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The Full Federal Court has, by majority (Goldberg and Jessup JJ, Dowsett J dissenting), allowed the taxpayer's appeals against penalties imposed by the Commissioner in a case in which the taxpayer lost its appeals on the substantive issues of tax liability.

On 27 February 2009, the Full Federal Court (Goldberg, Dowsett and Jessup JJ) upheld the Commissioner's appeal from the decision of Gordon J, who had allowed the taxpayer's appeal against a decision of the Commissioner to disallow deductions for rental prepaid by the taxpayer in conjunction with the grant, by the NSW Casino Control Authority (CCA), of a casino licence and the grant of a 99 year lease of land upon which the casino was to be built. The rental prepaid ($120 million) was for the first 12 years of the term of the lease and represented the present value of an annual rental over that period of $15 million per annum. After the first 12 years, the rental reduced to $250,000 per annum.

The Commissioner disallowed the deductions on the basis of the capital exclusion under 51(1) of ITAA 1936 or s 8-1 of ITAA 1997 or, alternatively, on the basis that Part IVA applied. Gordon J held that the capital exclusion did not apply and further that Part IVA did not apply as there was no "tax benefit" as there was no reasonable "alternative postulate". The CCA was always seeking an upfront payment from the successful bidder for the casino licence.

Although no longer relevant, the Gordon J also rejected the Commissioner's imposition of penalties (under the former s 226L ITAA 1936 and s 284-145 Taxation Administration Act 1953) at the rate of 50% on the grounds that Part IVA applied and that it was not reasonably arguable that Part IVA did not apply. The taxpayer's sole or dominant purpose, viewed subjectively, was not to obtain a tax benefit: Star City Pty Limited v FCT [2007] FCA 1701.

On appeal, the Full Federal Court held that the prepayment was a payment of a capital nature not deductible under s 51(1) of ITAA 1936 or s 8-1 of ITAA 1997 as the character of the advantage sought by the payment was the securing of the casino licence and the exclusive right to operate a casino in New South Wales rather than the quiet enjoyment of the casino site for 12 years: FCT v Star City Pty Limited [2009] FCAFC 19. This meant that the question of penalties became an issue.

In relation to the penalties imposed under the former s 226L, Goldberg and Jessup JJ held that the effect of s 226L is that a penalty may be imposed with respect to a Pt IVA scheme even though that Part is not enlivened because, as in this case, the taxpayer failed to obtain a tax benefit as a result of the application of s 51(1) of the 1936 Act or s 8-1 of the 1997 Act, rather than Part IVA. However, their Honours held that s 226L imports a subjective test of "purpose" - FCT v Starr [2007] FCAFC 204; (2007) 164 FCR 436 - and the Commissioner had not submitted that Gordon J's finding as to subjective purpose was wrong. Accordingly, their Honours held that the penalties imposed under s 226L should be set aside.

In relation to the penalties imposed under s 284-145, Goldberg and Jessup JJ held, unlike "s 226L, s 284-145 does not address the situation in which a taxpayer has sought to obtain a benefit or tax advantage by claiming in a taxation statement (ie a tax return, for example), a deduction for a loss or outgoing of a revenue nature relying on s 51(1) of the 1936 Act or s 8-1 of the 1997 Act, being a deduction to which, on the proper application of the legislation, the taxpayer was not entitled." Accordingly,  their Honours held that the penalties imposed under s 284-145 should also be set aside.

FCT v Star City Pty Limited (No 2) [2009] FCAFC 122 ( Full Federal Court; Goldberg, Jessup and Dowsett JJ; 10 September 2009).

For a copy of the decision, go here


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