Court Decisions
Prepaid “rent” capital
27.02.2009
Reversing the decision of Gordon J at first instance, the Full Federal Court has held that, having regard to all relevant facts, a prepayment of “rent” was an expenditure of capital or of a capital nature and, accordingly, was not deductible as a general deduction (FCT v Star City Pty Ltd [2009] FCAFC 19).
The taxpayer company obtained a casino licence from the New South Wales Casino Control Authority (“the Authority”). There were two lease agreements, one referred to as the “Construction Lease” (which commenced on 14 December 1994 and terminated on the date the other lease referred to as the “Permanent Lease” commenced). The Permanent Lease commenced on 26 November 1997 and will terminate on 13 December 2093. These leases gave the taxpayer company, in substance, a term of 99 years for the operation of the casino.
On 15 December 1994, pursuant to the provision in the Construction Lease, Star City paid a lump sum of $120,000,000 to the Authority in respect of rent paid in advance for the 12 years following the commencement of the Construction Lease in which rent was fixed at $15,000,000 per annum. It was provided that only circumstance where the rent paid in the advance was likely to be refunded was if the parties mutually agreed to terminate the lease and that rent paid in advance be refunded. The rental payable under the Permanent Lease was $250,000 per annum.
Goldberg J said that there was no issue that any of the documents was a sham, but there was an issue as to the label of “rent” which the parties had used to describe the lump sum prepayment of $120,000,000. Labels are not determinative and surrounding circumstances may be resorted to determine the true characterisation of a payment in an appropriate case. The present case was, in his Honour’s opinion, one such case. The prepayment was a payment of a capital nature 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.
The other members of the Full Court (Dowsett and Jessup JJ) both reached the same conclusion. Dowsett J noted that the taxpayer company had not suggested that the matter should be disposed of upon the basis of any apportionment of the sum of $120,000,000 as between rent and other aspects of the transaction.
