We were recently asked for our views on the Sharpcan Case (Commissioner of Taxation v Sharpcan Pty Ltd [2018] FCAFC 163), being a Federal Court case from late 2018 (a copy of the full judgment can be found here:

Why should we care?

This case is relevant because it involves these points:

  • It further describes when certain expenses will be revenue expenditure (and immediately deductible this year) or capital expenditure (and only recognised as part of an asset’s CGT cost base when it is eventually sold); and
  • It describes the scope of the ‘blackhole’ expenditure provisions in section 40-880 ITAA 97, and about when certain amounts are money spent to ‘preserve (but not enhance)’ the value of goodwill. Specifically, it looked at when money was spent with the intention to preserve goodwill, even if it happened to enhance that value.

There are already several cases about the revenue/capital distinction for expenditure.  However, this case is particularly interesting as it relates to the scope of the ‘blackhole’ expenditure provisions under section 40-880.


The Sharpcan Case was about whether money spent by a taxpayer who operated a hotel in Victoria could be deducted as an ordinary business expense (i.e. as a deduction on revenue account). The expenditure related to licences to continue operating its poker machines.  These licences (called ‘Gaming Machine Entitlements’) were needed because the Victorian Government changed the law about how poker machines were regulated.  The business had already been operating 18 poker machines and had previously engaged Tattersalls as a ‘gaming operator’ pre-2012.

After August 2012, this system changed, and the taxpayer needed to acquire its own Gaming Machine Entitlements to continue using its poker machines.  If the taxpayer did not acquire the licences then, overnight, it could no longer operate any poker machines.  These licences were offered to the public at an ‘auction’ on 10 May 2010. Under the auction, the licences would be awarded by the Victorian Government to the highest bidder.  As it turned out, the taxpayer acquired the 18 GMEs that it needed, and was able to continue operating its 18 poker machines.

The question was then – could the taxpayer claim a deduction for what it had paid for the GMEs?

The court’s decision

The majority of the Federal Court decided these things:

  • The expenses on the licences were deductible by the taxpayer as normal business expenses (i.e. on the revenue account). The majority said the expenses were directly referable to the ‘income stream’ (or the income-earning process as Dixon J described in the Sun Newspapers case) that the business had already been earning from the poker machines.  In other words, the Court saw the cost of the GMEs to be directly referable to the income of the business, and so it should be deductible.
  • If the expenses were instead of a capital nature, then the ‘blackhole’ expenditure provisions in section 40-880 should allow them to be deductible over 5 years, as money spent to preserve (but not enhance) the goodwill of the business.

In our view, this case was unusual because it involved the taxpayer effectively being ‘forced’ to incur expenditure on the GMEs.  If the taxpayer did not acquire the licences then it would be unlikely to continue its business.  As it happened, the taxpayer’s acquisition of the licences resulted in the business actually increasing its profits.  This meant the Court had to consider the unusual situation where money had to be spent to stay in business (i.e. to preserve goodwill) which also created additional value to the business (which would ordinarily be recovered through the cost base of CGT assets).

What is next?

In our view, this case is interesting for these reasons:

  • It appears to be an expansion of the ability for taxpayers to claim certain expenditure as revenue and be immediately deductible.
  • It appears to expand the scope of the ‘blackhole’ expenditure provisions where money was spent to preserve the goodwill of the business (i.e. the Court allows ‘blackhole’ deductions when money was spent for the intention of preserving the goodwill of a business, even if it happened to end up ‘enhancing’ the value of the business).

The High Court recently gave leave to the ATO to hear an appeal of this case.

It will be interesting to see if the High Court is focused on further defining the scope of the revenue/capital distinction or the ‘blackhole’ provisions as they relate to preserving goodwill.

We will provide an update when we hear more about the High Court’s decision on the appeal.