FEDERAL COURT OF AUSTRALIA Jupiters Limited v Deputy Commissioner of Taxation [2002] FCAFC 206 INCOME TAX – allowable deductions – agreement under State legislation for lease for 75 years of land and construction and operation of casino complex thereon – "Exclusivity Arrangements" whereby State covenanted not to permit defined forms of gaming in another casino within 60 kilometres of site for a period of 10 years – "Special Rental" of $7,000,000 per annum payable for next 10 years of lease – whether Special Rental payable for Exclusivity Arrangements – whether Exclusivity Arrangements a capital asset Income Tax Assessment Act 1936 (Cth) s 51 Income Tax Assessment Act 1997 (Cth) s 8-1 Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 364 referred to Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 cited Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 659 and 655 cited Federal Commissioner of Taxation v The Broken Hill Proprietary Co Ltd (2000) 179 ALR 593 at [31] cited GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 cited Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648 cited Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation (1952) 85 CLR 423 discussed JUPITERS LIMITED (ACN 010 741 045) v DEPUTY COMMISSIONER OF TAXATION NO Q4 OF 2002 HEEREY, MANSFIELD AND HELY JJ 25 JUNE 2002 MELBOURNE (HEARD IN BRISBANE) IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q4 OF 2002 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: JUPITERS LIMITED (ACN 010 741 045) APPELLANT AND: DEPUTY COMMISSIONER OF TAXATION RESPONDENT JUDGES: HEEREY, MANSFIELD AND HELY JJ DATE OF ORDER: 25 JUNE 2002 WHERE MADE: MELBOURNE (HEARD IN BRISBANE) THE COURT ORDERS THAT: 1. The appeal is dismissed. 2. The appellant pay the respondent's costs to be taxed, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q4 OF 2002 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: JUPITERS LIMITED (ACN 010 741 045) APPELLANT AND: DEPUTY COMMISSIONER OF TAXATION RESPONDENT JUDGES: HEEREY, MANSFIELD AND HELY JJ DATE: 25 JUNE 2002 PLACE: MELBOURNE (HEARD IN BRISBANE) REASONS FOR JUDGMENT THE COURT: 1 The appellant Jupiters Limited (Jupiters) appeals from a decision of a judge of this Court (Dowsett J) who held that payment by Jupiters to the State of Queensland (the State) of amounts described as "Special Rental" were not allowable deductions under s 51 of the Income Tax Assessment Act 1936 (Cth) or s 8-1 of the Income Tax Assessment Act 1997 (Cth) in the income years 1995 to 1999. The Brisbane Casino Complex 2 The statutory and contractual arrangements giving rise to the payments in question form the basis upon which Jupiters designed, constructed and proceeded to operate a hotel and casino complex (the Complex) in the City of Brisbane. 3 In early April 1991 the State called for expressions of interest. A number of firms applied and negotiations took place. On 28 May 1992 the State advised Jupiters that it was the "preferred applicant". 4 In 1992 the Queensland Parliament passed the Brisbane Casino Agreement Act 1992 (Qld) (the Agreement Act) which commenced on its date of assent, 30 November 1992. Section 4 of the Agreement Act authorised the Minister to make on behalf of the State an agreement for the development and operation of the Complex but only if the proposed agreement had been approved by regulation. By s 5 that agreement was to have effect as if it were an enactment of the Agreement Act. 5 Pursuant to regulations made under the Agreement Act, Jupiters and the State entered into an agreement dated 3 May 1993 (the Casino Agreement). The recitals recorded that the State had permitted the establishment and operation of casinos in Queensland by licensing one in Northern Queensland and one in Southern Queensland and had further resolved to permit the establishment and operation of a casino in the City of Brisbane. Recital D was as follows: "The State acknowledges that the establishment of the Complex is a large scale development project requiring a very large capital expenditure and that it is necessary to give to the Company the security and assurances contained herein to enable the provision of capital for the establishment of the Complex." 6 Jupiters agreed to design, develop, construct, fit out and commission for operation the Complex in accordance with the Schematic Design Drawings and further working drawings thereinafter provided for: cl 18(b). For this purpose the State was to ensure the issue to Jupiters of a Permit to Occupy the construction site: cl 22. By cl 73 the State covenanted that upon the Minister being satisfied that Jupiters had complied with its obligations under the Casino Agreement, the relevant provisions of the Casino Control Act 1982 (Qld) (the Control Act) and any provisions of the Agreement Act to be complied with up to the time of the grant of the Casino Licence, the State would recommend to the Governor in Council the grant of a Casino Licence pursuant to the Control Act and a "Special Lease" to commence on the relevant "Lease Commencement Date" for a term of seventy-five years. That date was to be the date on which the Complex would be open for use by the public: cl 1. Under Queensland legislation dealing with Crown lands a Special Lease is a lease granted by the Crown without gazettal. 7 By cl 74 of the Casino Agreement "the rent to be paid under the Special Lease" was to be $50 per annum in advance "and as otherwise prescribed under the Financial Agreement". By cl 75(a) it was provided as follows: "75. Exclusivity (a) Subject as hereinafter provided, the State shall not either before or during the periods of exclusivity hereinafter provided for respectively, notwithstanding the provisions of any other Act from time to time in force in the State of Queensland authorise, permit or approve in any manner whatsoever and whether pursuant to the Control Act or otherwise the conduct or playing in a casino of any of the games listed below or any variation or derivative of such games for a distance of 60 kilometres from the Site and for a period of 10 years from the date upon which the Company opens the Casino for operation and use by members of the public: blackjack; roulette; baccarat; craps; two-up; mini dice; wheel of fortune; and sic-bo." 8 In the seventh schedule to the Casino Agreement the terms and conditions of the Special Lease were set out. Clause 2 of that schedule provided that Jupiters was to pay "rent" to the Queensland Treasury "yearly in advance at the rate identified within the provisions of" the Casino Agreement (ie $50 per annum, see above). 9 Clause 84 of the Casino Agreement set out circumstances in which the Special Lease might be terminated. These included "the rent or any other money payable by (Jupiters) under the Special Lease" being unpaid for a period exceeding one month: cl 84(a)(i). 10 On 6 May 1993 the State entered into another agreement with Jupiters called the Financial Agreement. It was recited that Jupiters and the State had entered into the Casino Agreement pursuant to which the Special Lease, the Casino Licence and the Special Facility Licence (ie a liquor licence) would be issued and that the parties had agreed to enter into the Financial Agreement "to set out inter alia the terms upon which the Premium, the Security Deposit, Special Rental and Annual Rental payments will be made." 11 Clause 2 provided for payment of the "Premium" which was defined in cl 1(a) as "the sum of $45,100,000 payable by Jupiters to the State in connection with the issue of the Special Lease, the Casino Licence and the Special Facility Licence." 12 Under cl 2 Jupiters was to pay the Premium by an instalment of $5,000,000 on the date of execution of the Casino Agreement (in fact this amount was paid on 15 June 1993) and by an instalment of $40,100,000 within four weeks of the commencement of Site Establishment (ie the beginning of construction) or at such later date as approved by the Minister. 13 Clause 3 of the Financial Agreement dealt with the circumstances in which Jupiters might obtain a refund in whole or in part of the Premium. Clause 3(a) provided that where either the Casino Agreement or the Permit to Occupy was terminated prior to the issue of the Casino Licence, the Special Lease and the Special Facility Licence, except where any such termination was in accordance with the terms of the Casino Agreement or as a result of a breach of the terms of the Permit to Occupy by Jupiters, the State was to refund the Premium. 14 Clause 3(b) dealt with the termination of the Casino Agreement, the Casino Licence, the Special Lease or the Special Facility Licence after the issue of the Casino Licence, the Special Lease or the Special Facility Licence "and within the ten year exclusivity period" for any reason other than a valid termination. In such event the State was to refund to Jupiters a pro rata amount calculated in accordance with a formula in cl 3(c). 15 Under cl 4 Jupiters was to pay an amount of $5,100,000 to the State on the date of the commencement of the Special Lease, being a payment in lieu of stamp duty on all agreements. Clauses 5, 6 and 7 provided as follows (emphasis added): "5 ANNUAL RENTAL OF COMPLEX In addition to the rental specified in the Special Lease, Jupiters shall pay to the State the Annual Rental [defined in cl 1(a) as $1,000,000 per annum] in respect of the Complex during each Rental Year. The Annual Rental shall be paid on the first day of each Rental Year. 6 SPECIAL RENTAL DURING EXCLUSIVITY PERIOD (a) In addition to the Annual Rental, Jupiters shall pay to the State the Special Rental in respect of each of the first 10 Rental Years of the term of the Special Lease. The Special Rental shall be paid by Jupiters to the State on the first day of each of the first 10 Rental Years of the term of the Special Lease. (b) If the Exclusivity Arrangements cease to be valid and binding obligations of the State capable of being enforced by Jupiters against the State in accordance with their terms, at any time during the first 10 years of the Special Lease then the Special Rental shall no longer be payable and any instalment of Special Rental paid to the State in respect of the Rental Year in which the Exclusivity Arrangements cease to be valid and binding obligations of the State capable of being enforced by Jupiters against the State in accordance with their terms shall be refunded on a pro-rata basis by the State to Jupiters. In cl 1(a) "Special Rental" was defined as $7,000,000 per annum and "Exclusivity Arrangements" were defined as "the exclusivity granted to Jupiters pursuant to clause 75 of the Brisbane Casino Agreement". 7 CESSATION OF OBLIGATION TO PAY ANNUAL & SPECIAL RENTAL If the Special Lease is terminated for any reason whatsoever then the obligation of Jupiters to pay the Annual Rental and the Special Rental shall also be terminated with effect from the date of termination of the Special Lease." 16 By cl 8 Jupiters was to pay a "Security Deposit", defined in cl 1(a) as the sum of $50,000,000, on the same day that the second instalment of the Premium was to be paid. The Security Deposit was not to bear interest: cl 9. Subject to cl 12 it was to be refunded to Jupiters by ten instalments of $5,000,000 per annum payable on the first day of each of the ten rental years of the term of the Special Lease: cl 10. By cl 11 either party was entitled to set-off amounts payable on the first day of each Rental Year against amounts receivable by that party. Clause 12 provided: "12 REFUND OF SECURITY DEPOSIT IF EXCLUSIVITY CEASED If the Exclusivity Arrangements cease to be valid and binding obligations of the State capable of being enforced by Jupiters against the State in accordance with their terms, the State shall, subject to clause 13, refund to Jupiters an amount equivalent to the Security Deposit less any moneys previously paid to Jupiters by the State under clause 10." 17 By cl 13 the State's obligation to make refunds under cl 10 and cl 12 was to cease if any of the Casino Agreement, the Special Lease, the Casino Licence and Permit to Occupy were validly terminated by the State, with so much as had not been refunded by that time being retained by the State for its own use and benefit. 18 In summary therefore Jupiters was obliged to pay the State: · Premium $45,100,000 – Financial Agreement cl 2 · Payment in lieu of stamp duty $5,100,000 – Financial Agreement cl 4 · Rental $50 per annum– Special Lease cl 2 · Annual Rental $1,000,000 per annum– Financial Agreement cl 5 · Special Rental $7,000,000 per annum for first ten Rental Years – Financial Agreement cl 6 · Security Deposit $50,000,000 – Financial Agreement cl 8 19 As already mentioned, Jupiters paid the Security Deposit and the second instalment of the Premium in about early June 1993. Thereafter the set-off arrangements reduced the amount of payments Jupiters was required to make for Annual Rental and Special Rental with the result that it paid a net amount of $3,000,000 per annum. 20 On 6 April 1995 the Special Lease was granted to Jupiters for a term of 75 years commencing on 11 April 1995. On that date a Casino Licence was granted and Jupiters commenced to operate the Complex. 21 In each of its returns of income for the tax years 1995 to 1999 Jupiters claimed a deduction of an amount equal to the Special Rental (ie the gross amount before set-off). The respondent disallowed these deductions on the ground that they were "considered to be of a capital nature". Judgment of the primary judge 22 His Honour [at 55] rejected Jupiters' case that the Special Rental should simply be treated as rent for commercial premises. In also rejecting the further argument that the Special Rental represented "the additional value that the lease has to Jupiters during the period of exclusivity" his Honour said [at 56](emphasis in original): "It is clear that the Special Rental was consideration for the exclusivity arrangements. No doubt those arrangements increased the potential value to (Jupiters) of all durable assets used in conducting the casino, including the lease. In the language used in the cases, the Special Rental was paid for the exclusivity arrangements. Any increase in the value of the Special Lease or any other asset was merely the result of the acquisition of the benefit of those arrangements." 23 Turning to the nature of the Exclusivity Arrangements, his Honour considered two aspects to be of special significance. First, it was clear that Jupiters considered it was likely to derive an ongoing benefit from the ten year exclusivity period, which benefit would extend beyond that period. Jupiters expected to enjoy de facto exclusivity after the expiry of the ten year period, no doubt because its established position would make it difficult for a competitor to establish itself, given the perceived limit to the size of the market. The second relevant aspect, which reflected the first, was Jupiters' treating of the Special Rental for accounting purposes as being properly amortised over the full seventy-five year period of the lease. His Honour thought the Exclusivity Arrangements were not, in any sense, to be acquired or consumed on an annual basis over the ten year term. His Honour also observed that the price for the acquisition of the rights associated with the Exclusivity Arrangements was substantially paid in advance, notwithstanding the mechanism for refunds to be set-off against the special rental. These facts suggested the acquisition of a capital asset. His Honour concluded by citing as applicable the words of Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 364: "In these circumstances I think that in principle the transaction must be regarded as strengthening and preserving the business organization or entity, the profit-yielding subject, and affecting the capital structure." Relevant principles as to deductibility 24 On the appeal there was little, if any, dispute as to the applicable principles. In the leading case of Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 Fullagar J (with whom Kitto and Taylor JJ agreed) said (emphasis in original): "The questions which commonly arise in this type of case are (1) What is the money really paid for? – and (2) Is what it is really paid for, in truth and in substance, a capital asset?" 25 In the present case, and again this was not really a matter of controversy, the question of what the Special Rental was paid for can be answered by reference to the instruments which operated to create the obligation to pay. This is not a case concerned with payments made "voluntarily and on the grounds of commercial expediency": see Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 659, Federal Commissioner of Taxation v The Broken Hill Proprietary Co Ltd (2000) 179 ALR 593 at [31]. Nor is there any suggestion of sham. 26 At the outset, senior counsel for Jupiters, correctly in our opinion, eschewed any claim that the mere use of the label "rental" was determinative. In Battery Makers Gibbs ACJ said (at 655): "If the only advantage sought was the right to possession under the lease, and what was called "rent" really answered that description, clearly the outgoings were entirely of a revenue nature. If on the other hand one advantage sought by the outgoings was the acquisition of a capital asset (the land and buildings), the fact that the payments were called 'rent', and were made periodically, would not necessarily prevent them from being in part outgoings of a capital nature [authorities cited]." What were the payments for? 27 In our opinion, the respondent was correct in his submission that the payments were made by Jupiters to secure the advantage of exclusivity and freedom from competition conferred by cl 75 of the Casino Agreement. 28 Leaving aside for the moment the characterisation of that exclusivity, there is no doubt it was something of value, for which it might be expected that Jupiters would provide consideration. That consideration was not the Premium, which was payable in connection with the issue of the Special Lease, the Casino Licence and the Special Facility Licence: Financial Agreement cl 1(a). Likewise, the Security Deposit was, as its name suggests and as cl 1(a) of the Financial Agreement states, security for payments to be made by Jupiters to the State under that agreement. 29 The Annual Rental ($1,000,000) and the rental specified in the Special Lease ($50) were payable "in respect of the Complex during each rental year", that is to say for each year of the seventy-five year term of the Special Lease. Both these payments were rental in the ordinary sense of the term and without doubt payments on revenue account. 30 However the Special Rental is paid not "in respect of the Complex" but "in respect of each of the first ten rental years of the term". Any doubt that the Special Rental is paid "for" the Exclusivity Arrangements is removed by cl 6 which relieves Jupiters of any obligation to pay the Special Rental once the Exclusivity Arrangements cease to be valid and binding obligations of the State. The characterisation of the advantage obtained 31 The nature of the asset acquired (see GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137) was exclusivity and freedom from competition within 60 kilometres of the Complex. That advantage was of a lasting or enduring quality. In itself ten years is a substantial period but, as his Honour pointed out, for practical purposes the advantage obtained would extend well beyond that, as was recognised by Jupiters' own accounting treatment. Although there were default provisions applicable to both parties, it would be unreal to see Jupiters as buying a year's exclusivity as it made the Special Rental payments year by year. 32 The exclusivity and freedom from competition went to enhance the goodwill of Jupiters' business. It related "to the character and organization of the profit-earning business and (was) not to be an incident in the operations by which it (was) carried on": Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648. Indeed the present case seems stronger than Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation (1952) 85 CLR 423 where the protection from competition obtained as a result of the expenditure held to be on capital account was of a fragmented and ad hoc nature. A fundamental asset of Jupiters' business at the Complex was the permission of the State to carry on, for profit, gaming which would otherwise be unlawful. The value and usefulness of that asset were greatly enhanced by the Exclusivity Arrangements, which prevented anybody else from carrying on such activities in Brisbane for at least 10 years, and in all probability for much longer. Conclusion 33 The decision of his Honour involved the application of well established principles to facts which were not in dispute. No error has in our opinion been showed in his Honour's reasoning or in the conclusion which he reached. The appeal will be dismissed with costs, including reserved costs. I certify that the preceding thirty three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 21 June 2002 Counsel for the Appellant: Mr A H Slater QC with Mr J A Logan SC and Mr D Marks Solicitor for the Appellant: Corrs Chambers Westgarth Counsel for the Respondent: Mr R Edmonds SC with Mr P Fraser Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 17 May 2002 Date of Judgment: 25 June 2002