licence which entitled AusNet to carry on business. Here, we had a separate licence, a hotel business licence that enabled us to carry on the hotel business. This was one aspect of the business and at that an ongoing business.

That brings me to the next proposition that expenditure incurred in the course of an ongoing business to meet an obstacle or difficulty which has arisen in the course of conducting that business and which is aimed at enabling the taxpayer to carry on the same business unfettered by that difficulty can be on revenue account. The four cases upon which we rely for principle, not for their facts, for that proposition, are Hallstroms, Snowden & Willson, Magna Alloys and BP.

GAGELER J: When did the obstacle arise here?

MR BLOOM: When they were told that if they wanted to continue obtaining income from the conduct of gaming on their premises they had one choice and one choice only which was to apply for a GME in respect of each machine.

GAGELER J: When was that?

MR BLOOM: That was in 2008, was when they were told. Then, they went to the auction in 2010 and under the auction in 2010, they paid 33,000 for each gaming machine entitlement.

GAGELER J: Their previous ongoing business had a finite time on the horizon, did it not, so far as the use of poker machines were concerned?

MR BLOOM: So far as Tatts were concerned, yes, as this has a finite time. But, of course, when these ended, there was a new allocation of gaming machine entitlements again. At that time, the trustee itself, the hotel, in fact, the hotel was sold in 2015. But the point is, your Honour, the State one can presume, is always going to be happy to collect revenue from gaming machines and a way will be found in which that is going to happen. What happened here was by the opening – going away from the duopoly, opening up competitive gaming, States still made sure ‑ and my learned friend took you to the provisions ‑ that it was getting its cut, but the point is that gaming would continue and it was told it could continue but only if it applied for a gaming machine entitlement for each machine.

Now, the first three of those cases, Hallstroms, Snowden & Willson, Magna Alloys, involved the acquisition of no asset. They were expenses, both advertising in one case, and legal in all cases. BP, of course, did involve the acquisition of finite assets which were exclusive trade ties with service stations.

Could I ask your Honours to go to Hallstroms, it is in volume 7 at tab 21 ‑ and your Honours know these cases well, as your Honour the Chief Justice warned us, so I will not take you to all of it. But if I could ask – your Honours remember the facts. Legal costs were incurred in opposing the extension of a competitor’s patent. If I could ask your Honours to go to the judgment of Chief Justice John Latham at 2874 of the court book:

In my opinion, the expenditure by the company was not made for the purpose of acquiring an asset or of adding to the profit‑yielding subject which constituted the capital structure of the business but, as Lord Hanworth M.R. said . . . the expenditure was made “not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on” the same business, unfettered by a particular difficulty which had arisen in the course of the year.

It is true here an asset was acquired, but the asset that is acquired must be one which is capable of being described as enduring and that is something that I will come to shortly.

GAGELER J: It is a different point, is it not?

MR BLOOM: It is a different point. Then towards the end of that page, last paragraph:

Nor can it be said that the company, by making the expenditure, gained “an enduring advantage”.

That is the point we seek to make. Then over to the middle of page 642 at about point 6:

If the petition of the Electrolux Company had been granted the business of the appellant company would not have been extinguished, though it would have been seriously diminished during the period of extension.

It was held, Sir Owen Dixon dissenting, that the expenditure was on revenue account. The next case is Snowden & Willson. There they incurred advertising and legal expenses defending the name and reputation of the company both by advertisements in the press and also at a Royal Commission inquiring into their business methods. Snowden & Willson is behind tab 16 in volume 6.

KIEFEL CJ: Do we need to go to it?

MR BLOOM: Only to something said in it, your Honour. The difficulty with all of these is that these are all cases on different facts. Every capital revenue case is a case on different facts but the courts give helpful little guides and it is often just by going to those short words that one can rely upon them. That is at 2759 in the judgment of Sir Owen Dixon at about point 4:

But as it appears to me, the carrying on of the business of the nature described brought with it the attacks against which the taxpayer company sought to defend itself. The attacks touched its business nearly; they disparaged the methods by which it was conducted; they were calculated to deter intending or likely customers from dealing with it and to destroy the faith of existing customers in their current relations with the company. No doubt it would be instinctive in the business man or, perhaps, in any man, to defend himself and those associated with him in business against an attack of such a description on the manner in which they were pursuing their business activities. But the instinct is founded upon sound if intuitive conceptions of what must be done if they are not to suffer in their pursuit of custom and profit. Whether on the merits they were in a position to defend themselves successfully or whether, on the other hand, the attacks upon them lacked adequate foundation alike seem to me to be matters not to the point.

Then over at page 2760 the first full paragraph:

In the present case it appears to me that the taxpayer company could do nothing else but defend itself, if it was to sustain its business and continue carrying it on in anything like the same volume or according to the same plan.

That is this case, with respect. At the end of the next paragraph he talks about avoiding a decline in custom.

Then, Magna Alloys involved legal costs in defending the directors and employees who had been offering secret commissions in the sale of the products of the company. Magna is behind tab 23 of volume 7. It was a decision of the Full Federal Court – Justices Brennan, Deane and Fisher. Justice Brennan deals with this at page 228, at the very bottom:

Nor was the expenditure an outgoing of a capital nature. The capital of the business was in no way increased by the expenditure incurred. True it is that the expenditure protected the reputation and goodwill of Magna’s business, but the attack which was made arose out of the day to day selling activities of that business and it was the business purpose of vindicating the methods by which it was conducted that brings the expenditure within s 51(1). Though goodwill is a capital asset of a business it is frequently earned and maintained by the daily activities of those engaged in the business. The valuable if intangible asset of goodwill frequently grows out of activities the cost of which is a charge on revenue account: see Sun Newspapers . . . Expenditure incurred in attempting to vindicate the business methods of the taxpayer, overcoming the obstacle to its trading which had been raised by the prosecutions is properly to be regarded as a cost on revenue account.

Then, in the judgment of Justices Deane and Fisher – I will give your Honours, simply, the reference – is it at 239, line 21 to line 34.

BP – about which my learned friend had much to say – is in volume 6, tab 11. Your Honours will recall that Sir Owen Dixon and Justice Kitto had, in the High Court, dissented. At 2607, they set ‑ ‑ ‑

GORDON J: Sorry, what page are we at, Mr Bloom?

MR BLOOM: Page 2607, your Honour. This is in BP, behind tab 11.

GORDON J: What page of the case are we at, I am sorry?

MR BLOOM: Page of the case? I am sorry, page 391.

GORDON J: Thank you.

MR BLOOM: Sir Owen Dixon said – this is at the last paragraph:

“I do not think it was acquiring a capital asset or doing any more than so conducting its business –

talking about BP:

on revenue account as to increase it and make as certain as it could that its business was continuing and also would continue, if possible, to expand.

He is talking about the exclusive trade ties which were undoubtedly obtained, were contractual – not subject to the fragility – as we, with respect, refer to these licences or these GMEs. But, he says:

For my part I cannot think that all the course adopted changed the character of the transactions of the company from those of a continual attempt to establish its product in a consumers’ market and to meet all the obstacles which arose in a long and rather troubled to obtaining a reputation for its product.”

They refer to what Justice Kitto said over the page:

“But a promise by a service station operator not to deal with oil companies other than the appellant or its allies was only the negative side of the substantial positive advantage which it was the purpose and practical effect of the agreement to produce, namely the advantage of a practical certainty that the whole of the custom of the service station, for motor spirit, would be given to the appellant –

Then, your Honours, at page 393, second paragraph:

B.P.’s ultimate object was to sell petrol and to maintain or increase its turnover. There can be no doubt that the only ultimate reason for any lump sum payment was to maintain or increase gallonage.

Here to maintain or increase the conduct of gaming on its 18 existing machines. Then, over the page, they refer to it, at the very top of the page as a “crisis”, and they refer in the middle of 395 to the fact that:

B.P. was not achieving a monopoly –

and, of course, we have moved away from duopoly, at least, to opening up competition. Then, at 396 to 397 in no uncertain terms, they say why Atherton’s Case has absolutely nothing to do with a case such as BP or, we would say, a case such as this. Then, they go on to consider, amongst other things, the enduring or otherwise nature of the assets.

Now, before I finish with “enduring nature” there is one more proposition which comes, your Honours, from the judgment in AusNet in volume 6 at tab 9, it is in paragraph 19 and it is another difference between this case and AusNet because AusNet was buying a business and your Honours held, just as had been held in Colonial Mutual and in the other cases my learned friend relies upon, that when you pay amounts like that as part of the acquisition cost, they are capital. But this is an outgoing in the course of an ongoing business. At paragraph 19, the plurality referred to the Law Shipping Case:

The proposition is well established that expenditure of a kind ordinarily treated as being on revenue account in one set of circumstances may be treated as on capital account in another set of circumstances. An example is found in . . . Law Shipping . . . The expenditure of substantial sums on repairs to a ship which had been necessary at the time of its purchase was treated as capital. The need for repairs meant that the ship when purchased was a less valuable asset than if it had been in repair. Absent the need for repairs, the sellers could have demanded a higher price.

But, as their Lordships noted ‑ and at footnote 71 sets out the relevant passages ‑ had the vendor incurred the same expenses on repairs during the course of carrying on its business before it sold the boat, it would have got a deduction for them. Here, we have, of course, an ongoing business.

So, your Honours, the final proposition is that an asset may not relevantly be described as having an enduring nature for the purposes of applying the tests in all of the cases that include Sun Newspapers even though it potentially lasts for a number of years. The true nature of the asset needs to be examined in order to determine whether its nature can relevantly be described as enduring.

In Citylink, your Honours recall that there was a contractual right to operate the Citylink toll road for a period of some 30‑odd years. It was contractual, it was not subject to the fragility that these rights are and it was for some 30 years. Justice Crennan dealt with that, and I will not take you to it, at 152 to 154 and held that the outgoing was, nonetheless, on revenue account. The roadworks went back at the end of the period to the State.

That the GMEs in this case are not enduring assets finds support, in our respectful submission, in what was said in the joint judgment of your Honour the Chief Justice and Justices Hayne and Bell in ICM Agriculture and that is in volume 8 at tab 35 and if I could ask your Honours to turn to paragraph 144 on page 200, 3484 of the court book:

The second point to bear in mind is that bore licences and aquifer access licences are each creatures of statute. And each form of licence is, or was, a statutory dispensation from a general prohibition against the taking of groundwater.

Same as here ‑ not groundwater, but gambling:

Because all sub‑surface water was vested in the State in 1966, none of the licences was a regulation of some common law right to extract groundwater. That right had disappeared . . . And because the rights given by the licences were statutory rights, they were inherently susceptible to change or termination.

Then over at 147, there is a reference to the fragility point that we seek to rely upon. So, your Honours, given the nature of a GME, it is incorrect, in our respectful submission, to describe it as having an enduring nature within the meaning of the authorities.

While on its face it is granted for 10 years, with a possible but once only two‑year extension, it is not otherwise renewable. And it is subject to divestment, and even extinguishment, if the instalments of the total purchase price are not paid, or if one of the events envisaged in the provisions inserted by the further amending Act – that is, when there is a cap, a new cap put on the number in the State or the region were to occur ‑ or if there was disciplinary action with regard to the venue operator’s license.

Given its nature, and in particular that fragility, it cannot, with respect, be properly described as enduring, and that assists the conclusions, with respect, that the advantage sought was not the GMEs for themselves. That all four of Hallstroms, Snowden v Willson, Magna Alloys and BP provide useful guidance, in this case, and suggest that the advantage sought was the removal of an obstacle to continued trading, that was the only thing that could be done if the business was to be sustained in what was an important cog in the earning of both direct and indirect income. In our
respectful submission, the expenditure was on revenue account. Your Honours, Mr Murphy will address on 40‑880.

KIEFEL CJ: Yes, thank you, Mr Bloom.

MR MURPHY: Your Honours, I note the time. Would you wish me to come up?

KIEFEL CJ: Yes, please, and we will be resuming at 2.00 pm.

MR MURPHY: Thank you, your Honours. If I could take your Honours first to section 40‑880. It can be found in volume 6 at page 2411 and 2412. Your Honours, perhaps prior to dealing with the section, I should just address your Honour Mr Justice Gageler’s point earlier on, in relation to the provisions of section 40‑880(5). The case was argued on the basis that subsection (f) applied, not that subsection (d) applied, and that that is to be found in the Tribunal’s decision at paragraph 19.

Your Honours, if I can take you to section 40‑880(6), and if we can make three observations – three observations which I will develop in a minute. Firstly, that the repeated use of the word “you” in the subsection focuses the attention on the taxpayer, as distinct from focusing the attention on the expenditure, or the value of goodwill as such. The question is did the taxpayer incur the expenditure to preserve, but not enhance, goodwill? The question is the value to the taxpayer.

The second point is that the statutory context of this particular case is very different from that in Placer Dome. In Placer Dome the issue essentially was the determination of whether or not the taxpayer was a land‑rich corporation which required a calculation of values and the taking of values of various assets. There is no question of amounts in this case. The amount is the expenditure which has been incurred and that is known.

The third is when one looks at the subsection it is clear that it refers to goodwill in the context of an asset in its own right. But it is predicated on the acquisition of a legal or equitable right, which is another asset. If I could turn back to the first point, the question in relation to the phrase:

you incur to preserve (but not enhance) the value of goodwill –

is to be answered by reference to the circumstances of the taxpayer. Those circumstances were found by the Tribunal in paragraph 26 when it said – and if I could take you to the Tribunal’s decision, which is at page 23. What the Tribunal said in paragraph 26 was:

That purpose of the expenditure (on the assumption that it was of capital) was, from a practical and business point of view, to preserve the value of goodwill and was also reflected in the trustee’s goodwill.

That is a clear finding. But what the Tribunal then went on to do in paragraph 27 was to point out that:

The expenditure must not, however, have been to enhance goodwill for the expenditure to be deductible, and the expenditure in this case did “enhance” the value of the goodwill because the gaming machine entitlements which were acquired increased the trustee’s rights by 10 years longer than it had previously.

We say at that point, your Honour, that the Tribunal has fallen into error. What the Tribunal has done is to look at the gaming rights and has asked itself the question: did the expenditure preserve but not enhance the goodwill?

That is not the question that the section requires to be answered. This question the section requires to be answered is whether the taxpayer incurred the expenditure to preserve but not enhance the goodwill. So, we say the Tribunal fell into error. This error was in part picked up by Justice Thawley. If I could take you to his Honour’s decision. This is in the court book at page 125, at paragraph 323. He says:

The inquiry into whether the expenditure was “incurred to preserve (but not enhance) the value of goodwill” is an inquiry into the purpose of the expenditure, not the effect of it.

We would accept that. He then goes on to say:

However, the effect of the expenditure may, and generally will, be at least probative and often determinative of the purpose of the expenditure because the effect of the expenditure is an objectively ascertainable fact which is likely to illuminate the purpose of the expenditure.

We say his Honour, respectfully, fell into error. The error that his Honour fell into was to look at the effect of the expenditure, as distinct from looking at the effect that the taxpayer intended the expenditure to achieve.

KIEFEL CJ: But his Honour went on, in the next sentence, to acknowledge that:

The inquiry is into the actual purpose –

So, his Honour went on to say that the inquiry is as to the actual purpose. He was mindful of what he was doing.

MR MURPHY: He was mindful of what he was doing but, nonetheless, the test he applied was to say because this is the effect, necessarily it has to be that the purpose of the expenditure was to achieve that effect.

NETTLE J: No, he said that was the objective purpose and there was no evidence as to the subjective purpose in paragraph 329, last three lines of that paragraph.

MR MURPHY: Sorry, your Honour?

NETTLE J: Paragraph 329, last three lines:

This evidence does not demonstrate that the purpose of the expenditure –

He is speaking about the subjective purpose:

was “to preserve (but not enhance) the value of goodwill”.

GORDON J: Then he goes on to consider effect.

NETTLE J: He dealt with the objective purpose up in paragraph 327.

MR MURPHY: Yes, he talked – and we would take issue with that, your Honour, because - we take issue in that the purpose, we say, of the taxpayer in this case was to preserve the goodwill. It was not to enhance the goodwill. We say that by reference to the fact is that he has adduced, also, by reference to the comments of Justice Greenwood in paragraphs 247 to 254.

NETTLE J: Just before we go there, Justice Thawley at paragraph 328 states, and I am going to ask you whether correctly or not, that the only evidence that was relied upon by the taxpayer to establish subjective intention to preserve and not enhance goodwill is that which is set out in paragraph 328. Is that correct?

MR MURPHY: The only evidence of Mr Canny to establish his subjective intention is that set out.

NETTLE J: His Honour concludes at 329 that it does not demonstrate:

that the purpose of the expenditure was “to preserve (but not enhance) the value of goodwill”.

It would seem, with respect to him, to be right.

MR MURPHY: But that begs the question, your Honour, with respect, as to whether or not the question of purpose is to be determined by reference to the subjective evidence of the particular taxpayer - this is why I incurred the expenditure - or it is to be determined by applying objectively all the circumstances, all the background circumstances and, in this case, the circumstances where the original licencing arrangements would terminate and if he wanted to be able to offer ‑ to continue to offer the same services and products to his custom then he had to – then, in those circumstances he had to acquire the GMEs.

GORDON J: According to Justice Thawley’s analysis, you lost on both.

MR MURPHY: We then take issue with Justice Thawley in that regard.

NETTLE J: So, what we are considering here is whether his Honour erred in his perception of the effect of the evidence of objective purpose?

MR MURPHY: Yes, your Honour. In that regard, if I can take you back to the extract of the subjective evidence that is in paragraph 328, and to that last sentence:

As a result, I agreed with my wife and an administrative manager, Kimberley Roberts, to bid for exactly 18 GMEs to continue to enable DRHT [the Trustee] to operate its existing business as it had under the then existing regime.

So, what we say, your Honour, in determining the purpose of the taxpayer in this case – and for the purposes of this provision – one does not just look at the subjective purpose and essentially just say what did the taxpayer say that their purpose was? One looks at all the objective circumstances. It is in that context of all the objective circumstances that the taxpayer – whatever the taxpayer says can be gauged.

In that last sentence, your Honour, it makes it clear that what they wanted to do was to enable the trustee to operate its existing business and that is the existing business in 2010. That is the existing business which would come to an end in 2012 – as it had under the existing regime. True, there have been a number of changes in the way that the taxpayer carried on its business. But, if one looks at it from the point of view of the customers who are coming in, nothing changed between 15 August 2012 and 17 August 2012.

That we say, your Honours, is very important in the context of what is goodwill because, as the Court made clear in Murry and as your Honours made clear in the decision in Placer Dome, the unifying factor of the three aspects of goodwill – property, legal and value – is the attraction of custom; not the old concept of patronage but the attraction of custom.

Your Honours, in that regard the words “preserve (but not enhance)” are strange words and they tie in with the value. We say that the finding of the Tribunal that the trustee incurred the expenditure to preserve the goodwill, in a case like this, and having regard to the other circumstances of the case, necessarily means that it did not acquire the GMEs for the purpose of enhancing goodwill.

In a sense, your Honours, it comes down to this. It is accepted that had the taxpayer not acquired ‑ the trustee not acquired the GMEs, the effect would be that from 16 August 2012 the business it would operate would have been different. It would not have contained a gaming element. In that sense, you could say that the goodwill ‑ and the expenditure was incurred to make sure that that did not happen.

If one measures the value of the goodwill at the point where you say that it has diminished because you do not have the gaming, then any expenditure is necessarily going to enhance that goodwill. But if one says what you do is you measure the goodwill and then you say, if I incur expenditure to prevent a reduction in the value of that goodwill ‑ which is the way we say these provisions should be characterised ‑ and if I incur expenditure for the reduction of goodwill, then in that case I have preserved the goodwill but I have not enhanced it.

If one takes the former approach where one says your starting point for value to determine enhancement is the value after it has been affected by, in this case, the loss of a licence, it is very difficult to see how this provision would apply to almost any case. Your Honours, we say that Justice Greenwood was correct when he said at paragraph 247 in court book page 101:

However, the Tribunal, in this passage, wrongly, in my respectful view, is treating the question of enhancement as a matter of “effects” such that if the result or effect or consequence of incurring the outgoing (even though the outgoing was incurred to preserve the value of goodwill) is to enhance the value of goodwill, the deduction is not available because, on that approach to constructional choice, the elements of subsection (6) are not satisfied.

He also said at paragraph 254 on page 102:

I accept that the effect or consequence of incurring the outgoing was to enhance the value of goodwill.

The effect was to enhance:

However, I respectfully disagree with the proposition that the effect of enhancing the goodwill is a matter determinative of Mr Canny’s mental element in incurring the outgoing. He incurred the outgoing to preserve the value of goodwill, not to enhance it.

In this context it is very important, as his Honour said at paragraph 243 which is on page 100:

It is important to remember that the relevant comparison in examining the incurring of the contested outgoing, is the comparison confronting Mr Canny, on the one hand, of, the business of a Pub with custom and patronage influenced by gaming across all aspects of the business –

This was the integrated hotel business:

and, on the other hand, a Pub business without the outgoing and no gaming; no gaming revenues, no contribution to other revenues from the presence of gaming; and significantly diminished custom and patronage in the hotel business.

Mr Canny incurred the expenditure to prevent the loss of goodwill, that is, to prevent the loss of custom which would necessarily have had a knock‑on effect on revenues.

KIEFEL CJ: That might be a convenient time. The Court will adjourn until 2.00 pm.

AT 12.45 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.00 PM:

KIEFEL CJ: Yes, Mr Murphy.

MR MURPHY: Thank you, your Honours. Before lunch we were looking at the question of the use of the word “you” and in particular the question of whether, in the phrase “you incur to preserve (but not enhance) the value of goodwill”, that the term “you” there means that you have to look at the circumstance of the taxpayer, that is, what you do is you say what was the advantage which the taxpayer sought to achieve by incurring this expenditure rather than just by saying what was the advantage that this expenditure would achieve. It is a different focus.

I only wish to add one or two points. The first is that in this case that intention can be determined objectively and it can be determined objectively essentially from two factors. The first is that originally the taxpayer had operated 18 machines under its licence from Tattersalls after it applied for 18 GMEs. It did not apply for 25 GMEs or 50 GMEs; it applied for exactly the same number of GMEs.

The second is that there was a finding by the Tribunal which is in paragraph 10, case book 13, that the GMEs, though they could be transferred, were not in this case acquired to be transferred. We say it is apparent from these that the taxpayer incurred the expenditure – I withdraw that – the trustee incurred the expenditure for the purpose of preserving, but not enhancing.

My learned friend took you to the decision of this Court in Box and Box makes the point - in that case it concerned a restraint of trade covenant. Now, as this Court has made clear it is important that, when you are looking at questions of goodwill you have to be very careful about looking in the correct statutory context. The correct statutory context for Box appears at page 395. It is in tab 10:

Section 83(1) provides that premium means any consideration in the nature of a premium, fine or foregift payable to any person for or in connection with the grant or assignment by him of a lease or any consideration for or in connection with the surrender of a lease, or for or in connection with any goodwill or license attached to or connected with land –

So the question in that case was the covenant on restraint of trade connected to the land. So one then looks at the covenant on restraint of trade. One does not look at the purpose for which the taxpayer in that case incurred the expenditure. In that regard, if one was to just look at the effect, the difficulty would be a difficulty which my learned friends obliquely referred to in paragraph 68 of their submissions where they pointed out:

The GMEs do have inherent value because they entitle the holder to conduct gaming and so derive gaming income, and can be exchanged for value. In this way GMEs can be contrasted with, for example, a restrictive covenant imposed on a departing employee which has no value apart from its effect upon the attraction of custom –

and they refer to Box –

It is apparent s 40-880(6) was intended to have limited application, where a legal or equitable right only has value in relation to goodwill (the attraction of custom). The GMEs are not such a right.

Your Honours, the second point that I was going to make was the ‑ ‑ ‑

NETTLE J: Mr Murphy, why is that wrong?

MR MURPHY: Sorry?

NETTLE J: Why is that wrong, that proposition that you have just articulated.

MR MURPHY: The proposition is wrong because if they were relying on Box, section 40‑880(6) would not apply. It would not apply because, as my learned friend took you to – sorry, if you are just relying on the effect – as my learned friend took you to that passage, the Court said that the goodwill was enhanced and that would be the disqualifying factor here. But we say it is not the effect of the expenditure you look to. What you look to is the ‑ ‑ ‑

NETTLE J: Subjective purpose of the taxpayer.

MR MURPHY: Yes, the mental element, as I think Justice Greenwood called it. The second observation one would make about section 40‑880(6) is its statutory context. This is a case unlike Placer Dome where, as I said earlier, the question before the Court was to determine valuations and to determine whether or not a particular ratio was also achieved. But in that case this Court did reconsider the principles established in Murry in the light of some academic commentary and further observations which have been made, which may have been thought to have broadened it.

The critical passages in relation to the questions of goodwill and value of goodwill are to be found at what we would say is page 79 of the report, paragraphs [68] to [70]. In that, your Honour, I take your Honours particularly to paragraph [70], and the final summation which your Honours make, where you say:

finally, the legal concept of goodwill has three different aspects – property, sources and value – and what unites those aspects if the “conduct of a business”. It was each of these aspects that the majority then addressed. As will become evident, for each aspect, the attraction of custom remained the critical focus of, and central to, the legal concept of goodwill.

Goodwill focuses on the attraction of custom. So, to the extent – and in that context, your Honours went on at paragraph [77], which is at page 80 of the report, 2652 of the core book:

As custom is central to the nature and sources of goodwill, the majority recognised that the value of the goodwill of a business varies with the earning capacity of the business and the value of the other identifiable assets and liabilities.

Your Honour, what we take from that and applying it in the circumstances of this case and what we say is that the trustee incurred the expenditure to conduct its business in substantially the same way and by substantially the same means as had attracted custom to it prior to August 15 when the license would expire.

If one looks at it from the perspective of the customer, the entity to be attracted is the customer. If one looks at it from the perspective of the customer, nothing changed. Nothing changed, because the trustee incurred the expenditure to acquire the GMEs. A customer walking in on 17 August would not have noticed any difference from a customer walking in on 15 August.

The third point I want to make, your Honour, is that the legislation distinguishes – or more accurately, deals separately with the statutory right – I withdraw that – the legal or equitable right and the goodwill. There can be no issue that the expenditure here was incurred to acquire the GMEs. Of course it was. But, that does not answer the question as to whether – it does not either question as to whether the liabilities were incurred to preserve the goodwill, nor does it answer the question as to the value of the rights to the trustee. The question is whether or not the trustee incurred the expenditure in the context that the value of the rights that it would obtain would be solely attributable to the effect that the right has on goodwill.

Here, as I mentioned a minute ago, the evidence was that the trustee – and accepted by the Tribunal – was that the trustee did not acquire these GMEs to trade – to sell. The Tribunal found that. It can be accepted, as the Commissioner did – as Justice Greenwood pointed out in paragraphs 241, 242 and 243 of his decision – and that is on page 99 of the core book. As he said, in paragraph 242:

that was an expenditure obligation incurred as a means to secure the custom and patronage of the business –

Acquiring the GMEs was the means to the end of preserving the value of the goodwill. Earlier, he had said, at paragraph 232:

The Commissioner accepts that it is “completely true” that if the gaming machine entitlements had not been obtained by incurring the outgoing, there would have been a loss of goodwill.

He makes similar statements in a few other places in the judgment.

GAGELER J: So, is the value to the taxpayer a subjective question, in your submission?

MR MURPHY: It is in the sense that you have got to look at the taxpayer rather than to look at the value that these rights might have on a market and the values that might have to anybody else.

GAGELER J: Of course, but does it depend on what is in the taxpayer’s mind?

MR MURPHY: Yes, but the question then becomes ‑ ‑ ‑

GAGELER J: The answer is, yes?

MR MURPHY: The answer to that is, yes. But, the question then becomes, how do you determine what is in the taxpayer’s mind? That, we say, is to be objectively determined and to be objectively determined, one looks at all the evidence. And, the objective evidence is much like the factors we talked about before – the surrounding circumstances – the fact that the trustee only acquired 18 machines when it could have acquired more machines. The circumstances under which this came to be – that is, that the gaming was part of the integrated business which the trustee wished to keep on carrying on in the same way, in the same form, after 16 August. These are objective factors.

BELL J: To the extent that consideration of the subjective purpose of Mr Canny was relevant, the finding at 242 is that that purpose was to obtain the GMEs in order to secure the right to conduct gaming. How does that assist your argument?

MR MURPHY: Your Honour, we do not resile from that because quite clearly his purpose was to obtain the GMEs. He bid at auction for them and it is quite clear that was what he was wanting to do. As his Honour goes on and says in the next line that was an obligation which was incurred as a
means to secure the custom and patronage. The advantage that the trustee was trying to achieve was to secure the custom and patronage. He achieved this by ‑ ‑ ‑

BELL J: By acquiring an asset.

MR MURPHY: By acquiring the asset. But the acquisition of the asset is the means to the end. If your Honours have no further questions.

KIEFEL CJ: Yes, thank you. Anything in reply, Mr Davies?

MR DAVIES: Your Honours, my learned friend, Mr Bloom, submitted that the advantage sought from the expenditure was not the allocation of the GME itself but rather the continued earning of income direct and indirect from the conduct of gaming on each of those 18 machines already in the hotel. We, of course, submit, your Honour ‑ ‑ ‑

NETTLE J: Mr Davies, could you speak up just a bit, please?

MR DAVIES: Sorry, your Honour. In our submission, that is an inaccurate submission. The advantage that was sought, in our submission, was the acquisition of the GMEs and that is because, your Honour, without the GMEs there was no right to conduct gaming. It was not a question of preserving an ongoing business of gaming. The present right of the trustee to conduct gaming was of limited duration and did not extend beyond 15 August 2012.

The legislation that my learned friend took the Court to demonstrated that in order for there to be a right to conduct gaming after August 2012, the gaming operator required GMEs. The expenditure incurred as between the trustee and the State of Victoria at competitive auction was for one thing and one thing only, the acquisition of the GMEs. That acquisition conferred upon the trustee what it did not have - the right to conduct gaming after 16 August 2012.

My learned friend’s second proposition was that the expenditure was incurred to meet an obstacle or difficulty which had arisen in the course of conducting an ongoing business and which is aimed at enabling the taxpayer to carry on the same business. What I have just submitted to the Court is of equal application to that observation. It cannot be described, in our submission, accurately to say that what happened here from the expenditure was to meet an obstacle or difficulty. That was not the purpose of the expenditure. The purpose of the expenditure was to obtain something which the trustee did not have and required to have in order to carry on gaming, and it was that acquisition that gave the trustee then the right to conduct gaming thereafter.

My learned friend referred to Hallstroms. Can I just quickly refer to a passage in Hallstroms that indicates that the facts of Hallstroms and of the other cases that my learned friend refers to in relation to meeting an obstacle or difficulty are of a different nature to the one that we are concerned with in this case. Hallstroms is behind tab 21 in volume 7. Might I take the Court’s attention to page 641 of the report at the foot of the page where the Chief Justice observes:

Nor can it be said that the company, by making the expenditure, gained “an enduring advantage.” It gained nothing‑it merely succeeded in maintaining an existing position.

That is not this case, your Honours:

The prevention or avoidance of a loss is not a gain of anything. The prevention of subtraction is not the same thing as addition.

So his Honour is making a distinction that is applicable to the facts of this case. Here what is being done is to add and the adding is to the business structure of the trustee.

Might I go to the next point that my learned friend mentioned, which was to make a distinction between the fact that this was not a case where an existing business was being acquired, but rather the outgoing was incurred in the course of an ongoing business. That, of course, your Honour, is not a factual matter that indicates either way as to whether the outgoing is on capital account or revenue account.

Sun Newspapers Case itself is an example of an ongoing business where the taxpayer incurred a capital outgoing. A plumber running an existing business with a truck that is in need of replacement replaces the truck. It is an outgoing of a capital nature, notwithstanding that it has been done in the course of an ongoing business. It is also an outgoing of a capital nature notwithstanding that it might be done in order to carry on exactly the same business as has been carried on before.

Then, finally, the last point my learned friend raised, and that was that the GMEs could not be described as enduring. I want to say this, your Honours, the question whether they are or are not enduring, the question still remains is there application – acquisition, one which is adding to the profit‑making structure of the trustee or is it one that an expense that has arisen in the ongoing income‑producing activities of the business.

My learned friend referred to Citylink. At the paragraphs my learned friend referred to there, paragraphs 153 and 154, the findings were that the concession fees in that case were not incurred in the acquisition of ownership rights of roads or lands. So, it is not a case where the Court was concerned with outgoings incurred in acquiring assets. The finding was that the concession fees were periodic licence fees in respect of the link infrastructure assets, a different case from the one your Honours are concerned with.

But on the question of enduring, might I refer your Honours to Broken Hill Case about the relevance of whether an asset is enduring or not - Broken Hill, I think, is behind tab 12 in volume 6. At page 430 of the report, Justice Williams refers to, clearly with approval, the passage of the Chief Justice in the Sun Newspapers Case and it is the passage that I am referring to at about point 3 to 4 of the page:

When the words ‘permanent’ or ‘enduring’ are used in this connection it is not meant that the advantage which will be obtained will last forever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole”.

Now, in this case two things are clear. First of all, they are one‑off expenses. It is a one‑off acquisition for 18 GMEs; no recurring nature about it at all. The second is that it is clearly for the benefit of the business as a whole. Very valuable intangible assets were acquired. They were valuable intangible assets for at least two reasons. The first is they entitled the conduct of gaming and therefore the derivation of gaming income. The second was that they were assets with a value that were capable of being transferred if the trustee desired to do that, which in fact is ultimately what happened in 2015.

If I can turn very briefly to the second part of the case, in relation to that part of the case we submit that the error that my learned friend’s submissions – substantive error that it suffers from is to equate the value of the GMEs with the value of goodwill. My learned friend’s submissions do not grapple with the distinction that is clear from the cases that a value that is referable to using an asset in business and thereby derive an income stream from it is separate and distinct from the value of the goodwill of the whole business and here questions were raised about the subjective intention of the trustee and so on. One reads the evidence that is referred to in Justice Thawley and in their Honours’ judgments and then reads what the majority says about what Mr Canny thought ‑ each time that their Honours refer to what Mr Canny thought he was producing was the need to produce income from gaming.

Now, once that is identified as a part of the purpose of incurring the expenditure, subsection (6) does not apply because that is a matter that
relates to the value of exploiting the GME. It is not a factor that relates solely to the effect on goodwill. If the Court pleases.

KIEFEL CJ: The Court reserves its decision in this matter and adjourns to 10.00 am on Tuesday, 13 August.

AT 2.26 PM THE MATTER WAS ADJOURNED