FEDERAL COURT OF AUSTRALIA

Tabcorp Maxgaming Holdings Limited v Commissioner of Taxation
[2025] FCA 115

ORDERS

THE COURT ORDERS THAT:

1.    The parties confer with a view to providing within 7 days orders:

(a)    giving effect to [275] to [286] of these reasons, granting the applicant leave to amend and rely upon grounds not relied upon in the relevant objection; and

(b)    providing for the expeditious electronic filing of the relevant documents.

2.    The appeal be dismissed.

3.    The applicant pay the respondent’s costs, including the costs of the interlocutory applications referred to at [278].

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THAWLEY J:

INTRODUCTION

1    This appeal under Part IVC of the Taxation Administration Act 1953 (Cth) concerns the deductibility for income tax purposes of an alleged loss made by the applicant (Tatts) from a financial arrangement within the meaning of Div 230 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), which concerns the taxation of financial arrangements (TOFA). Unless otherwise stated, all references to legislation are references to the ITAA 1997.

2    Tatts’ case is that it incurred a loss of $1,491,309,000 from a financial arrangement, deductible under s 230-15(2) when the asserted financial arrangement ceased in the financial year ended 30 June 2013 – see: ss 230-435(1) and 230-445(1).

3    As will be further explained below, Tatts has already been allowed $1,193,952,000 of that amount in deductions under s 8-1 in the financial years ended 30 June 1999 to 30 June 2013. Time limits prevent any review of the assessments under which those deductions were claimed and allowed. The fact that Tatts would obtain a double deduction in the amount of $1,193,952,000 if its arguments are correct is said to be relevant to interlocutory issues, heard at the final hearing, concerning whether Tatts should be granted leave to amend to rely on grounds not relied upon in the objection to the assessment for the 2013 year.

4    In order to understand the issues, it is necessary to understand the factual background. I should observe that I have made findings based on the evidence adduced in the proceedings, but included references to High Court (and other) decisions for background and because the parties made extensive reference to those decisions – see: s 91 of the Evidence Act 1995 (Cth).

FACTUAL BACKGROUND

The State of Victoria legalises gambling by gaming machines and creates a duopoly

5    The State of Victoria legalised gambling activity involving the use of gaming machines in 1991 by the Gaming Machine Control Act 1991 (Vic) (1991 Act). On 14 April 1992, the State issued to each of the Totalisator Agency Board of Victoria (TAB) and the Trustees of the Will and Estate of the late George Adams a “gaming operator’s licence” under s 33 of the 1991 Act for a term of 20 years, thus creating a gaming machine “duopoly”.

6    Neither the TAB nor the Trustees paid an upfront fee for their gaming operator’s licence.

7    Clause 6 of the Trustees’ gaming operator’s licence required the Trustees to pay to the Victorian Gaming Commission the fees required to be paid under s 136 of the 1991 Act: CB Tab 40 at 757. It provided:

6. Amounts Payable to Commission

The Trustees must pay to the Commission amounts payable under section 136 of the Act -

6.1    on a nominated day of each week in respect of amounts payable for the week ending seven (7) days before the nominated day; or

6.2    otherwise as agreed between the Commission and the Trustees.

8    Clause 8 contemplated that there would be a review of the fees payable under s 136 by 1 November 1996: CB Tab 40 at 757. It provided

8. Review of Fees

A review of rates of return payable by the Trustees under section 136 of the Act shall be conducted by the Minister in consultation with the Trustees and Other relevant parties before 1 November, 1996.

9    Section 136(1) imposed an obligation on the “gaming operator” to pay amounts under either s 136(2) or (3) as the Commission determined. The Commission determined that the amounts were payable under s 136(3), which provided for the “daily net cash balance” method. The “daily net cash balance” was, in summary, the amount wagered less amounts paid out and any amount prescribed for any jackpot: s 136(5). Section 136(3) required the Trustees as a “gaming operator” to pay in total 66⅔% of the “daily net cash balance”: A4192. The TAB was also required to pay amounts under s 136.

10    Consistently with cl 8 of the licence conditions, s 160 of the 1991 Act contemplated amendments to s 136(3) of the 1991 Act on 1 November 1996 the effect of which was to authorise the percentage of the “daily net cash balance” that the Trustee must pay under s 136(3) to be increased from 66⅔% to a “prescribed percentage” that could be no more than a total of 75% of the “daily net cash balance”: A4194. The “prescribed percentage” was to be set by regulations.

11    The Trustees began operating their gaming machines in approved venues through the Tattersall business in August 1992: Gillooly at [14].

12    Over the twenty years from 1 July 1992 to 15 August 2012 the Trustees (and associated entities) paid the State $5,501,300,780, which Tatts referred to in submissions as “Base Payments”: CB Tab 22 at 265–7.

The TAB is privatised by way of public float

13    In 1993, the Victorian Government announced a proposal to privatise the TAB by way of a public float on the Australian Stock Exchange (ASX), with the proceeds of the privatisation being paid to the State. Tabcorp Holdings Limited was listed on the ASX on 15 August 1994.

14    Tabcorp was granted a conjoined “wagering licence” and “gaming licence” for a term of 18 years under s 12 of the Gaming and Betting Act 1994 (Vic) (1994 Act) and s 222 of that Act brought Tabcorp’s gaming operator’s licence to an end. Tabcorp was required to pay the net float proceeds ($597.2 million) to the State: s 13 of the 1994 Act; Tabcorp Holdings Limited v Victoria [2016] HCA 4; 90 ALJR 376 at [24]. The State considered that about $450 million of those proceeds was the upfront licence fee paid for the “gaming licence”: CB Tab 56 at 1107.

15    The Trustees continued to hold their “gaming operator’s licence” under the 1991 Act. The duopoly was thus retained.

16    The State had been advised that, if Tabcorp was to be repaid the initial licence fee upon the granting of new licences after the expiry of Tabcorp’s conjoined licences in 18 years, the capital value of the conjoined licences would not need to be amortised in the financial statements set out in the prospectus – see: Tabcorp at [3]. This would maximise the return to the State from the privatisation. That advice was accepted and s 21(1) was included in the 1994 Act, containing what has been referred to as the ‘terminal payment provision’. This entitled Tabcorp to a ‘terminal payment’ after expiry of its conjoined licence, if a new licence was granted, regardless of whether that new licence was granted to Tabcorp or to another person. Section 21(1) of the 1994 Act provided:

21.     Entitlement of former licensee on grant of new licences

(1)     On the grant of new licences (other than the initial licences), the person who was the holder of the licences last in force (in this section called the “former licences”) is entitled to be paid an amount equal to the licence value of the former licences or the premium payment paid by the new licensee, whichever is the lesser.

Levelling the playing field between the duopolists

17    The State wanted to level the playing field between the Trustees and Tabcorp in addition to dividing that playing field between them – see: Victoria v Tatts Group Limited [2016] HCA 5; 90 ALJR 392 at [10] (Tatts HCA). The State wanted an adequate return from the Trustees’ “co-exclusive” gaming operator’s licence and wanted to put the Trustees onto a more equal competitive footing with Tabcorp – see: Tatts HC at [10], referring to Victoria, Legislative Assembly, Parliamentary Debates (Hansard), 4 June 1996 at 565-566 in relation to the history of the negotiations.

18    Negotiations between the State and the Trustees culminated in an agreement between them dated 17 November 1995 (1995 Agreement) – see: CB Tab 118 at 1479. Recital B of the 1995 Agreement referred to the review of fees payable to the State contemplated by cl 8 of the Trustees’ gaming operator’s licence and stated that the agreement “constituted that review” once it became unconditional: CB Tab 118 at 1481. Recital B provided:

Clause 8 of the Gaming Operator’s Licence provides for a review of amounts payable by the Trustees under Section 136 of the Act to the Victorian Casino and Gaming Authority, to be undertaken not later than 1 November 1996. This Agreement when it becomes unconditional constitutes that review.

19    Clause 6 of the 1995 Agreement confirmed that the Trustees’ “business will be regulated on terms substantially as favourable as the terms regulating the gaming machine business operated by Tabcorp” and continued:

At the time of entering into this Agreement the share of net machine income retained by the Trustees is 33⅓ percent and other terms regulating the business are contained in the Ministerial Directions document dated 28 August 1995 (annexed as Schedule 1). Prior to entering into this Agreement, the Trustees received from the Treasurer of Victoria, and considered, the letter annexed to this Agreement as Schedule 2.

20    Schedule 2 to the 1995 Agreement comprised a letter from the Treasurer of Victoria recording, amongst other things, that the “[a]mounts which may be retained by you by way of commission on gaming will be maintained at 33.33% for the period of the licence”: CB Tab 118 at 1478. It also made clear that the “statement of principles” in the letter did not bind the Government or future Governments.

21    Clause 3 imposed an obligation on the Trustees to pay the State what was described in Tatts HCA at [15] as “an annual licence fee” – see also: Victoria, Legislative Assembly, Parliamentary Debates (Hansard), 4 June 1996 at 566: A5491.

22    The High Court observed that the present discounted value of the licence fee was substantially equivalent to the amount paid by Tabcorp from the proceeds of the TAB’s privatisation. This was not the subject of specific evidence in the present case.

23    It follows from what has been said that the 1995 Agreement secured the outcome that:

(a)    the amounts payable under s 136 of the 1991 Act would not increase on 1 November 1996 from 66⅔% as had been contemplated by cl 8 of the licence and s 160 of the 1991 Act; but

(b)    further (licence) fees would be payable in addition to the payment of fees of 66⅔% required under s 136.

24    Clause 7 of the 1995 Agreement provided for “compensation for the investment in infrastructure lost” to be paid to Tatts “[i]f the Gaming Operator’s Licence expires without a new gaming operator’s licence having issued to [Tatts]” (cl 7.1), but for no amount to be payable if a new gaming operator’s licence was not issued at all, or was issued to Tatts or a related entity of Tatts (cl 7.2).

25    Clause 7 might also be referred to as a “terminal payment provision”, but it is different to s 21(1) of the 1994 Act applicable to Tabcorp, in particular because Tabcorp was entitled to a payment even if it was granted a new licence.

26    Tatts emphasised the importance of the possible “compensation” payment contemplated by cl 7. In this respect, it adduced evidence from Mr Peter Gillooly (who was at the time Chief General Manager) and Mr Duncan Fischer (who was at the time Chief Financial Officer): CB Tab 31 at [7] (Gillooly); CB Tab 34 at [11] (Fischer).

27    Mr Gillooly and Mr Fischer both gave evidence that, during negotiations, they considered the “compensation” payment to be a critical consideration in agreeing the “additional payments” under clause 3 – see, for example: Gillooly at [26]; Fischer at [31].

28    Clause 2 of the 1995 Agreement provided a condition subsequent that the Trustees obtain a private binding ruling on the tax implications of the draft legislation, acceptable to the Trustees. As the evidence made clear, it was critical to the Trustees that the payments referable to cl 3 of the 1995 Agreement (being the payments required by s 135A of the 1991 Act as amended by the 1996 Act) were deductible under what was then s 51(1) of the Income Tax Assessment Act 1936 (Cth), later s 8-1 of the ITAA 1997.

29    Clause 8 of the 1995 Agreement provided, amongst other things, that the Minister would use his best endeavours to draft and procure the passing of legislation that included the obligation of the Trustees under cl 3 and the obligation of the State to pay the “Licence Value” as contemplated by cl 7 of the 1995 Agreement. Clause 8 included:

8. Draft Legislation

8.1    The Minister will cause to be drafted and will use his best endeavours to procure that the Parliament of Victoria enacts legislation which: '

8.1.1    includes the Trustees’ obligation to pay the Minister in accordance with clause 3 of this Agreement;

8.1.2     includes the obligation of the State of Victoria to pay (lie Licence Value to the Trustees in accordance with the provisions of clause 7 of this Agreement;

…

8.1.5    includes provision that the percentage of total daily net cash balances referred to in the proposed sub-section 136(3B) contained in section 160(3) of the Act will be amended to read “66⅔ per centum” in place of “75 per centum”;

8.1.6     includes provision requiring the holder of any new gaming operator’s licence issued following the expiry of the Gaming Operator’s Licence to pay any licence fee by way of lump sum premium upon the grant of the new licence; …

30    As anticipated by cl 8, legislation was passed in the form of the Gaming Acts (Amendment) Act 1996 (Vic) (1996 Act), which amended the 1991 Act with effect from 2 July 1996. One of its express purposes was “to make further provision in relation to gaming operator’s licences” – see: s 1(a) of the 1996 Act. The 1996 Act introduced into the 1991 Act:

(a)    new ss 33, 33A and 35A, to provide for the issue of a new gaming operator’s licence on the expiration of the Trustees’ existing licence and for the payment of what was described in Tatts HCA at [24] as “compensation” if the new gaming operator’s licence was not granted to the Trustees or a related entity – see: ss 5 and 6 of the 1996 Act. In substance, this gave effect to cl 7 of the 1995 Agreement; and

(b)    a new s 135A, entitled “Amounts payable by Trustees” – see: s 9 of the 1996 Act. In substance, this gave effect to cl 3 of the 1995 Agreement.

31    Section 35A(1) was as follows (A4139):

(1)    If—

(a)    a gaming operator's licence held by a person ("the former licensee") expires; and

(b)    the Authority grants a gaming operator's licence to a person other than the former licensee, or a related entity of the former licensee being a licence that commences within 6 months after that expiry; and (c) the Authority does not grant a gaming operator's licence before the expiration of that period to the former licensee or a related entity of the former licensee—

the former licensee is entitled to be paid an amount equal to the licence value of the licence held by the former licensee or the premium payment paid by the holder of the licence referred to in paragraph (b), whichever is the lesser.

32    The Attorney-General’s speech on the second reading of the relevant bill (referred to in Tatts HCA at [10]), included the following (A5490-1):

One consequence of the float of Tabcorp was that it and [the Trustees] were placed in quite different competitive situations. Tabcorp had made a licence payment to the government, but [the Trustees] had not. Consequently, in 1994 the government commenced negotiations with [the Trustees] over the payment of a licence fee for its co-exclusive access to the gaming machine market.

As a result of these negotiations, the parties agreed that [the Trustees] will pay a licence fee. The fee is payable by instalments over the life of the licence which expires in April 2012. The licence fee is to be equivalent to 30 per cent of the net profit from [the Trustees’] gaming division subject to a minimum payment of $35 million each year. The minimum is to be indexed to the consumer price index from June 1996. The licence fee is not to exceed 35 per cent of such net profit in any year. The licence fee obligation is effective from 1 January 1995 and instalments for 1995 have been paid. On the basis of projections by the government's advisers, these arrangements are broadly equivalent to the licence fee paid by Tabcorp.

33    The Trustees applied for and obtained rulings, satisfactory to the Trustees, that the amounts payable to the State under the legislation (implementing the 1995 Agreement) were deductible for the financial years ended 30 June 1996 to 1999: CB Tab 123 at 1550–1. The parties proceeded on the basis that the condition subsequent in cl 2 of the 1995 Agreement was satisfied.

34    The Trustees considered and acted on the basis that the payments required by cl 3 were licence fees that were deductible under s 8-1 (and its predecessor) and that the “nature of the payment of the amount provided under s 135A is exactly the same as that provided under s 136(3)(d)”: CB Tab 136 at 1626.

The Trustees restructure

35    In 1998, the Trustees restructured the business.

36    Tattersall’s Holdings Pty was incorporated as parent company to three subsidiaries which each operated a branch of the business – gaming, lotteries and club keno. Tattersall’s Gaming Pty Ltd came to operate the gaming business: Fischer at [45].

37    The Gaming Acts (Amendment) Act 1998 (Vic) (1998 Act) was enacted on 19 May 1998 to amend the 1991 Act to permit the Minister to declare a company to be the “operator” in relation to a person’s gaming operator’s licence – see: s 3A.

38    On 23 June 1998, Holdings and Gaming signed an agreement to govern their relationship and the role of Gaming in operating gaming machines: Exhibit 1. Clause 4.1 of that agreement provided that, from 1 July 1998, Gaming would operate the Trustees’ gaming business under any appointment as an operator of the Trustees’ gaming operator’s licence. Clause 4.1.3 provided that Gaming would ensure that the requirements of the 1991 Act and the Trustees’ licence were complied with, including by causing all sums of money to be paid in accordance with ss 135, 135A, 135C and 136 of the 1991 Act as required.

39    On 29 June 1998, on the Trustees’ recommendation, the Minister exercised his power under s 3A of the 1998 Act to nominate Gaming as operator. From 1 July 1998, Gaming paid the required fees under ss 135A and 136: T118.10–15. Mr Fischer stated that those payments were treated as “top of the line” expenditure, which in context meant costs regularly incurred in earning gaming receipts (analogous to above the line expenditure for costs of goods sold) – see: T125.5 (the transcript reference to “loan” rather than “line” is incorrect).

40    On 2 July 1998, the Commissioner issued a private ruling in relation to the licence fees payable by Gaming under the proposed new arrangements: CB Tab 134 at 1614. This ruling was unfavourable in that it concluded that the “licence fees” that would be payable by the Trustees to the State under s 135A in respect of the 1999 to 2012 years were not deductible. This conclusion was said by the Commissioner to flow from the fact that those payments were: (a) on capital account because “the advantage sought from the payment is the acquisition of the right to carry on the business”; (b) “similar to the kind of ‘monopoly rent’ discussed in” United Energy Ltd v The Commissioner of Taxation of the Commonwealth of Australia [1997] FCA 836; and (c) in the nature of a duty payable out of Gaming’s net profit: CB Tab 134 at 1615. This position was also explained in a letter from the Commissioner dated 30 June 1998: CB Tab 133 at 1610–2; see also: Tatts HCA at [27].

The 1999 Agreement

41    The adverse private ruling led to an agreement between the State and the Trustees made on 28 June 1999 (1999 Agreement) which at least purported (see Tatts HCA at [27]) to amend the 1995 Agreement. The recitals in the 1999 Agreement provided:

A     On the 17th day of November 1995 the Trustees and the Honorable Haddon Storey, QC, MLC, former Minister for Gaming acting for and on behalf of the State of Victoria, entered into an agreement (“1995 Agreement”) which inter alia, reviewed amounts to be paid by the Trustees to the Victorian Casino and Gaining Authority pursuant to Section 136 of the Act.

B.     By the Gaming Act Amendment Act 1996 (Act No 17/1996) the Parliament of Victoria legislated to reflect in statutory form the payment requirements contained in clause 3 of the 1995 Agreement

C     The Government of Victoria and the Trustees have decided for mutual benefit to alter the payment requirements as reflected in the 1995 Agreement and in Act No 17/1996, and for this purpose inter alia, the Government of Victoria has introduced to the Parliament of Victoria and the Parliament of Victoria has passed the State Taxation Acts (Amendment) Act 1999 (Act No 47/1999, the “1999 Act”).

D.     The Government of Victoria and the Trustees have agreed to amend the 1995 Agreement in view of the new statutory payment obligations and the parties wish to reduce their further agreement to writing.

42    The State Taxation Acts (Amendment) Act 1999 (Vic) (1999 Act) referred to in Recital C was assented to on 8 June 1999 and commenced on 1 July 1999 – see: ss 7, 164. The 1999 Act repealed s 135A of the 1991 Act and replaced it with a new s 136(3A). Unlike s 135A, the payments under s 136(3A) were not calculated by reference to profits. Rather, like the existing payments required under s 136(3), the amount payable under section 136(3A) was fixed by reference to a percentage (7%) of the “daily net cash balances” of the “gaming operator”. It provided:

A gaming operator must ensure that, in addition to amounts payable under sub-section (3), there is paid, in respect of such periods as the Authority determines, to the Authority to be paid into the Consolidated Fund, 7 per centum of the daily net cash balances during that period of all gaming machines of the gaming operator at approved venues.

43    At the time, the Trustees considered that 7% of “daily net cash balances” was roughly equivalent to 30% of the Trustees’ net profits from gaming machines: T122.43–45 (Fischer). The Trustees considered that this amount was acceptable because it was less than the theoretical maximum of 75% that the State could once have required the Trustees to pay under the 1991 Act: T122.5–8 (Fischer).

44    The 1999 Agreement amended the terms of the Trustees’ obligation under cl 3 of the 1995 Agreement (enacted in the form of s 135A of the 1991 Act) by limiting its operation to the period ending 30 June 1999, in respect of which period the Trustees had obtained a private ruling that they considered satisfactory: CB Tab 143 at 1657.

45    Clause 3 of the 1999 Agreement recorded the parties’ agreement that the payments under ss 136(3) and 136(3A) were of the same nature as each other:

Amounts payable pursuant to Sections 136(3)(c), 136(3)(d) and 136(3A) of the Act shall be considered to be of the same nature as each other, notwithstanding the later addition of Section 136(3A) to the Act by operation of the 1999 Act.

46    This clause is consistent with the views conveyed by the Managing Trustee and Chief Executive Officer of the Trustees to the Australian Taxation Office on 22 September 1998 that the “nature of the payment of the amount provided under s 135A is exactly the same as that provided under s 136(3)(d)”: CB Tab 136 at 1626. The clause also confirms the parties’ intention that the payments were fees for the conduct of gaming made pursuant to condition 6 of the gaming operator’s licence.

47    By cl 4.1 of the 1999 Agreement, the parties affirmed their obligations to perform, and the validity of, the 1995 Agreement as amended by the 1999 Agreement.

Legislative change in 2003

48    In 2003, multiple pieces of legislation regulating gambling were re-enacted and consolidated into the Gambling Regulation Act 2003 (Vic) (2003 Act). The duopoly was retained. Tabcorp’s (conjoined) wagering licence and gaming licence were provided for in Pt 3 of Ch 4 of the 2003 Act. The Trustees’ gaming operator’s licence was provided for in Pt 4 of Ch 3 of the 2003 Act.

49    Tabcorp’s ‘terminal payment’ provision was re-enacted in s 4.3.12(1). Section 4.3.12(1) provided that, “[o]n the grant of new licences”, the holder of the former licences would be “entitled to be paid an amount equal to the licence value of the former licences or the premium payment paid by the new licensee, whichever is the lesser”.

50    With respect to the Trustees, ss 3.4.29, 3.4.30 and 3.4.33 enacted similar but not identical provisions for the issue of further gaming operator’s licences and for the making of a ‘terminal payment’ to those that were previously in ss 33, 33A and 35A of the 1991 Act as amended by the 1996 Act. Sections 3.4.29, 3.4.30 and 3.4.33 provided:

3.4.29    Gaming operator’s licence

The Commission, on application by the Trustees or any other person, may grant a gaming operator’s licence to the Trustees or other person.

3.4.30    Premium payment

(1)    Before a licence is granted under section 3.4.29, the applicant must pay to the Treasurer as consideration for the grant of the licence the amount determined by the Treasurer as the premium payment.

(2)    The premium payment is a tax.

…

3.4.33    Entitlement of former licensee on grant of new licence

(1)    If—

(a)    a gaming operator’s licence held by a person (“the former licensee”) expires; and

(b)    the Commission grants a gaming operator’s licence to a person other than the former licensee, or a related entity of the former licensee, being a licence that commences within 6 months after that expiry; and

(c)    the Commission does not grant a gaming operator’s licence before the expiration of that period to the former licensee or a related entity of the former licensee—

the former licensee is entitled to be paid an amount equal to the licence value of the licence held by the former licensee or the premium payment paid by the holder of the licence referred to in paragraph (b), whichever is the lesser.

51    Tabcorp continued to be entitled to a ‘terminal payment’ after expiry of its conjoined licence if a new licence was granted, regardless of whether that new licence was granted to it or to another person. The Trustees were only ever entitled to “compensation” (cl 7 of the 1995 Agreement) or a terminal payment if a new gaming operator’s licence was granted after expiry of the Trustees’ licence and it was granted to a person other than the Trustees (or a related entity). The requirement for a new licence to be issued within 6 months (not in cl 7 of the 1995 Agreement) was introduced by the 1996 Act as part of s 35A. A requirement that the clause only operate in relation to a new licence issued within a reasonable time would have been implied into the 1995 Agreement in any event – see: Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; 73 CLR 1 at 13.

The Trustees transfer their assets to Tatts

52    In 2004, the Trustees decided to corporatise the Trustees’ business by floating a company on the ASX. Tattersall’s Ltd was registered on 12 August 2004. It was later named Tatts Group Ltd and then Tabcorp Maxgaming Holdings Ltd (being the applicant (Tatts)).

53    The Gambling Regulation (Amendment) Act 2004 (Vic), which was given royal assent on 21 September 2004, amended the 2003 Act to allow the transfer of the Trustees’ gaming operator’s licence to Tatts. A new s 12.3.2 was inserted into the 2003 Act and provided for the Trustees to transfer their gaming operator’s licence to Tatts upon the Minister’ approval. Upon that transfer, Tatts would have all the rights, liabilities and obligations under the licence and Chapter 3 of the 2003 Act that the Trustees had immediately before the transfer.

54    On 23 May 2005, Ernst & Young (EY) provided an “Independent Valuation Report” in relation to the restructuring of the Trustees’ business. The EY valuation concluded that the value of the various licences held by the Trustees was between $368,811,000 and $381,404,000 (the midpoint of which is $375,107,500): CB Tab 151 at 1879, 1899. That valuation of the licenses took into account the residual payment representing the then current estimate of the Trustees’ contingent entitlement to receive a payment from the State if the Trustees’ gaming operator’s licence was not renewed in 2012: CB Tab 151 at 1901. This was referred to as the “Tatts Pokies Licence Residual Value” at [7.10]: CB Tab 151 at 1869. The amount to be received was estimated by Tatts’ management as $598 million. EY observed that the entitlement did “not arise from a previous capital payment” and so carried a potential future 30% tax liability. On this basis, and using a post-tax cost of debt of 4.8%, EY estimated the net present value of the entitlement to $598 million at $297,357,000.

55    On 31 May 2005, the business – including the Trustees’ gaming operator’s licence and all rights and obligations under the 1995 Agreement and 1999 Agreement – was transferred to Tatts. Three agreements (Float Agreements) were executed:

    Transfer Agreement executed by the State, the Trustees and Tatts;

    Deed of Assignment and Transfer of Gaming Operator Licence executed by the Trustee and Tatts; and

    Restructure Implementation Agreement executed by the Trustees and Tatts.

56    Recital D of the Transfer Agreement stated that the Minister, the Trustees and Tatts wished to enter the agreement to (CB Tab 157 at 1924):

(i)     facilitate the proposed Corporatisation and Listing;

(ii)     effect the transfer of the rights and obligations under the 1995 Agreement as amended by the 1999 Agreement together with all rights and obligations of the Trustees arising pursuant to the 1999 Agreement from the Trustees to [Tatts]; and

(iii)     facilitate the transfer of the Licences [defined as the licences and authorisations held by the Trustees under the 2003 Act, including the gaming operator’s licence: CB Tab 157 at 1926] from the Trustees to [Tatts].

57    Clause 10 of the Transfer Agreement provided (CB Tab 157 at 1934).

The rights and obligations of the Trustees arising pursuant to the 1995 Agreement as amended by the 1999 Agreement together with all rights and obligations of the Trustees arising pursuant to the 1999 Agreement are transferred to [Tatts] in accordance with clause 11 of the 1995 Agreement, as contemplated by the [2004] Act.

58    Clause 11 of the 1995 Agreement, headed “Assignment”, provided (CB Tab 118 at 1488):

The Trustees will not assign the benefit of this Agreement without the consent of the Minister which shall not be withheld in the case of a proposed assignee which is also the transferee of the Gaming Operator's Licence pursuant to clause 5 of this Agreement and which meets probity and other reasonable conditions imposed by the State of Victoria.

59    Clause 4.1 of the Deed of Assignment of Gaming Operator Licence provided (CB  Tab 157 at  1915):

With the approval of the Minister as evidenced by … his execution of the Transfer Agreement, the Trustees hereby assign and transfer to [Tatts] … :

(a)     the Gaming Operator Licence together with all of its rights and obligations, and

(b)     the rights and obligations under the 1995 Agreement as amended by the 1999 Agreement together with all rights and obligations of the Trustees arising pursuant to the 1999 Agreement.

60    Under cl 4 of the Restructure Implementation Agreement, the Trustees agreed to sell to Tatts their “Assets”, which was defined to include, amongst other things, “Gaming Licences” and various “Contracts”: CB Tab 157 at 1976. Under cl 6 of the Restructure Implementation Agreement, the parties agreed to the values of the assets and an apportionment of the net value of each class of asset. The total value of the assets transferred was agreed to be $1,201,726,202: CB Tab 157 at 2005.

61    The consideration paid by Tatts to acquire the assets of the Trustees was the issue of 599,999,999 ordinary shares to the Trustees (the Trustee Shares, valued at $1,106,567,997) and the assumption of liabilities valued at $95,158,205: CB Tab 157 at 2005. The relevant value of the shares less the liabilities assumed is referred to as the Restructure Consideration.

62    A prospectus was issued as part of the float: CB Tab 159 at 2010. PriceWaterhouseCoopers (PwC) prepared an “Investigating Accountant’s Report” on historical and forecast financial information, contained in Section 8 of the prospectus: CB Tab 159 at 2137. The Financial Information in Section 7 of the prospectus was to be read with the “Investigating Accountant’s Report”: CB Tab 159 at 2113. The licences are recorded in Tatts’ “Financial Position” at [7.5] at a value of $375.1 million: CB Tab 159 at 2122. The accompanying Note 7 records the value of the gaming operator’s licence as $372.6 million: CB Tab 159 at 2132. The “Detailed Financial Position” at [7.7] records that “[t]he gaming licence has not been amortised as the Licence Expiry Payment … which may be paid to [Tatts] at the end of the licence period, is expected to be not less than the carrying value of the asset”: CB Tab 159 at 2128.

63    In its Financial Report for the year ending 30 June 2005, Tatts did not amortise its gaming operator’s licence on the basis that “the licence expiry payment which may be paid to the parent entity at the end of the licence period, is expected to be not less than the carrying value of the asset”: CB Tab 144 at 1662, 1669, 1680; T125.20 (Fischer).

Victoria restructures its gaming industry

64    In 2008 and 2009, the Victorian Government restructured Victoria’s gaming industry. Neither Tabcorp’s conjoined licences nor Tatts’ gaming operator’s licence was to be renewed after those licences expired in 2012 and Tabcorp and Tatts were to lose their right to conduct gaming operations – see: Tabcorp HCA at [5].

65    After the existing licences expired in 2012, the right to conduct gaming operations was to be granted to holders of a new authority called a “gaming machine entitlement” or “GME”.

66    In a media release issued on 10 April 2008, the Victorian Premier stated (CB Tab 163):

The Premier, John Brumby, today announced approved hotels and clubs would bid directly for gaming machine entitlements under the new structure for Victoria’s gambling industry beyond 2012.

Mr Brumby said the Victorian Government had decided to move to a new structure for the industry, which removes the need for separate gaming machine operators -Tattersall’s and Tabcorp – with venues set to own, operate and maintain electronic gaming machines.

“Today’s announcement fundamentally reshapes the gaming Industry in Victoria”, Mr Brumby said.

…

Reform of the gaming industry structure is part of a broader reform of all gaming and wagering in Victoria post 2012. Other reforms include:

•    Keno operations will be offered as a single, specific licence; and

•    A single, stand-alone licence will be offered for wagering, currently run by Tabcorp.

“This is the first time in Victoria’s history that licences to operate keno and wagering will be opened up for competition”, Mr Brumby said.

…

The Government’s decision represents an entirely new regulatory model for the operation of wagering, gaming and keno in Victoria after the expiration of the current licences in 2012, and the Government has formed the view that neither Tattersall’s nor Tabcorp are entitled to compensation.

…

Legislation giving effect to today’s announcement will be introduced in Parliament in two stages, commencing next week.

67    By 5 February 2009, legislation to implement the changes to the industry structure for keno and wagering and betting had been passed by Parliament and had commenced operation: A5531. On 5 February 2009, the Victorian Minister for Gaming moved that the Gambling Regulation Amendment (Licensing) Bill 2009 be read a second time: A5531. After referring to the implementation of reforms for keno and wagering and betting, the Minister stated:

The bill before the house implements the next phase of the government’s announcement, namely the regulatory arrangements for the post-2012 gaming machine industry, as well as introducing further refinements to the wagering and betting industry structure and keno licence. Under the new arrangements, Victoria will transition from the current duopoly gaming operator system to a venue operator system. The decision reshapes the gaming machine industry for the next generation by empowering local venue operators to make local decisions about their gaming operations. A venue operator system allows for a greater spread of benefits to be returned to the community.

…

The bill before the house will amend the Gambling Regulation Act 2003 to put in place the legislative provisions to support the new venue operator industry structure. Following the expiry of the existing gaming operators’ licences in 2012, the state will not issue any further gaming operator licences. Rather, approved hotels and clubs will be able to bid directly for 10-year gaming machine entitlements, which will authorise venues to possess and operate gaming machines.

68    On 23 June 2009, s 13 of the Gambling Regulation Amendment (Licensing) Act 2009 (Vic) (2009 Act) inserted a new s 3.4.3 into the 2003 Act, which removed any possibility of the issue of a new gaming operator’s licence. It provided:

3.4.3 Application of Part – gaming operator’s licences

This Part applies only with respect to the gaming operator’s licence that was issued [to the Trustees] on 14 April 1992 and does not authorise the grant of any further gaming operator’s licence.

69    Section 25 of the 2009 Act inserted a new Part 4A into Chapter 3 of the 2003 Act. Part 4A contained the new regime for “Gaming Machine Entitlements”.

70    The Directors’ Report in Tatts’ 2008 Annual Report included a statement in relation to the proposed changes and observed that the State had expressed the view that Tatts would not have any right to compensation when its gaming operator’s licence expired in 2012 (CB Tab 164 at 2285):

On 10 April 2008, the Victoria State Government announced future changes to the Victorian Gaming, Wagering and Keno licensing arrangements post 2012. This announcement will effectively mean the end of the Tatts Pokies gaming machine operations as they presently exist from 2012. The Government’s announcement also included a statement in relation to non-entitlement of Tatts Group to compensation. Any attempts on the part of the Victorian State Government to fail to meet its clearly understood obligations to Tatts Group will result in Tatts Group taking all necessary actions to protect its shareholder interests

71    Note 19 to the balance sheet in the 2008 Financial Statements recognised a full impairment charge to Tatts’ brand and licence intangible assets and included the following explanation (CB2307; 2341–2):

The impairment charge arose in the Company to the brand and licence intangible assets following the announcement by the Victoria Government on 10 April 2008 on the gambling licence arrangements that will apply beyond 2012. The impairment of these gambling licensing arrangements post 2012 on the business of the Group, and the Government’s statements on the licence expiry payment, have led to the brand and licence intangible assets in the Company being fully impaired. The accounting treatment adopted here for the gaming licence is in accordance with Australian Accounting Standards.

It does not reflect any assessment by the Company of its entitlement to the licence expiry payment or other rights following on from the Government’s statements.

The deductions which were claimed by Tatts and allowed

72    Consistently with the private binding ruling which had been sought and obtained, the Trustees claimed (and were allowed) deductions for the payments made under s 135A of the 1991 Act in the financial years ended 30 June 1996 to 30 June 1998. Gaming claimed and was allowed deductions in respect of payments under s 135A in the 1999 year.

73    As noted above, after the Commissioner had given an unfavourable ruling on 2 July 1998 in relation to the financial years ended 30 June 2000 to 30 June 2012, the Trustees negotiated and entered into the 1999 Agreement with the State and secured legislative changes contained in the 1999 Act such that the s 135A licence fees ceased to be payable after 30 June 1999 and became payable on a different basis (a percentage of net cash balance rather than profit) under s 136(3A). This was done, at least in substantial part, to ensure that the fees were deductible having regard to the unfavourable position which had been expressed by the Commissioner in his private ruling issued on 2 July 1998.

74    Gaming claimed and was allowed deductions for each of the 2000 to 2013 years (the gaming operator’s licence was extended until 15 August 2012 from its original expiry date of 14 April 2012).

Tatts sues the State

75    After expiry of its licence on 15 August 2012, Tatts sued the State seeking payment of the amount of $451,157,286. Although successful at first instance (Tatts Group Limited v The State of Victoria [2014] VSC 302 (Hargrave J) (Tatts VSC)) and on appeal (Victoria v Tatts Group Ltd [2014] VSCA 311 (Tatts VSCA)), Tatts was unsuccessful before the High Court.

76    At trial, Hargrave J upheld the claim based in contract (but not the claim under s 3.4.33) and awarded $451,157,286 plus interest: at [251]. The Victorian Court of Appeal dismissed the appeal: at [246].

77    In Tatts HCA at [6], the High Court held that “the phrase ‘new gaming operator’s licence’ in cl 7 referred to a gaming operator’s licence granted under Pt 3 of the 1991 Act (as it might be amended, re-enacted or replaced from time to time)” and “did not have a generic meaning which covered any statutory authority whose effect was to confer on the holder substantially the same rights as were conferred on Tatts by its gaming operator’s licence at the time of its expiration”. A ‘new gaming operator’s licence’ was never issued and Tatts was not entitled to payment on the proper construction of cl 7 of the 1995 Agreement.

78    It follows that the High Court rejected Tatts’ contractual claim. It also rejected its claim under cl 3.4.33 for the reasons given by the trial judge and the Court of Appeal: Tatts HCA at [83] and [84].

The present litigation

79    As set out in more detail below, Tatts’ claims it had a “financial arrangement” which came into existence on expiry of its gaming operator’s licence and which subsisted for a period of 6 months. The gaming operator’s licence expired at midnight on 15 August 2012. Accordingly, the contended “financial arrangement” was claimed to exist from 16 August 2012 for 6 months.

80    The contended “financial arrangement” was described as a “contingent right to a terminal payment” of up to $598 million from the State. It was said to be “based in” or arise from the 1995 Agreement and/or cl 3.4.33 of the 2003 Act.

81    The TOFA regime provides for a loss from a financial arrangement to be deducted where the loss arises from the disposal or complete cessation of the financial arrangement – see: ss 230-15(2) (providing for a deduction for a loss from a financial arrangement); 230-435(1) (providing for when a balancing adjustment is made) and 230-445(1) (providing a method statement for computing a balancing adjustment).

82    Tatts received nothing when its contended “financial arrangement” ceased in the year ended 30 June 2013 and claims it provided “financial benefits” under the financial arrangement that totalled $1,491,309,000. Tatts claims it therefore incurred a loss in the 2013 year of $1,491,309,000, calculated in accordance with the method statement in s 230-445(1).

83    The “financial benefits” allegedly provided under the financial arrangement comprise the following (see: CB Tab 21 at 263–4 (Notice to Admit); Tab 22 at 267–268 (Notice of Dispute); as to the shares: AOS [8]–[10]; [79]–[80]; CB Tab 151 at 1869; as to the amounts allowed: AOS [11], [236]; ROS[5]):

84    By its second further amended appeal statement (2FAAS) and opening submissions (CB Tab 20 at 244; AOS[171]; T47.19), Tatts abandoned a claim for losses based on the amounts paid by the Trustees under s 135A of the 1991 Act, as follows:

85    In summary, Tatts contended that the Trustees agreed to pay the “Additional State Payments” – being the payments made under s 135A of the 1991 Act by the Trustees and Gaming and under s 136(3A) of the 1991 Act and 3.6.7 of the 2003 Act – in return for the contingent right to receive the terminal payment (and some other rights under the 1995 Agreement of nominal value). It contended that the payments made by Gaming are taken to have been incurred by Tatts for the purposes of the ITAA 1997 by operation of the entry history rule and single entity rule in Part 3-90 – see: s 701-5. These payments total $1,193,952,000.

86    As noted in the table above, Tatts also claims an amount of $297,357,000 said to represent the proportion of the value of the shares issued to the Trustees on 31 May 2005 (Trustee Shares) immediately before the float of Tatts that was referable to the contingent right to the terminal payment: AOS[8].

87    Accordingly, Tatts claims it provided two (types of) “financial benefits” in relation to the “financial arrangement” totalling $1,491,309,000: the Additional State Payments totalling $1,193,952,000 and the “Float Financial Benefit” of $297,357,000.

88    In closing submissions, Tatts did not put a case that no apportionment whatsoever was appropriate in relation to either of the two types of financial benefits: ACS[16]. Tatts position was that:

(a)    as to the Additional State Payments:

(i)    a nominal amount should be apportioned to rights obtained under the 1995 Agreement other than the right to compensation in cl 7;

(ii)    nearly the whole of those payments should be apportioned to the contended financial arrangement (the contingent right to a terminal payment);

(iii)    none of those payments should be apportioned to the use, or holding, of the gaming operator’s licence: ACS[15] and [16];

(b)    as to the Trustee Shares, an amount of $297,357,000 was referable, and should be apportioned, to acquiring the contingent right to the terminal payment, consistently with the contemporaneous valuation evidence: ACS[19] and [20].

THE ISSUES

89    The ultimate question in the proceeding is whether the assessment for the 2013 year is excessive within the meaning of Part IVC of the TAA 1953 because Tatts made a “loss … from a financial arrangement” that is allowable as a deduction under s 230-15(2) in that year. The issues, as raised and addressed by the parties, can be summarised as follows:

Topic 1: Financial arrangement

(1)    Did Tatts have a “financial arrangement” within the meaning of s 230-45 as contended?

Topic 2: The Additional State Payments

(2)    If Tatts had the contended financial arrangement, were the Additional State Payments financial benefits provided by Tatts “under” the financial arrangement for the purposes of step 2(a) of the method statement in s 230-445(1) and s 230-60(1)?

(3)    If the Additional State Payments were financial benefits provided by Tatts under the financial arrangement, and the financial benefits satisfy s 230-60(1), what is a reasonable basis of apportionment under s 230-65(2)?

(4)    Does step 1(b) of the method statement under s 230-445(1) include any part of the Additional State Payments on the basis that they had already been allowed as a deduction under s 8-1?

Topic 3: the Trustee Shares

(5)    If Tatts had a financial arrangement, was any part of the Restructure Consideration capable of constituting a financial benefit provided by Tatts under the financial arrangement for the purposes of step 2(a) of the method statement under s 230-445(1)?

(6)    If part of the Restructure Consideration was a financial benefit provided under the financial arrangement, what is a reasonable basis of apportionment under s 230-65(2)?

Topic 4: Exceptions

(7)    If Tatts made a “loss … from a financial arrangement” in the 2013 income year, is Div 230 prevented from applying to permit the loss to be claimed under s 230-15(2) by reason of any one or more of the exceptions in s 230-460(2)(d)(ii), s 230-460(2)(e)(ii) and s 230-460(8).

Topic 5: Leave to amend

(8)    Should Tatts be granted leave to amend to raise grounds not raised in its objection, such leave being required by reason of s 14ZZO(a) of the TAA 1953 and rule 8.21 of the Federal Court Rules 2011 (Cth)?

CONSIDERATION

Topic 1: Financial arrangement – s 230-45

The critical provisions

90    In Subdivision 230-A, s 230-45(1) provides:

230-45     Financial arrangement

(1)     You have a financial arrangement if you have, under an *arrangement:

(a)     a *cash settlable legal or equitable right to receive a *financial benefit; or

(b)     a cash settlable legal or equitable obligation to provide a financial benefit; or

(c)     a combination of one or more such rights and/or one or more such obligations;

unless:

(d)     you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e)    for one or more of the rights and/or obligations covered by paragraph (d):

(i)     the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii)     the right or obligation is not cash settlable; and

(f)     the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

Note 1:     Whether your rights and/or obligations under an arrangement constitute a financial arrangement can change over time depending on changes either to the terms of the arrangement or external circumstances (such as particular rights or obligations under the arrangement being satisfied by the parties). For example, a contract may provide for the transfer of a boat in 6 months time and payment of the contract price at the end of 2 years. Until the boat is delivered, there is no financial arrangement because of the operation of paragraphs (d), (e) and (f) above. Once the boat is delivered, there is a financial arrangement because those paragraphs are no longer applicable.

Note 2:     The operative provisions of this Division do not apply to all financial arrangements, and only apply partially to some: see the exceptions in Subdivision 230-H.

Note 3:     There are some rules in this Division that tell you what happens if an arrangement ceases to be a financial arrangement (see Subdivision 230-G and section 230-505).

…

91    Also within Subdiv 230-A, s 230-85 provides:

230-85 Rights and obligations include contingent rights and obligations

To avoid doubt:

(a)    a right is treated as a right for the purposes of this Division even if it is subject to a contingency; and

(b)    an obligation is treated as an obligation for the purposes of this Division even if it is subject to a contingency.

Summary of Tatts’ submissions

92    Tatts submitted that it had a financial arrangement which “comprised its contingent right to the terminal payment”, being a legal or equitable right to receive a payment under cl 7 of the 1995 Agreement and/or under s 3.4.33 of the 2003 Act if and when the conditions of cl 7 and/or s 3.4.33 were satisfied: AOS[5]; ACS[2]. Tatts submitted that:

(a)    there was no financial arrangement at any time during which the gaming operator’s licence subsisted by reason of the exclusion in s 230-45(d) to (f): AOS[129]; and

(b)    the financial arrangement came into existence on expiry of the gaming operator’s licence at midnight on 15 August 2012: AOS[130], [147]; AORS[12].

93    Tatts submitted that:

(a)    between 1995 and 15 August 2012, Tatts’ non-cash settlable rights and obligations under its ‘broader arrangements’ prevented it from having a “financial arrangement”: s 230-45(1)(d)-(f) (ACS[6]) because before expiry of its gaming operator’s licence, “Tatts had a legal or equitable (contingent) right to receive something and legal or equitable obligations to provide something, that is, other than the [c]ontingent [r]ight to receive the [t]erminal [p]ayment”: AOS[129];

(b)    “[o]n expiry of [the gaming operator’s] licence at midnight on 15 August 2012, all rights and obligations under the broader arrangement ceased except for Tatts’ terminal payment right”: ACS[6];

(c)    from the time its rights and obligations under the broader arrangement ceased:

(i)    “Tatts had a financial arrangement and had satisfied the first condition of cl 7 and/or s 3.4.33”;

(ii)    “there was then a 6-month window during which the State would have been required to make the terminal payment to Tatts if the remaining conditions were satisfied”: ACS[6].

(d)    “[a]t the end of that [6-month] window, the remaining conditions could no longer be satisfied, and Tatts’ right to a terminal payment ceased” for the purposes of s 230-435 (A4428).

94    It follows from these submissions that Tatts contends that the financial arrangement came into existence on 16 August 2012, the financial arrangement not being capable of existing until the gaming operator’s licence expired.

95    On the topic of contingent rights, Tatts observed that s 230-85 expressly contemplated that a right “is treated as a right for the purposes of Div 230 even if it is subject to a ‘contingency’”: ACS[7]. Tatts submitted that a “contingency” is “an event conceived of as a possible occurrence in the future”, referring to: Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd [1981] HCA 4; 146 CLR 336 at 385 (Mason J). Tatts also referred to Australian Accounting Standard AASB 137 Provisions, Contingent Liabilities and Contingent Assets at [10], which provides:

[a] contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

96    Tatts submitted that the accounting concept of “contingency” is “relevant to the construction of ss 230-45 and 230-85 because Div 230 was formulated with close regard to Australian accounting standards, including AASB 137”, referring to the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (Cth) (TOFA EM) at [1.16] to [1.18]: ACS[7]. Tatts submitted that ss 230-45 or 230-85 recognise a right even if the right is “subject to an improbable or remote contingency” and that a “financial arrangement may exist even if the “value or existence of the right [to receive a financial benefit] is contingent on some event or other thing”: TOFA EM at [2.24], [2.38], [2.65] (Tatts’ emphasis added): ACS[7].

97    Tatts – referring to the relevant contingencies as “conditions” – submitted that:

(a)    the first condition – that the Licence “expires” – “was satisfied upon the expiry of Tatts’ Licence at midnight on 15 August 2012”: ACS[3]. Both cl 7.1 (CB Tab 118 at 1486) and s 3.4.33(1)(a) (A4083) required the gaming operator’s licence to “expire”: ACS[3];

(b)    the remaining conditions would be satisfied if, within 6 months of the expiry of the Licence, a gaming operator’s licence was issued to a person other than Tatts or a related entity, referring to cl 7 and s 3.4.33(1)(b) and (c): ACS[3]; and

(c)    the existence of s 3.4.3 of the 2003 Act on and following 15 August 2012 did not negate the possibility of the satisfaction of the conditions just mentioned: “It was possible that, in the 6-month period following the expiry of Tatts’ [gaming operator’s licence], the State could amend the law and issue a gaming operator’s licence or otherwise deem the contingent condition in cl 7 and s 3.4.33 to be satisfied”: ACS[9].

98    On the topic of whether the right in cl 7 survived the enactment of subsequent legislation, Tatts submitted that:

(a)    the “right in cl 7 [of the 1995 Agreement] survived the enactment of subsequent legislation”, referring to Tatts VSCA at [210]-[214] and Tatts VSC at [106]-[117]: ACS[4]; and

(b)    “[a] fortiori, cl 7 survived the [2009] Act that introduced s 3.4.3 [into the 2003 Act], which was not made in furtherance of any term of the [1995 A]greement”: ACS[4];

(c)    by the amendments made by the 2009 Act, the State expressly retained s 3.4.33 of the 2003 Act and the right that it conferred upon Tatts: AOS[154]-[162]; AORS[14(b)].

99    Tatts submitted that the High Court’s decision in Tatts HCA was “predicated upon cl 7 of the 1995 Agreement remaining operative”: AOS[139]. Tatts submitted that the “High Court’s obiter at [78]-[81] does not govern this Court’s determination of the issues before it based on the evidence in this proceeding”: ACS[4]. Tatts submitted (ACS[5]):

At most, s 3.4.3 operated to deprive Tatts’ contingent right to payment under s 3.4.33 (and cl 7) of its “present utility”: Tatts VSCA at [52]. On a proper construction of the 2003 Act (as amended by the 2009 Act), the amendments affecting the introduction of s 3.4.3 evinced “a calculated legislative intent to prevent the change in regime being seen or treated as an alteration of the rights constitutive of Tatts’ [gaming operator’s licence]” because, despite those amendments: (i) the right in s 3.4.33 (and other relevant provisions in Part 4, Chapter 3 of the 2003 Act) was preserved [Tatts VSCA at] [63]-[65]); and (ii) the legislature did not enact an equivalent to s 3.4.28F, which provided that no compensation was payable in respect of “venue operators” and “venue agreements”: Tatts VSCA at [58]-[59].

100    According to Tatts, the contingent right to the terminal payment “was enshrined in legislation and in contract, irrespective of the changes to the licensing regime”: AORS[14(b)].

Summary of Commissioner’s submissions

101    The Commissioner agreed with Tatts that, at least for the period until the gaming operator’s licence expired at midnight on 15 August 2012, there was no financial arrangement by reason of paragraphs (d), (e) and (f) of s 230-45(1); during the currency of the gaming operator’s licence Tatts’ rights and obligations included the authority to possess and use gaming machines for the lawful conduct of gaming: ROS[87], [88]; RCS[5].

102    However, the Commissioner submitted that there was no “financial arrangement” under the broader arrangements between the Trustees (and later Tatts) and the State, at any relevant time. Consequently, Div 230 could not have any application and there was no loss to which s 230-15(2) could apply: ROS[85]; RCS[4].

103    As for the 6 month period from 16 August 2012 and Tatts’ reliance on cl 3.4.33 of the 2003 Act, the Commissioner submitted that Tatts had no legal or equitable right to receive a financial benefit from the State at any time during the relevant period: ROS[89]; RCS[7]. From 29 June 2009, when s 3.4.3 was inserted into Part 4 of Chapter 3 of the 2003 Act and “Part 4A – Gaming Machine Entitlements” was also inserted into that Act, the arrangement between the State and Tatts was that no new gaming operator’s licence would be granted to any entity after the expiry of Tatts’ gaming operator’s licence and the condition for a right to a payment to arise under s 3.4.33 (and/or cl 7 of the 1995 Agreement) would not be met and could not occur: RCS[7] and [8]. This was put in the following way in the Commissioner’s opening submissions (ROS[89], footnotes omitted):

By the enactment of the 2009 Act, there was no longer legislative authority to grant a new gaming operator’s licence. As and from the enactment of that Act, the State conducted itself with Tatts and the wider public on the basis that a new gaming operator’s licence would not be issued and in its place GMEs would be created and sold to the public. From the enactment of the 2009 Act onwards, including at the time of the expiry of Tatts’ licence, the State’s arrangement with Tatts was such that no new gaming operator’s licence would be granted and there would be no payment to Tatts whether under s 3.4.33 of the 2003 Act or cl 7 of the 1995 Agreement. Accordingly, [there was no arrangement under which there was a “cash settlable legal or equitable right to receive a financial benefit”, whether contingent or otherwise].

104    The Commissioner submitted that (RCS[9]):

(a)    the theoretical possibility of the State changing its mind, the legislation being amended, and a new gaming operator’s licence being granted to another entity does not assist;

(b)    the terms of the arrangement in existence, not of some speculated new or amended arrangement, govern the issue as to whether there was a financial arrangement; and

(c)    further, a hypothetical occurrence devoid of reality and substance is not a contingency within the meaning of s 230-85, referring to: Inland Revenue Commissioners v Trustees of Sir John Aird’s Settlement (No 1) [1982] 2 All ER 929 at 940; Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; 153 FCR 509 at [35].

105    In Carey (No 6) at [35], French J quoted the following passage of Nourse J in Sir John Aird’s Settlement at 940:

A contingency is an event which may or may not happen. If there is no real possibility that it will not happen, so that it is as good as certain that it will, it is a contingency without reality and substance and no contingency at all. But a real possibility is not the same thing as a probability. It may be highly improbable that an event will happen, but there can still be a real possibility that it will. If there is that possibility, however remote it may be, the contingency is one of reality and substance.

106    As for the 6 month period from 16 August 2012 and Tatts’ reliance on the 1995 Agreement, the Commissioner submitted that such reliance was misplaced: ROS[90]. The Commissioner submitted that the High Court held that Tatts had no right to a payment under cl 7 of the 1995 Agreement on the expiry of its licence: Tatts HCA at [76]. Tatts’ commercial interests were protected only whilst the duopoly continued: Tatts HCA at [74]. The Commissioner observed that, upon the expiry of Tatts’ gaming operator’s licence, the duopoly did not continue; instead, upon expiry of the licence, the gaming operations which Tatts had previously carried on were henceforth carried on by the holders of “Gaming Machine Entitlements”: Tatts HCA at [40] to [42]. The effect of the 2009 Act “[p]ut simply, [was that] there was to be a new regime and the duopoly was not to continue”: Tatts HCA at [40].

Resolution

107    Tatts’ gaming operator’s licence expired at midnight on 15 August 2012. Tatts contends (and the Commissioner agrees) that a financial arrangement did not exist whilst ever its licence existed – see: the exclusion in paragraphs 230-45(d) to (f). It is central to Tatts’ case that its financial arrangement did not commence until after its gaming operator’s licence ceased to exist.

108    It is perhaps also relevant to note that Tatts did not make:

(a)    the early start election to have Div 230 apply to income years commencing on or after 1 July 2009 under subitem 103(2) of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (Cth) (TOFA Act); or

(b)    a transitional election to bring its pre-existing financial arrangements into Div 230 under subitem 104(2) of the TOFA Act.

109    Accordingly, Div 230 could only apply to financial arrangements that Tatts started to have in the income year commencing on 1 July 2010 or a later income year under subitems 103(1) and 104(1) of the TOFA Act.

The arrangements changed from time to time

110    Section 230-45 sets out when “[y]ou have a financial arrangement … under an *arrangement”, namely under an “arrangement” as defined in s 995-1(1), which furnishes the following definition:

any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

111    The arrangements between the Trustees (and at various times Holdings, Gaming and Tatts) on the one hand, and the State on the other, varied from time to time. Whilst there were “arrangements” between the parties at least from the time a gaming operator’s licence was issued to the Trustees on 14 April 1992 under the 1991 Act until 6 months after expiry of the gaming operator’s licence on 15 August 2012, there was not a single static “arrangement” or “agreement” or “understanding” which remained unaltered, whether by formal written contract or through conduct or the prevailing statutory environment.

112    Whatever the arrangements were from time to time, whilst ever the gaming operator’s licence existed, there could not have been a “financial arrangement”. This is because, under the various arrangements, the Trustees and Tatts had the right to hold the gaming operator’s licence and the right and authority to possess and use gaming machines for the lawful conduct of gaming such that paragraphs (d) to (f) of s 230-45(1) prevented the existence of a financial arrangement.

113    Under the arrangements which preceded the 1995 Agreement (from at least 14 April 1992 when the gaming operator’s licence was issued), the Trustees participated in a State created and sanctioned gaming duopoly with the TAB, which was initially State owned. It did so with the benefit of one of two gaming operator’s licences for which it had not paid an upfront fee. Under its arrangements or understanding with the State:

    Tatts had the right to be issued and then hold a gaming operator’s licence which was issued on 14 April 1992.

    Clause 6 of the conditions of the gaming operator’s licence required the Trustees to pay to the State amounts payable under s 136 of the 1991 Act: CB Tab 40 at 757.

    Section 136 imposed an obligation on the “gaming operator” (the TAB and the Trustees) to pay certain amounts, relevantly determined by reference to a percentage of “daily net cash balance”. The percentage totalled 66⅔%.

    Clause 8 of the conditions of the gaming operator’s licence contemplated that there would be a review of the fees payable under s 136 of the 1991 Act by 1 November 1996.

    Consistently with cl 8 of the licence conditions, s 160 of the 1991 Act permitted amendments to s 136(3) of the 1991 Act on 1 November 1996. Section 160 authorised the percentage of the “daily net cash balance” that the Trustee must pay to be increased from 66⅔% to no more than 75%.

114    In 1993, the Victorian Government announced a proposal to privatise the TAB. Tabcorp was listed on the ASX on 15 August 1994. Tabcorp was granted conjoined licences, being a wagering licence and a gaming licence for a term of 18 years. The Trustees continued to hold their gaming operator’s licence under the 1991 Act. The TAB was required to pay a licence fee in respect of its conjoined licences. The State wanted to level the playing field between the Trustees and Tabcorp in addition to dividing that playing field between them.

115    The 1995 Agreement constituted the review of fees payable by Tatts that was required by Tatts’ gaming operator’s licence and the 1991 Act to occur by 1 November 1996 – see: Recital B.

116    At the time of the 1995 Agreement as implemented by the 1996 Act, the arrangement or understanding between the Trustees and the State included that:

(a)    The obligation under cl 6 of the licence conditions continued.

(b)    By reason the 1995 Agreement and the 1996 Act:

(i)    the fees payable under s 136 of the 1991 Act would not increase from 66⅔% to a maximum of 75% as had been contemplated by cl 8 of the licence and s 160 of the 1991 Act (see Schedule 2 to the 1995 Agreement); but

(ii)    annual licence fees would be payable under s 135A of the 1991 Act (as amended) as contemplated by cl 3 of the 1995 Agreement, in addition to the payment of fees of 66⅔% required under s 136.

(c)    Under cl 7 of the 1995 Agreement (if not superseded by the 1996 Act), the Trustees were entitled to “compensation for the investment in infrastructure lost” if:

(i)    the Trustees’ gaming operator’s licence expired;

(ii)    a new gaming operator’s licence was not issued to the Trustees (or a related entity); and

(iii)    a new gaming operator’s licence was issued to some other person.

(d)    Under s 35A of the 1991 Act (introduced by the 1996 Act), the Trustees were entitled to a payment on substantially the same conditions as had been identified in cl 7 of the 1995 Agreement (except with the introduction of a 6-month period for issue of a new licence).

(e)    As was made clear by cl 6 and the Treasurer’s letter appended to the 1995 Agreement as Schedule 2, the State’s then stated intention would not bind that Government or future Governments and the Victorian Parliament would have the power at any time to amend existing legislation or pass new legislation affecting Tatts’ operations and the terms on which those operations were conducted and could therefore decide not to continue its sanctioning of a duopoly and not to issue further gaming operator’s licences – see also: Tatts VSCA at [65]; Tatts HC at [63] to [65], [68], [70] to [72].

117    Tatts had a contingent right to “compensation” at the time of the 1995 Agreement, or upon enactment of the 1996 Act, and for a time thereafter. Even then, it was clear that the right to “capital compensation” would not arise if the duopoly was not to continue. As the High Court explained in Tatts HCA, for example at [68] and [72], Tatts’ right to compensation depended on the continued existence of the duopoly.

118    The High Court stated (footnote omitted):

[68]    … [I]t is not possible to understand or explain the reference to “the premium payment” in cl 7 of the 1995 Agreement without understanding it as being a payment by the new licensee which would reflect the value of the right to participate in the duopoly. For the payment entitlement under cl 7.1 to arise, it was necessary that the duopoly continue and that the new licence to participate in that duopoly not be issued to Tatts. If the duopoly were to continue and Tatts was not granted a new licence, the value of the business which it had built up, and paid for under cl 3 of the 1995 Agreement, would have been amortised because the right lawfully to carry it on would have been denied to it and given to another. But if the duopoly were not continued, then even though Tatts would no longer share in the advantages of the duopoly in respect of gaming operations, the business which it built up and paid for would not have been given to another.

…

[72]    … [R]easonable business people reading the Treasurer’s letter would have appreciated that the 1995 Agreement gave no assurance that the duopoly would be continued, and that if the Executive government and legislature were not persuaded that the duopoly should continue, the entitlement to “capital compensation” would not arise. ...

119    Between 1995 and 15 August 2012, Tatts could not have had, and does not contend that it did have, a “financial arrangement”. That is because the right to compensation under cl 7 or to a payment under statute was a part of the “*arrangement” under which it held its gaming operator’s licence – see: s 230-45(1)(d) to (f).

120    Tatts did not assert that there were two arrangements at the time of the 1995 Agreement or when the 1996 Act was introduced, or at any later time. Rather, its position was that:

(a)    there was one arrangement until 15 August 2012 which was not a “financial arrangement” by reason of paragraphs (d) to (f) of s 230-45(1); and

(b)    once the gaming operator’s licence expired, the exclusions in paragraphs (d) to (f) of s 230-45(1) had no application with the result that Tatts then had a financial arrangement from 16 August 2012.

From 2008 / 2009, no new gaming operator’s licence would or could issue

121    From around the time of the Premier’s announcement on 10 April 2008, the understanding between the parties was that no new gaming operator’s licence would be issued. As has been mentioned, Tatts recorded a full impairment of its licence in its 2008 Financial Report – see [70] above.

122    The 2009 Act gave legislative effect to the position which the Victorian Premier had announced in his 10 April 2008 media release (CB Tab 163) – see [66] above.

123    By the time that the 2009 Act came into effect, the arrangement between Tatts and the State was that no new gaming operator’s licence would or could be issued to Tatts or to any other person. By 16 August 2012, the “arrangement” between Tatts and the State was quite different to what the arrangements had been as at the time of the 1995 Agreement.

124    The events demonstrate that there was no possibility that the duopoly would be maintained or that a new gaming operator’s licence would issue. By 5 February 2009, legislation to implement the changes to the industry structure for keno and wagering and betting had been passed by Parliament and had commenced operation: A5531. On 5 February 2009, the Victorian Minister for Gaming moved that the Gambling Regulation Amendment (Licensing) Bill 2009 be read a second time: A5531. The Minister re-confirmed the end of the duopoly; the complete restructure of the industry; and the fact that no new gaming operator’s licence would be issued on expiry of the current one – see [67] above.

125    On 7 June 2009, the Victorian Minister for Gaming determined to create 27,500 gaming machine entitlements under the 2003 Act (as amended by the 2009 Act), with an “effective date” of 16 August 2012 – see: Victorian Government Gazette (No S 209) at 5539. These gaming machine entitlements were auctioned off to venue operators: CB Tab 180. As part of that process, in July 2009, the State published ‘An Introduction to the Gaming Auction’: CB Tab 180, Exhibit 2. Set out in that document was a schedule that anticipated: “Business Education Workshops and Business Mentoring”; “State Wide Information Sessions”; the release of the second edition of the Overview of the Victorian Gaming Industry containing updated information on the new industry arrangements for the auctioning of gaming machine entitlements; the provision of detailed information including a “Bidder Information Pack for the Gaming Auction, “Further State Wide Information Sessions”; bidder registrations; bidder training; final information packs; and the “Gaming Auction” (anticipated for the second quarter of 2010). The gaming machine entitlements (or 27,300 of them) were acquired under a “pre-auction club offer” (October and November 2009) and an auction (April and May 2010): CB Tab 181; Exhibit 2.

126    On 29 June 2009, the 2009 Act inserted a new s 3.4.3 into the 2003 Act, formally preventing the issue of a gaming operator’s licence. This meant that neither the second nor third contingency upon which Tatts relied (s 3.4.33(1)(b) and (c) and the equivalent parts of cl 7) would or could be satisfied. Tatts had no right to receive a financial benefit under the arrangements which then subsisted and could not receive one.

Tatts’ reliance on Tatts VSCA

127    Section 3.4.33 of the 2003 Act was not removed by the 2009 Act, but – when read with the new s 3.4.3 – it could not operate to provide Tatts a payment. When s 3.4.33 is read in the context of the statute as a whole, it could not be regarded as furnishing Tatts with a right (legal or equitable, contingent or otherwise) to a financial benefit falling within s 230-45(1). On the preferable construction of the 2009 Act (including in particular s 3.4.3), the right in s 3.4.33 was brought to an end. From that time, and whatever the position was before that time, s 3.4.33 did not furnish Tatts a right to the financial benefit for the purposes of s 230-45(1).

128    Tatts relied upon various statements in Tatts VSCA as indicating that the Victorian Court of Appeal considered that the right to a payment in s 3.4.33 had been preserved.

129    Contrary to Tatts’ submissions, however, the Court of Appeal described s 3.4.3 as effecting “[t]he emasculation of the right to compensation”: Tatts VSCA at [65]. In other words, the Court of Appeal understood the right to have been removed. The Court continued at [65]:

… [A]s the State made unmistakably clear at the time of the Treasurer’s letter [Schedule 2 to the 1995 Agreement] and the 1995 Agreement, its then stated intention would not bind that government or future governments and Parliament would have the power at any time to amend existing legislation or pass new legislation affecting Tatts’ operations and the terms on which those operations were conducted. As we construe Part 4 of Chapter 3 of the 2003 Act, as amended by the 2008 Act and the 2009 Acts, that is what Parliament has done.

130    Tatts had submitted to the Court of Appeal that s 3.4.33 would have been removed if it had been intended to “abolish Tatts’ right to payment under s 3.4.33”: Tatts VSCA at [58]. The Court of Appeal rejected this argument at [59] where it stated its conclusion about Tatts’ submission in the following way:

Ultimately, what emerges to us from Part 4 of Chapter 3, as amended and construed as one connected and combined statement of the will of Parliament, is a statutory purpose to make clear that Tatts has not and never has had anything more under s 3.4.33 than a right to payment when and if a gaming operator’s licence as defined in s 1.3 issues to someone other than Tatts, and that, since none can now issue, Tatts now has nothing.

131    Tatts relied on a description by the Court of Appeal of Tatts’ right as a “contingent right”: Tatts VSCA at [63]. However, that was a description of what Tatts had before the introduction of s 3.4.3 not a conclusion about what it had after the introduction of that provision. In the same paragraph, the Court of Appeal stated that it was “no longer possible to satisfy the contingency on which s 3.4.33 was conditioned”. Read with [59] and [65], the Court of Appeal recognised that s 3.4.33 (stemming from the conditional right contained in cl 7 of the 1995 Agreement and which existed in that and another form before the introduction of s 3.4.3) had been “emasculated” (Tatts VSCA at [58]) by s 3.4.3 and that thereafter Tatts “ha[d] nothing” (Tatts VSCA at [65]).

132    As mentioned earlier, in dismissing Tatts’ notice of contention that it was entitled to a payment under s 3.4.33, the High Court agreed with the reasons of Hargrave J and the Court of Appeal.

133    In any event, the Court of Appeal’s reasoning in relation to the contended statutory right was not directed to the question whether, from 16 August 2012, Tatts had a financial arrangement “based in” (AOS[123]) the existence of s 3.4.33 either alone or in combination with the 1995 Agreement.

134    A right to compensation under the 1995 Agreement or an entitlement to a payment under s 3.4.33 could not have arisen from the time the 2009 Act came into effect. At that time, Tatts did not have, and does not contend that it had, a “financial arrangement” for the same reasons that it had no “financial arrangement” up until this time.

135    By at least 2009, it was clear that the duopoly would no longer exist after expiry of the existing licences. At the latest, from the time the 2009 Act came into effect, an entitlement to compensation could not arise. The “*arrangement” between the parties did not relevantly change from that time.

136    As at 16 August 2012, under the arrangement with the State, Tatts had no right to compensation under the 1995 Agreement and had no entitlement to a payment under s 3.4.33. It had no right to receive a financial benefit under any arrangement which subsisted at that date. It had no “financial arrangement” at this time and did not make any payments (or provide any financial benefits) under a financial arrangement which then existed. Indeed, Tatts had never made a payment under a financial arrangement with the State. As at 16 August 2012, Tatts remained in the position that there was no financial arrangement under which it would make a payment. No financial arrangement ever existed.

Clause 7 of the 1995 Agreement was superseded

137    The result is the same whether or not cl 7 of the 1995 Agreement remained operative as a source of rights. Nevertheless, the better view is that the right to compensation provided by cl 7 merged in or was superseded by the statutory right to a payment first introduced by the 1996 Act. It is tolerably clear that, as at 17 November 1995, the parties intended the agreed payment obligations (in cll 3 and 7) to be included in legislation – see: cl 8 of the 1995 Agreement. This is what then occurred.

138    Objectively ascertained, the parties did not intend two differing (albeit similar) sets of obligations in relation to the ‘terminal payment’, one contractual and one statutory. This conclusion is not altered by looking at the subsequent conduct which may, in general terms, be characterised as assuming or affirming the 1995 Agreement (a position which says nothing about which clauses in the 1995 Agreement continue to have any operative effect).

139    Clause 7 did not survive as a source of rights different from those furnished by s 35A of the 1991 Act (inserted by the 1996 Act), less still later statutory developments.

140    It is relevant to note that, in considered obiter, the High Court expressed reservations about whether the 1995 Agreement survived the enactment of the statutory provisions which that agreement envisaged (namely the 1996 Act). The Court stated (footnote omitted):

The 1995 Agreement and the 1996 Act

[77]    The Court of Appeal also concluded that the 1995 Agreement “was intended to survive the enactment of the statutory provisions which it envisaged … [I]t would be commercially improbable to attribute an intention to the parties that their rights and obligations under the 1995 Agreement should be spent upon the passage of the legislation provided for by cl 8” [Tatts VSCA at [211]-[212]].

[78]    Given the view formed about the proper construction of the 1995 Agreement, it is not necessary to address the correctness of that conclusion or the two propositions which underpinned it. The two propositions were, first, that the creation of an enforceable promise by the State to make the terminal payment was entirely a matter for agreement between the parties without the need for the legislation contemplated by cl 8 of the 1995 Agreement and, second, that the parties intended that cl 7 should continue to have an operation independent of that legislation. The first proposition may raise questions under the State Constitution, as to which we say nothing. The second is essentially constructional and does not sit well with cl 8.

[79]    The express words of cl 8, which have already been set out in these reasons, provide support for the conclusion that, objectively speaking, the parties did not intend that the terminal payment obligation in cl 7 of the 1995 Agreement should have an operation independent of, and more extensive than, the provisions of the 1991 Act dealing with that subject. Indeed, cll 8.1.1 and 8.1.2 of the 1995 Agreement are readily understandable as directed to providing the desirable certainty and avoidance of doubt.

[80]    The balance of cl 8 of the 1995 Agreement provides further support for that conclusion. The text of cl 8.1.7 indicates that the provisions of the legislation referred to in the earlier sub-clauses were intended by the parties “to give effect to this Agreement”. The natural reading of this provision is that there was to be only one legal “effect” or outcome on the performance of cl 8. Next, cll 8.1.1 and 8.1.2 contemplate that the legislation will “include” obligations to pay, the content of these obligations being in accordance with cll 3 and 7 of the 1995 Agreement. The possibility of variance between what may be achieved by the Minister by the exercise of his best endeavours and the effect of cll 3 and 7 of the 1995 Agreement is necessarily acknowledged by the fact that the Minister’s obligation was only to “use his best endeavours”. But there is no suggestion that the Minister did not comply with his obligation. The respective obligations as to payment imposed upon Tatts and the State were included in the legislation to “give effect to” that agreement.

[81]    Put simply, the parties’ expectation was that, upon the passing of the legislation, their respective payment obligations would be included in the legislation and have effect. There is nothing to suggest that the parties intended that the obligations which were to be “included” would remain operative independently of the legislation contemplated by the 1995 Agreement. If that supposition were adopted, there would be two charters of the parties’ rights in respect of the same subject matter operative at the same time. Such a result is unlikely. One would not readily attribute to the parties an intention that Tatts should be obliged to make two sets of payments, one under cl 3 and one under the legislation passed to give effect to cl 3. Such a result would be inconsistent with the express terms of the 1995 Agreement that this payment obligation was to be “included” in the legislation.

141    Given its views about the effect of the 1996 Act on the 1995 Agreement, the High Court did not need to address the further contention, advanced by the State, that the 2009 Act abrogated the relevant clauses of the 1995 Agreement (which included cl 7). The High Court stated:

Effect of 2009 Amendments

[82]    The State also contended that if the relevant provisions of the 1995 Agreement survived the enactment of the 1996 Act, then those provisions were abrogated by the enactment of the 2009 Amendments. Given the view formed about the proper construction of the 1995 Agreement and the effect of the 1996 Act on the 1995 Agreement, it is not necessary to address this contention.

142    As noted earlier, Tatts submitted that the High Court proceeded on the basis that cl 7 of the 1995 Agreement remained operative. I do not read the decision that way. The High Court did not need to reach a concluded view about whether cl 7 remained operative because, on the proper construction of cl 7, Tatts could not succeed whether or not it continued as a source of legal rights.

Tatts’ reliance on “contingencies”

143    A focus on whether or not events should be characterised as “contingencies” should not distract attention from fact that there was no contended financial arrangement for the reasons given above, including that: (a) the “arrangement” between the parties evolved and was substantially different by the time the contended financial arrangement was said to exist; (b) any “right” to compensation or entitlement to a payment had already ceased by 16 August 2012; and (c) as at 16 August 2012, there was no arrangement which included a possibility that a gaming operator’s licence could or would issue.

144    However, it must be observed that Tatts’ position is not improved by asserting that it had a “contingent right” as at 16 August 2012 as contemplated by s 230-85.

145    It is perhaps useful to summarise the position with respect to the contended “contingencies” by reference to paragraphs (a) to (c) of s 3.4.33(1):

3.4.33    Entitlement of former licensee on grant of new licence

(1)    If—

(a)    a gaming operator’s licence held by a person (the former licensee) expires; and

(b)    the Commission grants a gaming operator’s licence to a person other than the former licensee, or a related entity of the former licensee, being a licence that commences within 6 months after that expiry; and

(c)    the Commission does not grant a gaming operator’s licence before the expiration of that period to the former licensee or a related entity of the former licensee—

the former licensee is entitled to be paid an amount equal to the licence value of the licence held by the former licensee or the premium payment paid by the holder of the licence referred to in paragraph (b), whichever is the lesser.

146    As to the asserted contingency in s 3.4.33(1)(a): the financial arrangement put forward by Tatts was one which only came about after expiry of the licence and, strictly, the financial arrangement so defined could not contain a “contingency” that the licence expire (in the future) as opposed to involving the existing fact (or satisfied condition precedent) that the licence had already expired. A contingency is an event which may or may not happen: Carey (No 6) at [35]. An event which has already happened involves no contingency whatsoever; it is a certainty: Carey (No 6) at [35].

147    This may explain why, in its submissions, Tatts often referred to the contingencies as “conditions”. A “condition” is not necessarily a “contingency”. If, as Tatts’ contended, the “financial arrangement” first existed on 16 August 2012 because the gaming licence had expired – ending the excluding operation of paragraphs (d) to (f) of s 230-45(1) – then the financial arrangement must have involved the right to receive a payment because its gaming operator’s licence had already expired. The “arrangements” as they were at the time of the 1995 Agreement and the 1996 Act involved a contingent right to a payment if the gaming operator’s licence expired (and the other contingencies were satisfied), but the contended financial arrangement arising on 16 August 2012 could not have contained that requirement as a “contingency”.

148    In any event, as mentioned, whether or not the expiry of the licence can be regarded as a “contingency”, the contended financial arrangement did not exist.

149    As to the asserted contingency in s 3.4.33(1)(b): for the reasons given earlier, this was not a “contingency” because it could not and would not happen; the State could not and would not grant a new gaming operator’s licence to a person other than Tatts. There was no prospect of a ‘terminal payment’.

150    Even if it were possible to rely on the fact that the broad arrangement under which the financial arrangement existed at 16 August 2012 might have changed in the future (which it is not), a “contingency” is not established by pointing to far-fetched future events with no actual prospect of occurring, namely: a radical change in publicly promulgated policy; the recreation of an anti-competitive duopoly; the unwinding of the sale of GMEs to numerous third parties; and the introduction and passing of a large number of new regressive (anti-competitive) laws to alter the status quo as at midnight on 15 August 2012.

151    Division 230 in general and s 230-85 in particular – both of which should be construed and applied in a way which is consistent with commercial reality (as was their objectively ascertained intended operation) – is not concerned with fanciful theoretical possibilities with no chance of occurring – see: Carey (No 6) at [35].

152    As to the asserted contingency in s 3.4.33(1)(c): this was not a “contingency” because it was certain that the State would not grant a new gaming operator’s licence to Tatts. As Nourse J said in Sir John Aird’s Settlement at 940 (approved by French J in Carey (No 6) at [35]:

A contingency is an event which may or may not happen. If there is no real possibility that it will not happen, so that it is as good as certain that it will, it is a contingency without reality and substance and no contingency at all.

Conclusion

153    Tatts did not have a “financial arrangement” within the meaning of s 230-45 at any relevant time. It follows that none of the remaining issues arise and that the appeal under s 14ZZ(1)(a)(ii) of the ITAA 1953 must be dismissed. Notwithstanding, the balance of the issues are addressed below.

Topic 2: The Additional State Payments

Introduction

154    Assuming (contrary to the conclusions expressed earlier) that Tatts had a financial arrangement from 16 August 2012, on expiry of the gaming operator’s licence at midnight on 15 August 2012, three questions arise in relation to the Additional State Payments:

(1)    If Tatts had the contended financial arrangement, were the Additional State Payments financial benefits provided by Tatts “under” the financial arrangement for the purposes of s 230-60(1) and step 2(a) of the method statement in s 230-445(1)?

(2)    If the Additional State Payments were financial benefits provided by Tatts under the financial arrangement, and the financial benefits satisfy s 230-60(1), what is a reasonable basis of apportionment under s 230-65(2), of the financial benefits provided, between the financial arrangement and any other relevant things?

(3)    Does step 1(b) of the method statement under s 230-445(1) include any part of the Additional State Payments on the basis that they had already been allowed as a deduction under s 8-1?

The critical provisions

155    Section 230-435(1)(b) provides that a balancing adjustment is made if all of your rights and/or obligations under a financial arrangement completely cease. Section 230-445(1) includes:

230-445  Balancing adjustment

Complete cessation or transfer

(1)    Use the following method statement to make the balancing adjustment if paragraph 230-435(1)(a), (b) or (d) applies:

156    It is steps 1(b) and 2(a) that are of critical importance to questions 1 and 3 at [154] above.

157    Section 230-60(1) provides:

230-60    When financial benefit provided or received under financial arrangement

Financial benefit provided under financial arrangement

(1)    You are taken, for the purposes of this Division, to have (or to have had) an obligation to provide a *financial benefit under a *financial arrangement if:

(a)     you have (or had) an obligation to provide the financial benefit in relation to the arrangement; and

(b)     the financial benefit would not otherwise be treated as one that you have (or had) an obligation to provide under the arrangement; and

(c)     the financial benefit plays an integral role in determining:

(i)     whether you make a gain or loss from the arrangement; or

(ii)     the amount of such a gain or loss.

Paragraph (a) applies even if the entity to which you provide the financial benefit is not a party to the arrangement.

Note:     This means that the financial benefits you provide to acquire the financial arrangement (whether to the issuer, a previous holder or a third party) are taken to be financial benefits you provide under the arrangement. The financial benefits you provide may include, for example, fees paid or the forgoing of rights to receive a financial benefit.

158    Section 230-65 provides for apportionment:

230-65 Amount of financial benefit relating to more than one financial arrangement etc.

(1)    This section applies if:

(a)    a *financial benefit plays the integral role mentioned in paragraph 230-60(1)(c) or (2)(c) in relation to a *financial arrangement; and

(b)    either or both of the following apply:

(i)     the financial benefit plays that role in relation to one or more other financial arrangements;

(ii)     the financial benefit is provided or received for one or more other things that are not financial arrangements.

(2)    For the purposes of this Division, determine the amount of the *financial benefit that plays that role in relation to a particular *financial arrangement by apportioning the actual amount of the financial benefit, on a reasonable basis, between:

(a)    that financial arrangement; and

(b)    each other financial arrangement (if any) in relation to which the benefit plays that role; and

(c)    each other thing (if any) mentioned in subparagraph (1)(b)(ii).

159    The operation of s 230-65 is conditioned on a financial benefit playing an “integral role” (s 230-65(1)(a)) and a conclusion about apportionment requires consideration of that role – see: s 230-65(1)(b)(i) and (2)(b). The “integral role” to which s 230-65 refers is that referred to in s 230-60(1)(c).

Summary of Tatts’ submissions

160    Tatts accepted that, for the Additional State Payments to constitute financial benefits paid under the contended financial arrangement, those payments had to satisfy the requirements of s 230-60(1). That is, Tatts accepted that the payments were not made “under” the financial arrangement in accordance with the ordinary meaning of the word “under” – see: T20.40-3; CB Tab 20 at 257 [56] (2FAAS); AOS[174] and [176]; AORS[18] and [19]; ACS[10].

161    Tatts submitted that each of the requirements in s 230-60(1) were met in respect of the Additional State Payments because the obligation to make the Additional State Payments was incurred to acquire and retain Tatts’ contingent right to the terminal payment, referring to cll 3 and 7 of the 1995 Agreement and ss 35A, 135A and 136(3A) of the 1991 Act and ss 3.4.33 and 3.6.7 of the 2003 Act: ACS[13].

162    Tatts submitted that:

(a)    “in assessing the relationship and role played by the Additional State Payments for the purposes of s 230-60(1), evidence of the negotiations between representatives of the State of Victoria and of the Trustees forms part of the relevant facts and circumstances of the arrangement”; and

(b)    the negotiations “revolved around the payment of “licence fees” in exchange for a right to a terminal payment upon the expiry of the Trustees’ gaming operator’s licence”, referring to a number of contemporaneous communications and the evidence of Mr Gillooly and Mr Fischer: ACS[13].

163    On the second question, Tatts submitted that a reasonable basis for apportioning the Additional State Payments under s 230-65(2) between Tatts’ financial arrangement and the other things for which those financial benefits were provided would involve:

(a)    an objective assessment of the terms and provisions of the 1995 Agreement and the 1995 Act;

(b)    identification of the changes to Tatts’ rights and obligations brought about by those terms and provisions; and

(c)    identification of the benefit of those changes to Tatts’ business: ACS[15].

164    Tatts submitted that, on that basis, a reasonable apportionment of the Additional State Payments totalling $1,193,952,000 would be an apportionment of:

(a)    $1,193,952,000 to Tatts’ contingent right to the terminal payment, less a nominal amount apportioned to any other rights obtained by Tatts; or

(b)    alternatively, half of that amount ($596,976,000) to each of Tatts’ contingent right to the terminal payment and Tatts’ gaming operator’s licence, less a nominal amount to any other rights obtained by Tatts: ACS[16].

165    As to the third question, Tatts submitted that no part of the Additional State Payments is counted in step 1(b) of the method statement at s 230-445(1). According to Tatts, that step only counts amounts that “have been allowed … as deductions … for losses from the [financial] arrangement”. Deductions previously claimed by Tatts under s 8-1 (or its predecessor) do not meet that description because they are deductions claimed outside Div 230 and do not constitute a loss from a financial arrangement.

Summary of Commissioner’s submissions

166    The Commissioner submitted that the Additional State Payments did not constitute the provision of a financial benefit under the contended financial arrangement: RCS[10].

167    First, according to the Commissioner, the requirement of s 230-60(1)(a) was not satisfied. The expression “in relation to” requires a material and sufficient connection between the payments and the financial arrangement, referring to Australian Communications Network Pty Ltd v Australian Competition & Consumer Commission [2005] FCAFC 221; (2005) 146 FCR 413 at [28]-[30]. The Commissioner submitted (RCS[11] and [12]):

(a)    There was no contractual obligation on the Trustees to make payments under cl 3 of the 1995 Agreement after the 1999 financial year – see: cl 2.1 of the 1999 Agreement.

(b)    Neither the circumstances creating the statutory liabilities, nor the quantification of the payments had any connection with whatever right the Trustees or Tatts had under s 35A of the 1991 Act, s 3.4.33 of the 2003 Act or cl 7 of the 1995 Agreement. The liabilities were imposed for the conduct of gaming under the gaming operator’s licence and were quantified by reference to the daily net cash balances (or the net profit for the 1999 year) obtained from the conduct of the gaming. The Additional State Payments were made in discharge of liabilities imposed by statute.

168    Second, the Commissioner observed that, before the float in 2005, the Additional State Payments were made by Gaming pursuant to an agreement with the Trustees made on 23 June 1998 (Exhibit 1) and either for and on behalf of the Trustees (in the 1999 and 2004 to 2005 financial years) or on its own behalf in discharge of liabilities imposed on both it as “gaming operator” and the Trustees as the licence holder (in the 2000 to 2003 financial years). Tatts had no rights to any contingent terminal payment until 2005 when it became the holder of the gaming operator’s licence: RCS[14].

169    Third, according to the Commissioner, the requirement under s 230-60(1)(c) – that the financial benefit play an “integral role” in determining whether a loss or gain is made from a financial arrangement or the amount of such loss or gain – is not satisfied:

(a)    There was no loss or gain from the contended financial arrangement. At the commencement of the alleged financial arrangement there was a contingent right to a payment where one of the stated contingencies could not be satisfied, namely the issue of a new gaming operator’s licence. During the 6-month period nothing occurred to give rise to a loss or gain. The contingency remained incapable of occurring: RCS[15].

(b)    Moreover, of their very nature the financial benefits contended for by Tatts were not “integral” to any loss or gain. In this regard, the Commissioner referred to the TOFA EM at [3.36] (A5085). The Additional State Payments were directly referrable to the conduct of gaming that the licence authorised. The licence was not a financial arrangement and the gaming it authorised was not carried on under a financial arrangement: RCS[16].

170    On the second question, the Commissioner submitted that there was no basis for apportionment under s 230-65:

(a)    First, the requirement under s 230-65(1)(a) was not met. The Additional State Payments did not play the integral role required by s 230-60(1)(c): RCS[19].

(b)    Secondly, under s 230-65(2) there was no reasonable basis for apportioning any part of the Additional State Payments to the contended financial arrangement: RCS[20].

171    The Additional State Payments were statutory imposts upon the conduct of lawful gaming. The legislation reveals no discernible or quantifiable nexus between the Additional State Payments and the contingent right to the terminal payment held by the holder of the gaming operator’s licence and provides no discernible or rational basis for apportionment.

172    On the third question, the Commissioner submitted that the Additional State Payments fell within step 1(b) because deductions for those payments had been “allowed” under s 8-1 as and when incurred: RCS[23], [24].

173    The Commissioner submitted it was irrelevant to step 1(b) whether the deductions were allowable, referring to Vincent v Commissioner of Taxation [2002] FCAFC 291; 124 FCR 350 at [91] and Batchelor v Federal Commissioner of Taxation [2014] FCAFC 41; 219 FCR 453 at [16], [108]-[110]. In closing submissions, Tatts accepted this to be so: T201.19 to 202.23.

174    The Commissioner submitted that the application of step 1(b) arises only if the Additional State Payments are taken to have been provided under a financial arrangement: s 230-60(1)(a). In those circumstances, the Additional State Payments are “losses from the arrangement” for which deductions have been allowed: RCS[25].

Resolution

Question 1: s 230-60

175    Step 2(a) of s 230-60(1) of the method statement requires the total of all financial benefits “provided under the financial arrangement” to be calculated. Tatts relied upon s 230-60(1) in seeking to establish that the Additional State Payments were provided under the contended financial arrangement, accepting that it would not otherwise be found to have provided such benefits under the financial arrangement – see [160] above.

176    Section 230-60(1) is repeated for convenience:

230-60     When financial benefit provided or received under financial arrangement

Financial benefit provided under financial arrangement

(1)     You are taken, for the purposes of this Division, to have (or to have had) an obligation to provide a *financial benefit under a *financial arrangement if:

(a)     you have (or had) an obligation to provide the financial benefit in relation to the arrangement; and

(b)     the financial benefit would not otherwise be treated as one that you have (or had) an obligation to provide under the arrangement; and

(c)     the financial benefit plays an integral role in determining:

(i)     whether you make a gain or loss from the arrangement; or

(ii)     the amount of such a gain or loss.

Paragraph (a) applies even if the entity to which you provide the financial benefit is not a party to the arrangement.

Note:     This means that the financial benefits you provide to acquire the financial arrangement (whether to the issuer, a previous holder or a third party) are taken to be financial benefits you provide under the arrangement. The financial benefits you provide may include, for example, fees paid or the forgoing of rights to receive a financial benefit.

177    Tatts contended that each of ss (a) to (c) of s 230-60(1) applied to the Additional State Payments, with the result that those payments were “provided … under [the] financial arrangement”. The Commissioner disputed that ss (a) and (c) were satisfied.

178    The phrase “in relation to”, which is used in s 230-60(1)(a), signifies some degree of connection between two subject matters, but the degree of connection (including how directly connected and the substance of the connection) depends upon the context in which the phrase is used – see, in respect of the phrase “relates to”: HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126; 143 FCR 553 at [35] (Hill J); Travelex Ltd v Commissioner of Taxation [2009] FCAFC 133; 178 FCR 434 at [25] (Mansfield J), [44] (Stone J), [57] (Edmonds J); and see, in relation to the phrase “relating to”: Minister for Home Affairs v DMA18 [2020] HCA 43; 270 CLR 372 at [43].

179    In Travelex Ltd v Commissioner of Taxation (2010) 241 CLR 510; [2010] HCA 33 at [25], French CJ and Hayne J stated:

It may readily be accepted that “in relation to” is a phrase that can be used in a variety of contexts, in which the degree of connection that must be shown between the two subject matters joined by the expression may differ. It may also be accepted that “the subject matter of the enquiry, the legislative history, and the facts of the case” are all matters that will bear upon the judgment of what relationship must be shown in order to conclude that there is a supply “in relation to” rights.

180    The phrase “in relation to” can refer to a direct or indirect connection between two subject matters and one subject matter can “relate to” another subject matter even though the first subject matter relates also to other things – see: Project Blue Sky [1998] HCA 28; 194 CLR 355 at [87]; DMA18 at [43].

181    The statutory context here includes that:

(a)    in addition to the requirement that the financial benefit be provided “in relation to” the financial arrangement, s 230-60(1)(c) requires that the “financial benefit plays an integral role” in determining whether you make a gain or loss from the arrangement or the amount of such gain or loss;

(b)    if it becomes necessary to apportion a financial benefit between financial arrangements or between a financial arrangement and things that are not financial arrangements, s 230-65 requires identification of the integral role and consideration of that role in undertaking a reasonable apportionment.

182    This tends to indicate, as does the context more generally, that the connection required by s 230-60(1)(a) must be a real and substantial connection, rather than a remote connection. The more general context is that Div 230 provides for the inclusion in assessable income of gains from financial arrangements and the allowing of losses from such arrangements. It should not be presumed that the legislature intended Div 230 to apply where there was no real or substantial connection between the financial benefit and the financial arrangement.

183    The Additional State Payments were made because they were required by the gaming operator’s licence and the various statutory provisions for the lawful conduct of gaming – see: condition 6 of the licence; s 135A of the 1991 Act (for the 1999 financial year); s 136(3A) of the 1991 Act (for the 2000 to 2003 financial years); and s 3.6.7 of the 2003 Act (for the 2004 to 2013 financial years). There was no financial arrangement at these times – see: s 230-45(1)(d)–(f).

184    The 1995 Agreement provided a right to compensation “[i]f the duopoly were to continue and Tatts was not granted a new licence” (Tatts HCA at [68]) and this right to – whilst it existed – related to the value of the business which the Trustees had built up, and paid for under cl 3 of the 1995 Agreement. Clause 3 of the 1995 Agreement was given statutory effect through s 135A of the 1991 Act, introduced by the 1996 Act. In this sense, it can be said that there is a relationship between the payments made under s 135A of the 1991 Act (relevant to the 1999 financial year, no claim being made concerning the s 135A fees paid in the 1996 to 1998 financial years) and the entitlement to compensation in cl 7 of the 1995 Agreement.

185    Tatts submitted that its subjective understanding of what the payments were for, including its understanding during negotiations, was relevant to the inquiry and adduced evidence in this respect, including from Mr Fischer and Mr Gillooly. If such subjective understanding is relevant, it does not assist.

186    On 20 September 1995, Mr Fischer created a memo regarding the status of the ongoing negotiations: CB Tab 109 at 1423. The memo recorded that Treasury was seeking to include a term in what became the 1995 Agreement that the “terminal value payment not … exceed the sum of moneys of the fees payable by Tattersalls during the full licence term”: CB Tab 105 at 1425. Below that statement, the view of Tattersall is stated, namely that such an arrangement was “not acceptable” and “a major concern to our tax ruling”: CB Tab 105 at 1425; T116.7.

187    On 22 September 1995, Mr Gillooly and Mr Fischer met with Treasury again to continue negotiations: CB Tab 110 at 1426. Treasury’s report on that meeting noted that the Trustees had said they would not accept the State’s proposed condition that any compensation payment be less than the total sum of fees paid over the license period: CB Tab 105 at 1427. It goes on to say that the reason for Tattersalls’ opposition was that it received tax advice that doing so would result in a “perceived link between the annual payments and the terminal value”.

188    In cross-examination, Mr Fischer’s evidence was that “they weren’t connected, and, therefore, we had to make sure that they weren’t connected by some other mechanism”: T116.30-31. Mr Fischer agreed in evidence that the fees and the terminal payment were not connected because the liability to pay the fees arose out of conducting gaming during the course of the licence: T116-35.

189    In a letter to the ATO dated 22 September 1998, the Managing Trustee and CEO described the reason for the introduction of Additional State Payments embodied in section 135A: CB Tab 136 at 1624. He observed that the 1991 Act had “specifically envisaged” there being “an increase in the duty rate on 1 November 1996”. The negotiations in the lead up to the change were part of “the review required by 1 November 1996”. The Managing Trustee stated:

The Trustees’ negotiations were conducted on the basis of ensuring that the [Trustees] secured a position of retaining a larger percentage than was provided for in the [1991 Act]. That was that the operator will pay no more than 75% of the net machine income to the government and venues, ie the operator will retain at least 25%.

…

Section 136(3B) of the Act envisaged an increase of 8⅓ per centum in the duty payments to Government by limiting the total payout by the operator to 75%, up from the previous position of 66⅔%. However, as a result of our negotiations with the Government and the introduction of a duty based on net profits the actual increase of duty (when calculated by reference to turnover) in the current year is approximately 6.5%, up from 33⅓% to 39.86%. Clearly, this shows that the Trustees were successful in limiting the amount of duty payable to the Government. The nature of the payment of the amount provided under s 135A is exactly the same as that provided under s 136(3)(d).

However a different calculation method, as a result of our negotiations, was applied under s 135A. The alternative was always that the percentages in s 136(3)(d) would be increased to 41⅔%.

Moreover, we confirm that the Treasurer, through his representatives in the Department of Treasury and Finance, indicated that the renegotiations that led to the introduction of s 135A were being undertaken in lieu of the negotiations allowed by s 160. It was always the position of the Department of Treasury and Finance, and the understanding of the Trustees, that the duty imposed under s 136 would increase if the duty negotiated under s 135A had not come into existence. We trust this is satisfactory for your purposes.

190    Any relationship between the Additional State Payments and any right to compensation or entitlement to a terminal payment became more tenuous from 1 July 1999, because:

(a)    By the 1999 Agreement, the parties’ arrangement included an agreement to amend the terms of the Trustees’ obligation under cl 3 of the 1995 Agreement by limiting its operation to the period ending 30 June 1999.

(b)    From 1 July 1999, the parties’ arrangement was that the payments which once had been made under s 135A were instead to be made under s 136(3A) and were, accordingly, directly tied to condition 6 of the gaming operator’s licence.

(c)    The parties agreed that the payments under s 136(3A) were of the same nature as the payments under s 136(3)(c) and 136(3)(d) of the 1991 Act – see: cl 3 of the 1999 Agreement. Whilst the parties cannot, by the terms of their contract, agree the correct legal characterisation of the nature of a payment or its historic origins, cl 3 of the 1999 Agreement reflects an understanding that the fees under s 136(3A) were payable for the lawful conduct of gaming in the same way as the fees payable under ss 136(3)(c) and 136(3)(d) of the 1991 Act.

191    So even if the understanding of the parties was different at an earlier time, since at least the 1999 Agreement, the parties’ arrangement was that the s 136(3A) fees would fall within and be paid in accordance with condition 6 of the licence, because they were (again, at least thereafter) s 136 licence fees for the lawful conduct of gaming.

192    Whilst it is unnecessary to reach a concluded a view on the issue, because the Trustees (and later Tatts) did not have the contended financial arrangement from 16 August 2012 (or any financial arrangement at any time at all):

(a)    the relationship between the fees payable under s 135A (on the one hand) and the right to compensation in cl 7 of the 1995 Agreement or the entitlement to payment in s 35A of the 1991 Act (on the other) is probably sufficient for the purposes of satisfying the requirement in s 230-60(1)(a) that one be “in relation to” the other;

(b)    the foregoing conclusion does not answer whether those fees could be said have been provided “in relation to” the financial arrangement commencing on 16 August 2012, by which the time the arrangements had changed;

(c)    in light of the 1999 Agreement, the relationship between the fees payable under s 136(3A) and the right to compensation in cl 7 or the later statutory entitlements to payment (ss 35A of the 1991 Act and 3.4.33 of the 2003 Act) is insufficient for the purposes of satisfying the requirement in s 230-60(1)(a) that one be “in relation to” the other; and

(d)    consistently with what had earlier been the case in relation to the payments under s 135A (as indicated in the Managing Trustees’ letter), the arrangement between the parties from 1 July 1999 was that the s 136(3A) fees were statutory imposts for use of the gaming operator’s licence. The parties conducted themselves on that basis and on the basis that the fees were not related to the terminal payment.

193    As to s 230-60(1)(c), the financial benefits provided – whether under s 135A or s 136(3A) – did not “play an integral role” in whether a gain or loss was made from the financial arrangement or the amount of the gain or loss. The phrase “plays an integral role” clearly requires something more than mere relationship or connection, which is already required by s 230-60(1)(a). It is difficult to conceive of one thing playing an “integral role” in relation to another unless the first thing is necessary or essential to the second. Further, it is not necessarily of itself sufficient for something to play an integral role that the thing is necessary in a “but for” causal sense. The thing must play a role of sufficient significance or importance and, depending on the circumstances, this may not be satisfied merely because it is strictly causally necessary. The degree of significance or importance must be sufficient for it to be described as “integral” in the context of the particular financial arrangement concerned. This necessarily requires close attention to the particular financial arrangement and the role played by the financial benefit in relation to that financial arrangement.

194    The expiry of the licence (which is not a financial benefit) played an integral role in whether a right to compensation under cl 7 would materialise (if cl 7 continued as a source of rights) or whether Tatts would obtain a payment under s 35A or s 3.4.33. As has been mentioned, the licence had already expired by the time the financial arrangement came to exist. The contended financial arrangement came to exist because the licence expired. Once the licence expired the requirement to make payments ceased. It was only then that the contended financial arrangement existed.

195    The payments under s 135A and s 136(3A) (which are financial benefits) related to the conduct of gaming under licence and had to be made to comply with the statute and (at least in the case of s 136(3A)) the licence conditions. It is possible that the licence would have been terminated if the payments had not been made. This is not of itself sufficient for it to be said that the payments played an “integral role” in whether a gain or loss was made from the contended financial arrangement or the amount of that gain or loss. Those payments were integral to the requirements that came with holding the licence and were not in any substantial, real or sufficient way also integral to the contended contingent right to a terminal payment.

196    For these reasons, the payments did not play the relevant integral role required by s 230-60(1)(c) for a financial benefit to be “taken” to be paid under the financial arrangement, even if it can be said that they related in some way to the contended financial arrangement for the purposes of s 230-60(1)(a).

Question 2: s 230-65

197    It follows from the requirement in s 230-65(1)(a) that no question of apportionment can arise unless the relevant financial benefit “plays the integral role mentioned in paragraph 230-60(1)”.

198    Even if it could be said that there was an “obligation to provide the [Additional State Payments] in relation to the [contended financial arrangement]” (s 230-60(1)(a)), and that the payments played the relevant “integral role” (s 230-60(1)(c)), the apportionment to the contended financial arrangement would be negligible.

199    The Additional State Payments were made in respect of the various forms of the broad arrangement as it existed between the parties from time to time, but they were always paid as part of the lawful operation of Tatts’ activities under the gaming operator’s licence. The broad arrangements as they existed from time to time before expiry of the gaming operator’s licence did not on any view include a financial arrangement, consistently with Tatts’ case. The payments: were agreed to in the context of a review of the level of fees payable under the gaming operator’s licence to be completed by 1 November 1996; had to be made in order to conduct lawful gaming operations under the gaming operator’s licence under arrangements which did not constitute or include a financial arrangement; discharged the requirements imposed on Tatts under its licence and under the relevant statutes; were made during the currency of the gaming operator’s licence and as a condition of it; and entirely preceded the financial arrangement for which Tatts contends.

200    Tatts’ focus on: (a) the changes in Tatts’ rights and obligations before and after the 1995 Agreement and the 1996 Act; and (b) the benefit of those changes to Tatts’ business (see ACS[16] and [163] above), even though in various ways relevant, does not directly grapple with the apportionment process mandated by s 230-65(2). Section 230-65(2) focusses in substantial part on the integral role that the relevant financial benefit plays in the ways relevantly described in ss 230-60(1)(c)(i) and (ii), which direct attention to a required integral role in determining whether a gain or loss is made under the financial arrangement or the amount of such gain or loss. Section 230-65(2) necessarily requires close attention to the particular financial arrangement and the role played by the financial benefit in relation to that financial arrangement.

Question 3: step 1(b) of the method statement

201    As noted above, step 1(b) of the method statement in s 230-445(1) requires one to add up:

(b)    the total of the amounts that have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement;

202    The reference to “losses from the arrangement” in step 1(b) is a reference to losses allowed under s 230-15(2), which permits the deduction of “a loss you make from a financial arrangement”. Likewise, the reference in step 2(b) to “gains from the arrangement” is a reference to amounts included in assessable income under s 230-15(1), which includes in assessable income “gains you make from a financial arrangement”.

203    The object of s 230-445 is to provide a mechanism for determination of an appropriate balancing adjustment, including when a financial arrangement is transferred or ceases. This would logically look to amounts previously included in assessable income or allowed as deductions for gains or losses “from the financial arrangement”. The “loss you make from a financial arrangement” in s 230-15(2), like the “gain you make from the financial arrangement” in s 230-15(1), is specific in meaning. It signifies that, under Div 230, it is gains and losses which are assessable or deductible, not the individual receipts and outgoings. Taking interest as an example, under TOFA, interest received or paid is not assessable or deductible as such. Rather, what is assessable or deductible is the gain or loss which will be computed by reference (amongst other things) to interest, if received or provided.

204    Section 230-445(1) is not directed to clawing back deductions (for interest or anything else) incorrectly claimed under s 8-1. It is directed to making a balancing adjustment having regard (amongst other things) to the historic “gains from the arrangement” (step 2(b)) which have been included in assessable and the historic “losses from the arrangement” (step 1(b)) which have been allowed as deductions.

205    On the false hypothesis that Div 230 applied to Tatts because it had a financial arrangement, Tatts incorrectly claimed deductions under s 8-1 – see: s 230-20(4). If Tatts were correct that Div 230 applied to its contended financial arrangement, then the deductions it claimed under s 8-1 were not “allowable” in the years in which they were claimed. Such deductions were in fact allowed and – because of the expiry of relevant time limits – it is not now possible to amend the relevant assessments to disallow those deductions. This fact is obviously not a reason to give step 1(b) an operation which, according to the rules of statutory construction, the legislature should not be taken to have intended.

206    In opening submissions, the Commissioner contended that s 8-10 also applied. That section provides:

8-10 No double deductions

If 2 or more provisions of this Act allow you deductions in respect of the same amount (whether for the same income year or different income years), you can deduct only under the provision that is most appropriate.

207    The Commissioner submitted it was “most appropriate” to deduct the Additional State Payments claimed by Tatts under s 8-1.

208    Assuming s 8-10 is engaged at all, it has no application where the statute provides an express regime for priority as it does here in ss 230-20 and 230-25. The intended effect of these provisions is to prevent ss 6-5 and 8-1 (and other provisions) from operating again in respect of amounts that have already been included in performing the computation of gains and losses from the financial arrangement.

Topic 3: The Trustee Shares

Summary of Tatts’ submissions

209    Tatts submitted that each of the requirements in s 230-60(1) was met in respect of the financial benefit comprising the issue to the Trustees of the shares in Tatts (the Trustee Shares): ACS[18]. Tatts submitted that the shares were provided (in part) in exchange for the gaming operator’s licence, which resulted in Tatts Group Ltd acquiring the contingent right to the terminal payment from the Trustees.

210    Tatts submitted that a reasonable basis for apportioning the financial benefit provided, between Tatts’ financial arrangement and the others things for which those financial benefits were provided, would consider: (a) the total consideration given by Tatts to the Trustees under the Restructure Implementation Agreement; and (b) the value of the right to receive the terminal payment agreed by the parties, namely $297,357,000: RCS[19]. That basis of apportionment would allocate $297,357,000 to Tatts’ financial arrangement.

211    The ‘double deduction’ or ‘step 1(b)’ issue does not arise in relation to the Trustee Shares, because no s 8-1 deduction has been claimed or allowed.

Summary of Commissioner’s submissions

212    The Commissioner submitted that the shares were issued to the Trustees as part of the consideration for the acquisition of the assets of the Trustees. The Commissioner submitted that:

    $375,107,000 was apportioned by the parties to the acquisition of the Trustees’ licences, which included the gaming operator’s licence, referring to cl 6 and Sch 8 of the Restructure Implementation Agreement (CB Tab 157 at 1980 and 2004);

    the licence was “a discrete and separate asset” and was not a financial arrangement under Div 230;

    the statutory right under s 3.4.33 of the 2003 Act was not an asset of the Trustees capable of assignment and no amount of consideration was apportioned by the parties for the assignment of any such right;

    $1 consideration was apportioned by the parties as the value of the various contracts, which must include cl 7 of the 1995 Agreement, transferred under the agreement; and

    no part of the consideration given under the Restructure Implementation Agreement was provided in relation to the financial arrangement to which Tatts referred, save perhaps for part of $1.

213    Further, the Commissioner submitted that:

(a)    The issue of the shares to the Trustees could not constitute the provision of a financial benefit within the meaning of Div 230: RCS[17]. The Commissioner submitted that the issue of shares is a transaction that concerns the capital structure of a company and does not constitute a loss or outgoing of the issuing entity, referring to: Lowry (Inspector of Taxes) v Consolidated African Selection Trust Ltd [1940] AC 648 at 660-662; Ord Forest Pty Ltd v Commissioner of Taxation [1974] HCA 57; 130 CLR 124 at 131, 142, 148, 155; and Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; 207 CLR 165 at [19], [20], [64].

(b)    Section 974-30(1) reflects the position just mentioned and provides that the provision of a financial benefit is not constituted by an issue of equity interests by an entity.

(c)    Accordingly, the issue of shares could not occasion a loss that satisfies the requirements for deduction under s 230-15(2).

214    The Commissioner further contended that there was no reasonable basis for apportioning any part of the consideration given under the agreement to a contingent right that was not an asset for which the consideration was provided.

Resolution

215    As mentioned, the issues raised in relation to the shares issued to the Trustees do not arise because there was no financial arrangement.

216    As also mentioned, the Commissioner relied on three cases in support of the proposition that, as a matter of general law, the issue of shares concerns the capital structure of a company and does not constitute a loss or outgoing of the issuing company: ROS[204]; RCS[17].

217    The first case was Lowry. In that case, the company (Consolidated African) wished to reward employees for services rendered. It allotted shares to those employees at the face value of the shares. The market value of the shares was significantly higher than their face value. The company sought to deduct the difference in value in calculating its profits for income tax purposes.

218    By majority, the Privacy Council held that it could not. Viscount Cladecote held that the company had not laid out or expended anything for the purposes of its trade and the value could not be treated as an outgoing, expense or disbursement which could be deducted in calculating profits: at 657. Further, the cost to the company of earning its trading receipts were not increased by the issue of the shares at less than full market value: at 658.

219    Viscount Maugham considered that the company had not provided money or money’s worth to the employees (at 660) and that the “the issue of shares by a limited company is not a trading transaction at all” (at 661; 669). Viscount Maugham observed that the company was not discharging a debt or liability to the employees when it issued the shares and that the issue of shares was not in the nature of remuneration: at 661.

220    Lord Russell emphasised that the claim had been made on the basis that the difference in value represented remuneration, but rejected that characterisation: at 669. Lord Russell also held that the company had not transferred money or money’s worth to the employees and that the difference in value could not be treated as a disbursement or expense laid out for the purposes of the company’s trade: at 671-2.

221    In the present case, the Trustees transferred assets as consideration for an issue of shares.

222    Lowry was cited with approval in the second case on which the Commissioner relied, Ord Forrest. In Ord Forrest, Barwick CJ, Gibbs and Mason JJ each observed that, ordinarily, the issuing of shares in a company would not constitute a disposition of property: at 143 (Barwick CJ); at 148 (Gibbs J); at 155 (Mason J). The relevant issue of shares in that case did involve a “disposition of property”, but only because of the express terms of the statute there under consideration.

223    The present case is not concerned with whether an issue of shares is a “disposition of property”, except to the extent that may be relevant to the question whether a “financial benefit” was provided.

224    The third case relied upon by the Commissioner was Pilmer. K (a company) purchased shares in W in a takeover. The consideration for W’s shares was a combination of cash and shares that were issued by K for that purpose. K was given advice from accountants which negligently confirmed that the consideration offered by K was fair and reasonable. The central issue in the appeal was whether K had suffered loss by the issue and allotment of shares to those who accepted its takeover offer: at [4].

225    The majority (McHugh, Gummow, Hayne and Callinan JJ; Kirby J dissenting) emphasised that the claim was made by the company, not its shareholders and that the question in the appeal was what damage the company suffered, not whether its shareholders were adversely affected: at [18] and [45]. The majority observed that the relevant inquiry in the case had to proceed on the basis that, absent the negligent advice, no takeover would have occurred: at [63]. If no takeover had occurred, then K would not have outlaid cash or issued shares. Its losses were therefore the outlay of cash and the administrative costs in issuing the shares; but it gave up or lost nothing by the issue of its shares: at [64].

226    The present case is not concerned with issues analogous to those considered in Pilmer.

227    None of these cases address the questions raised by the terms of Div 230. On the (false) assumption that there was a financial arrangement of the kind contended, the question raised by the way Tatts argues its case is whether Tatts provided a “financial benefit” and whether that financial benefit was “under” the financial arrangement for the purposes of s 230-60(1) (and of step 2(a) of s 230-445), the terms of which have been set out earlier.

228    As has been mentioned, the note to s 230-60(1) is in the following terms:

This means that the financial benefits you provide to acquire the financial arrangement (whether to the issuer, a previous holder or a third party) are taken to be financial benefits you provide under the arrangement. The financial benefits you provide may include, for example, fees paid or the forgoing of rights to receive a financial benefit.

229    The meaning of “financial benefit” (for the purposes of the ITAA 1997, including Div 230) is supplied by s 995-1(1) by reference to the definition in s 974-160, namely:

“financial benefit”:

(a)    means anything of economic value; and

(b)    includes property and services; and

(c)    includes anything that regulations made for the purposes of subsection (3) provide is a financial benefit;

even if the transaction that confers the benefit on an entity also imposes an obligation on the entity.

230    There is no question that shares are property and have economic value. There is also no question that, where A gives sufficiently liquid (see s 230-45(2) and (3)) shares to B, that can constitute the provision of a financial benefit. There is no good reason to conclude that the issue of shares cannot constitute the provision of a financial benefit on the basis that it does not involve a “disposition of property”. Subject to whether s 974-30 applies (and the various requirements of s 230-45 including that the financial benefit be “cash settlable” – none of which the Commissioner relied upon in the present case), an issue of shares is capable of being characterised as the provision of a financial benefit.

231    As mentioned, the Commissioner relied on s 974-30 for the proposition that an issue of shares cannot constitute the provision of a financial benefit under a financial arrangement. Section 974-30(1) provides:

(1)    The following do not constitute the provision of a *financial benefit by an entity or a *connected entity of the entity:

(a)    the issue of an *equity interest in the entity or a connected entity of the entity; or

(b)    an amount that is to be applied in respect of the issue of an equity interest in the entity or a connected entity of the entity.

232    The Commissioner submitted that s 974-30 applies to Div 230 and it follows that the issue of an equity interest by an entity cannot constitute the provision of a financial benefit for the purposes of s 230-60(1): ROS[202].

233    Contrary to the Commissioner’s position, s 974-30 has no relevant application in this case.

234    Section 974-30 is located in “Division 974 – Debt and Equity Interest” and, more specifically, “Subdivision 974B – Debt interests”. The role of s 974-30 as a whole, within Subdiv 974B, is to provide for circumstances in which a scheme gives rise to a debt interest. The role of s 974-30(1) is to provide a specific exclusion.

235    To satisfy the debt test, amongst other requirements (and in simplified form):

(a)    the scheme must be a “financing arrangement” (obviously, this is not the same thing as a “financial arrangement” for the purposes of Div 230) for the entity issuing the interest – see: ss 974-20(1)(a) and 974-130;

(b)    the entity or a connected entity must receive a “financial benefit” under the scheme – see: s 974-20(1)(b); and

(c)    the entity must “have an *effectively non-contingent obligation under the scheme to provide a financial benefit” – see: s 974-20(1)(c).

236    Section 974-30(1) identifies two specific situations which do not constitute “the provision of a *financial benefit by an entity or a *connected entity of the entity”. Section 974-30(1) excludes the issue of an equity interest, and an amount applied in respect of the issue of an equity interest in the entity, from being the provision of a financial benefit. This exclusion applies most obviously for the purposes of s 974-20(1)(c). The exclusion is necessary to achieve the distinction between debt and equity interests to which Div 974 is directed. Section 974-30(1) furnishes a specific exclusion, not a definition.

237    Section 974-30(1) does not purport to, and nor properly construed does it, supply the meaning of the phrase “provide a financial benefit under a financial arrangement” for the purposes of the ITAA 1997 generally or for the specific purposes of s 230-60(1). Further, if s 974-30(1) applies to Div 230, there is no reason why ss 974-30(2) and (3) would not also apply to Division 230. Those provisions are directed to Div 974, not Div 230.

238    Division 230 is replete with references to the concept of providing a financial benefit. That concept (as opposed to providing a financial benefit under an arrangement) is not defined in Div 230 and is not supplied by s 995-1(1) (unlike the phrase “financial benefit”). Division 230 makes no reference to s 974-30. The TOFA EM, which is replete with references to Div 974, does not suggest that s 974-30(1) was intended to apply to Div 230. Section 974-30(1) has no relevant application in the present case.

239    As mentioned, the Commissioner also contended that the issue of shares is not a loss that you “make … in gaining or producing your assessable income” or that you “necessarily make … in carrying on a business for the purpose of gaining or producing your assessable income”, and so does not satisfy the terms of s 230-15(2)(a) or (b): T242-46–47, T243-1–2. Section 230-15(2) provides:

230-15 Gains are assessable and losses deductible

…

Losses

(2)     You can deduct a loss you make from a *financial arrangement, but only to the extent that:

(a)     you make it in gaining or producing your assessable income; or

(b)     you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230-H.

240    The shares which were issued (being a “financial benefit”) were part of the consideration provided by Tatts to the Trustees in exchange for the assets transferred to Tatts by the Trustees, which included the gaming operator’s licence and, expressly, the rights and obligations which came with it. The assets were acquired by Tatts in carrying on business for the purpose of gaining assessable income. It is not to the point that, generally, the issue of shares is not a trading activity. Had it been necessary to decide, I would have concluded that the issue of shares was the provision of a financial benefit capable of satisfying the requirement in s 230-60(1). As the note to that section records, a financial benefit provided to acquire a financial arrangement is taken to be provided under the financial arrangement. That is because it clearly relates to, and plays an integral role in, whether a gain or loss is made.

241    As mentioned earlier, however, Tatts at no point had a financial arrangement capable of being acquired.

242    If it is correct to say that the statutory right to a terminal payment was not an asset capable of assignment as the Commissioner submits, that does not relevantly alter the application of the statute to the facts. The fact is that, under the arrangements between Tatts and the Trustees, any right to the terminal payment moved from the Trustees to Tatts and it did so because Tatts provided shares (being a financial benefit) for the acquisition of all the relevant assets, including the right to a terminal payment. Tatts acquired the gaming operator’s licence (and the various rights and obligations which came with it) for the price considered to reflect market value. The value of the licence included what was considered to be the appropriate value of the right to a terminal payment under s 3.4.33.

243    Had it been necessary to decide, I would have concluded that an appropriate apportionment was the amount of $297,357,000 as contended by Tatts. The Commissioner did not challenge the value of the right to a terminal payment itself.

Topic 4: Exceptions: ss 230-460(2)(d)(ii), 230-460(2)(e)(ii) and/or 230-460(8)

244    A loss made from a financial arrangement is deductible under s 230-15(2), except for those losses which are subject to exceptions under Subdiv 230-H – see: the note to s 230-15(2) and s 230-460(1).

245    The Commissioner contended that, if Tatts made a loss from a financial arrangement pursuant to s 230-445(1), then Div 230 does not apply in relation to the loss by reason of ss 230-460(2)(d)(ii), 230-460(2)(e)(ii) and 230-460(8).

246    Subdivision 230-H includes:

Subdivision 230-H—Exceptions

…

230-460 Various rights and/or obligations

Rights and/or obligations subject to an exception

(1)    This Division does not apply to your gains and losses from a *financial arrangement for any income year to the extent that your rights and/or obligations under the arrangement are the subject of an exception under any of the following subsections.

Note: Further exceptions are also provided for in section 230-475.

Leasing or property arrangement

(2)    A right or obligation arising under:

(a)     an *arrangement to which Division 242 (about luxury car leases) applies; or

(b)    an arrangement to which Division 240 (about arrangements treated as a sale and loan) applies; or

(c)    an arrangement that relates to an asset to which Division 250 (about assets put to tax preferred use) applies; or

(d)     an arrangement that, in substance or effect, depends on the use of a specific asset that is:

(i)     real property; or

(ii)     goods or a personal chattel (other than money or a *money equivalent); or

(iii)     intellectual property;

and gives a right to control the use of the asset; or

(e)     an arrangement that is a licence to use:

(i)     real property; or

(ii)     goods or a personal chattel (other than money or a money equivalent); or

(iii)     intellectual property;

is the subject of an exception.

…

Certain guarantees and indemnities

(8)     A right or obligation under a guarantee or indemnity is the subject of an exception unless:

(a)     assuming that the *financial arrangement were a *Division 230 financial arrangement, it would be the subject of a *fair value election or an *election to rely on financial reports; or

(b)     the financial arrangement is a *derivative financial arrangement; or

(c)     the guarantee or indemnity is given in relation to a financial arrangement.

Sections 230-60(2)(e)(ii) and (d)(ii)

247    It is necessary first to address the use of the terms “financial arrangement”, “*arrangement” and “arrangement” in s 230-460.

248    Tatts submitted that the phrase “an arrangement” in paragraphs 230-460(2)(d) and (e) should be construed to mean the financial arrangement referred to in s 230-460(1): T216.30–33, T216.6–29. The Commissioner submitted it was there used in the sense defined in s 995-1(1) and that it refers to the arrangement under which the financial arrangement is held: T254.1–20.

249    In support of its construction, Tatts observed that the word “arrangement” is preceded by an asterisk in s 230-460(2)(a), but not preceded by an asterisk in s 230-460(b) to (e). According to Tatts – in what cannot accurately be described as its strongest submission – it should therefore be construed in paragraphs (b) to (e) as referring to the financial arrangement referred to in s 230-460(1) and not as a reference to the broader arrangement giving rise to that financial arrangement. On this construction, paragraphs (2)(d) and (e) would not apply to Tatts’ asserted financial arrangement because that financial arrangement does not include the rights and obligations under the “gaming operator’s licence”, because the licence expired before the financial arrangement arose on 16 August 2012.

250    On the Commissioner’s construction, paragraphs 230-460(2)(d) and (e) encompass the rights and obligations under the “gaming operator’s licence”, because the contended financial arrangement arose out of a broader arrangement in which the Trustees’ held that licence.

251    The Commissioner’s construction is correct. In many parts of the ITAA 1997, the first reference to a term in its defined sense in a subsection is preceded by an asterisk that identifies it as having the meaning defined in s 995-1(1). Subsequent references to the same word in the same subsection are often not preceded by an asterisk, but are used in the same way. Indeed, one need look no further than s 230-60(2) for an example: the phrase “*money equivalent” is used in s 230-60(2)(d)(ii) and “money equivalent” in s 230-260(2)(e)(ii), but both are plainly intended to have the same meaning. Division 230 is replete with examples too numerous to mention.

252    Tatts also submitted that, even if s 230-60(2)(d) and (e) do not refer to the financial arrangement mentioned in s 230-60(1), the language of s 230-60(1) is itself such that a right or obligation excepted under s 230-60(2) cannot satisfy s 230-60(1) unless it was also a right or obligation under the financial arrangement. Put another way (by Tatts): “[t]he second reference to “arrangement” (in s 230-460(2)) does not negate the requirement in s 230-460(1) that the relevant rights and obligations must arise ‘under’ the financial arrangement”: ARS[68]. This was said to be a complete answer to the application of s 230-60(2).

253    The relevant obligations to which s 230-460 might apply are Tatts’ obligations to make the Additional State Payments. Those obligations would potentially arise under the “arrangement” identified in s 230-460(2)(d) or (e), because that broader arrangement captures the terms on which Tatts was granted and allowed to retain its gaming operator’s licence. To say that those obligations do not pass the hurdle posed by s 230-460(1) is to concede that the obligations to make the payments were never “under” the financial arrangement contended for by Tatts, and to preclude deducting a loss computed by reference to those Additional State Payments.

254    The question then is whether the terms of s 230-60(2)(d)(ii) or (e)(ii) are satisfied. It is convenient to address s 230-60(2)(e)(ii) first.

255    Tatts submitted that the gaming operator’s licence was not a licence to use goods or a personal chattel, but rather a “licence with the predominant purpose of providing for conducting gaming activities and associated activities”: AOS[252].

256    Tatts submission involves the contention that the “gaming operator’s licence” is: (a) not a licence to use goods or personal chattels; or (b) is broader than a mere licence to use goods or a personal chattel and therefore not a licence of the kind captured by the exception. In this latter regard, Tatts referred to the s 3.4.2 of the 2003 Act and the various activities it authorised: ARS[70].

257    Each of the activities authorised by s 3.4.2 have a clear connection to the use of gaming machines:

    Subsection (a) is about the power to obtain gaming machines and restricted components, which is a precondition to the use of gaming machines.

    Subsection (b) approves the manufacturing of approved gaming machines and restricted components, which is likewise a precondition to the use of gaming machines.

    Subsection (c) is about the supplying of gaming machines and restricted components to venue operators, which is clearly to enable the gaming machines to be used in venues.

    Subsection (d) authorises the conduct of gaming at an approved venue – that is, the use of gaming machines.

    Subsection (e) is about selling or disposing of gaming equipment with the approval of the Commission and subsection (f) is about servicing, repairing or maintaining gaming equipment – both necessary incidents to the usage of gaming equipment capable of failing or breaking.

    Lastly, subsection (g) merely authorises activities necessarily incidental to those mentioned in the preceding subsections, which are all about the use of gaming machines.

258    As the Commissioner submitted, aspects of the statutory regimes under which the gaming operator’s licence was held are relevant. As to the 1991 Act, the purpose of the Act was to “establish a system for the … control of gaming machines”, with an aim of “regulating the use of gaming machines”: s 1. The following definitions were relevant to the operation of gaming machines:

    “game” is “a game designed to be played on a gaming machine”;

    “gaming” is “the playing of a gaming machine”; and

    “gaming machine” is “any device, whether wholly or partly mechanically or electronically operated, that is so designed that it may be used for the purpose of playing a game of chance or a game of mixed chance and skill; and as a result of making a bet on the device winnings may become payable”.

259    Under the 1991 Act, the Governor in Council could declare a machine or a type of machine to be a gaming machine (s 6), such that the prohibition on possession of it applies (s 7), unless you hold a gaming operator’s licence: s 11. The Commission had power to approve a gaming machine, such that it is an “approved gaming machine”: s 69. Each gaming machine was to be given an identification number: s 72. A gaming operator’s licence authorises the holder to “obtain approved gaming machines”; “manufacture approved gaming machines”; “supply approved gaming machines”; “conduct gaming at an approved venue”; “sell or dispose of gaming equipment”; “service, repair or maintain gaming equipment”: and “do all things necessarily incidental” to those things: s 14. The Trustee maintained a list of the identification numbers for each gaming machine that it was licensed to operate: T102.13–14.

260    As to the 2003 Act, the purpose of the relevant chapter was “to establish a system for the regulation, supervision and control of gaming equipment” with an aim of “regulating the use of gaming machines”: s 3.1.1. The following definitions were relevant to the operation of gaming machines:

    “gaming”, which means “the playing of a gaming machine” s 3.1.2;

    “gaming machine”, which means “any device, whether wholly or partly mechanically or electronically operated, that is so designed that it may be used for the purpose of playing a game of chance or a game of mixed chance and skill; and as a result of making a bet on the device winnings may become payable” s 1.3;

    “approved gaming machine”, which means “gaming machine of the type approved under section 354” s 1.3;

    “gaming operator’s licence”, which means “means a licence granted under Div 3 of Part 4 of Chapter 3” s 1.3; and

    “conduct of gaming”, which refers to (among other things) the management, use, supervision and operation of gaming equipment” s 3.1.4.

261    Under the 2003 Act, gaming was only lawful when “the gaming equipment is provided” “in accordance with” the relevant chapter: s 3.2.1. The Commission had power to approve a gaming machine type: s 3.5.4. Each gaming machine was given an identification number: s 3.5.8. The authorisation that a gaming operator’s licence provided was to “obtain … approved gaming machines”; “manufacture approved gaming machines”; “supply approved gaming machines”; “sell or dispose of gaming equipment”; “service, repair or maintain gaming equipment”; and “do all things necessarily incidental” to those things: s 3.4.2.

262    Under the 2003 Act, there was a prohibition on manufacturing, selling, supplying, obtaining or being in possession of a gaming machine, other than in accordance with the Act (under a gaming operator’s licence): s 3.5.1.

263    Tatts also placed reliance on the heading to s 230-60(2), namely: “Leasing or property arrangement”. No doubt headings can provide assistance, but they can also be misleading – see, for example: R v Lavender [2005] HCA 37; 222 CLR 67 at [21]; Adeels Palace Pty Ltd v Moubarak [2009] HCA 48; 239 CLR 420 at [13]; Em v The Queen [2007] HCA 46; 232 CLR 67 at [95]; Bell Group NV (in liq) v Western Australia [2016] HCA 21; 260 CLR 500 at [37]. Leaving aside positively misleading headings, it may also be observed that headings are often “an incomplete summary of the operation of the provision”: Commissioner of Taxation v Patrix Prestige Pty Ltd [2024] FCAFC 148 at [19].

264    The heading in s 230-460(2) cannot limit the plain words of the provisions that the heading purports to summarise. By way of example, it is clear that s 230-460(2)(e)(ii) is not concerned with “leases” as such. It is concerned with licences.

265    Tatts also referred to the TOFA EM at [2.143] which stated that most leasing arrangements will not be “cash settlable financial arrangements” because there will be a not insignificant non-cash settlable right or obligation: T216.35. Little assistance is furnished by this.

266    If there was a financial arrangement comprising the right to a terminal payment (which there was not), it was a right under an arrangement (as defined by s 995-1(1)) that is a “licence [being the gaming operator’s licence] to use … goods or a personal chattel [namely gaming machines]”.

267    It is possible that the exclusion should be construed as applying only to goods or personal chattels owned by the other party to the relevant arrangement and, accordingly, as not applicable to the arrangements in the present case. Such a construction would certainly cover several common or typical arrangements which one encounters. However, when regard is had to the reasons for the introduction of the TOFA regime and the sorts of transactions to which it was directed (see those mentioned in the TOFA EM), it is difficult not to read the exception as being intended to apply to any arrangements falling with the ordinary meaning of the words used, noting that those words do not expressly direct attention to questions of ownership and noting its broad language which extends to an arrangement that “in substance or in effect” depends on the use of the relevant asset. Had it been necessary to decide, and with some hesitation, I would have concluded that s 230-60(2)(e)(ii) applied to exclude the whole of the loss claimed by Tatts.

268    It is not necessary in the circumstances to determine whether the exception in s 230-60(2)(d)(ii) also applies.

Section 230-460(8)

269    As to s 230-460(8), the Commissioner submitted that:

(a)    the meaning of indemnity was a sum of money paid to compensate for loss, referring to the TOFA EM at [2.168]; Denmark Community Windfarm Ltd v Commissioner of Taxation [2018] FCAFC 11; 259 FCR 179 at [40]; and a dictionary definition: ROS[220]; RCS[31].

(b)    the contingent right to the terminal payment entitled the Trustees (and later Tatts) to “compensation for the investment in infrastructure lost” (cl 7.1 of the 1995 Agreement) if its gaming operator’s licence was not renewed and it was reissued to an unrelated operator.

270    Tatts also relied on [2.168] of the TOFA EM, which provides:

What is meant by a ‘guarantee’ or an ‘indemnity’ takes on its ordinary meaning to include a promise to answer for the debt or default of another, or to make good a loss suffered through a third party.

271    If there was a financial arrangement, it arose out of an arrangement under which Tatts was to be compensated for its lost investment or for being deprived of its investment in its gaming business and related infrastructure. There is no good reason to doubt that cl 7.1 accurately reflects the parties’ broader understanding. Indeed, in cross examination, Mr Gillooly and Mr Fischer stated that the terminal payment was intended to act as compensation for investment in infrastructure lost: T96-7.42-6 (Gillooly) and T110-23.31 (Fischer). In moving that the Gaming Acts (Amendment) Bill 1996 be read a second time, the Attorney-General stated (A5491):

If the new licence is not granted to Tattersalls or a related entity of Tattersalls, as compensation for the lost investment in infrastructure Tattersalls will be entitled to the lesser of the premium payment for the new licence and the licence value …

272    In Tatts HCA at [68], the High Court stated:

… For the payment entitlement under cl 7.1 to arise, it was necessary that the duopoly continue and that the new licence to participate in that duopoly not be issued to Tatts. If the duopoly were to continue and Tatts was not granted a new licence, the value of the business which it had built up, and paid for under cl 3 of the 1995 Agreement, would have been amortised because the right lawfully to carry it on would have been denied to it and given to another. But if the duopoly were not continued, then even though Tatts would no longer share in the advantages of the duopoly in respect of gaming operations, the business which it built up and paid for would not have been given to another.

273    The word “indemnity” bears its ordinary meaning, as [2.168] of the TOFA EM states. The ordinary meaning of the word “includes a sum of money paid to compensate a person for liability, loss or expense incurred by that person”: Denmark at [40]. The reference in [2.68] of the TOFA EM to “a promise to answer for the debt or default of another, or to make good a loss suffered through a third party” correctly describes circumstances which might be included in the ordinary meaning of the words, but an indemnity also includes a promise to make good a loss suffered whether or not it is suffered “through a third party”.

274    Had it been necessary to decide, I would have concluded that s 230-460(8) applied to exclude the whole of the loss claimed by Tatts.

Topic 5: Leave to amend

275    This issue need only be dealt with briefly given the conclusions reached above.

276    In its objection, Tatts claimed that it was entitled to a deduction under s 230-15(2) in the amount of $451,157,286 (or some lesser amount), calculated under s 230-445(1). The Commissioner’s decision to disallow the objection related to that claim. The notice of appeal filed by Tatts concerned that claim. Tatts later increased its claim and did so on more than one occasion.

277    Tatts must obtain the leave of the Court to rely on grounds not stated in its objection (s 14ZZO(a) of the TAA 1953 and see generally Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation [1991] FCA 667; 32 FCR 148 at 156) and to amend its notice of appeal (rule 8.21 of the Rules).

278    Tatts has filed two interlocutory applications seeking leave to amend: CB Tabs 24 and 29. The first relates to an increase in the claimed loss from $451,157,286 to $1,344,911,000 which relates to payments made under s 135A and 136(3A) (and includes payments made in the financial years ended 30 June 1996 to 30 June 1998): CB Tab 24 at 141.

279    The second seeks to raise the claim relating to the Trustee Shares in the amount of $297,357,000: CB Tab 29 at 337.

280    By a second further amended appeal statement, Tatts abandoned its reliance on payments made in the financial years ended 30 June 1996 to 30 June 1998: CB Tab 20 at 244.

281    The Commissioner’s opposition to leave being granted was based principally on the following (CB Tab 26 at 294):

(a)    deductions had already been allowed in respect of the payments made under ss 135A and 136(3A);

(b)    the amended claims are new and inconsistent with the grounds of objection;

(c)    there was an absence of explanation for the delay.

282    The Commissioner observed that, by reason of the expiration of time, there is now no power or authority in the Commissioner to amend the previous assessments which allowed the claimed deductions, with the result that allowing the amendments would permit an opportunity for Tatts to obtain a double deduction. The Commissioner submitted that there is “no discernible legislative objective or policy that would justify the court’s discretion now being exercised in favour of [Tatts] to enable it to prosecute such an outcome”.

283    On this issue, Tatts correctly observed that the ‘double deduction’ issue was always an issue and that all that has changed is the quantum of the double deduction which might be obtained: CB Tab 28 at 326 at [8].

284    The objection required the Commissioner to determine whether, by reason of an apportionment under s 230-65, the sum of $451,157,286 was the “the total of all the financial benefits [Tatts] provided under the financial arrangement” referred to in par (a) of step 2 of the method statement under s 230-445(1). The amended claim – raised for the first time in 2022 – was that the entirety of the fees under ss 135A and 136(3A), save for a de minimis amount, should be apportioned to the financial arrangement. That claim was not raised by the objection for consideration and determination by the Commissioner and is inconsistent with the objection.

285    I do not consider these matters to be a sufficient reason not to grant leave to amend. As Tatts submitted (CB Tab 28 at 327 at [16]), in Lighthouse at [156], the Full Court (Lockhart, Burchett and Hill JJ) said with respect to the predecessor provision to s 14ZZO(a):

The amendment to s 190(a) ... was of a remedial kind and thus must be construed in accordance with well-established principles relating to ameliorating legislation. It follows that the Tribunal or the court has power to permit a taxpayer to argue that the taxable income and tax payable are incorrect and “excessive” for reasons not initially advanced, even if those reasons involve, as in the present case, entirely fresh grounds in substitution for the original grounds, or even if they require consideration of matters not considered by the Commissioner in the original assessment process.

286    As to the explanation for delay and assuming a lack of explanation could be a proper basis for refusing leave, whilst it is thin in respect of some relevant periods, the explanation is not so thin as to warrant refusing leave.

CONCLUSION

287    Accordingly, leave to amend and rely upon grounds not raised in the objection should be granted, but the appeal as so amended should be dismissed with Tatts paying the costs of the appeal including the costs of its interlocutory applications.

Associate:

Dated: 21 February 2025