20 Nov 07 Prepaid rent allowed as a deduction - Star City
The Federal Court (Gordon J) has 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 argued that the amount prepaid was an outgoing of capital or of a capital nature, on the basis that it
- formed part of the consideration for the grant of the casino licence;
- was made for the purpose of obtaining a lease of the casino site; and/or
- was made in order to obtain the exclusivity of the casino licence in the first 12 years of operation.
The Court rejected the Commissioner's arguments on the basis that the prepayment was made to secure the use of the land for the purposes of generating income from the casino, and not for the purpose of acquiring any asset of an enduring nature. The State remained the owner of the land, and the taxpayer had no option to purchase the land at the end of the term of the lease. The period of 99 years did not represent all or a major proportion of the life of the land. In relation to the fact that the annual rental reduced after the first 12 years was explained by the Court thus: "The explanation for the difference in rate of annual rental offered by Star City Consortium (and accepted by the CCA) is no doubt (as the Commissioner accepted) connected with the period of exclusivity of the casino licence ending at the point at which the rate of rental changes".
The Commissioner also argued that if the prepayment was allowable as a deduction under s 51 ITAA 1936 or s 8-1 ITAA 1997 (as modified by s 82KZM of ITAA 1936), it was nevertheless not deductible by reason of the operation of Part IVA ITAA 1936. This argument was also rejected by the Court on the basis that the taxpayer derived no tax benefit from the scheme under which the payment was made. The "alternative postulate" proposed by the Commissioner (if the scheme had not been entered into or carried out) was not something that "might reasonably be expected to happen". The taxpayer did not offer it, and the CCA did not seek it or choose it. The CCA was always seeking an upfront payment from the successful bidder for the casino licence.
Finally, although no longer relevant, the Court rejected the Commissioner's imposition of penalties 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 was not to obtain a tax benefit. Further, the taxpayer's arguments for deductibility were reasonably arguable, as the Court's decision demonstrated. Accordingly, at most, the appropriate penalty (had the taxpayer been unsuccessful) would have been 25%.
Star City Pty Limited v FCT  FCA 1701 (Federal Court, Gordon J, 9 November 2007).
For a copy of the decision, go here.