Tabcorp Maxgaming Holdings tax deduction appeal judgment

Original Word Document (130 KB) Federal Court of Australia

Tabcorp Maxgaming Holdings Limited v Commissioner of Taxation [2026] FCAFC 30

| Appeal from: | Tabcorp Maxgaming Holdings Limited v Commissioner of Taxation [2025] FCA 115 |
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| File number: | VID 348 of 2025 |
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| Judgment of: | MOSHINSKY, HESPE AND BUTTON JJ |
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| Date of judgment: | 26 March 2026 |
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| Catchwords: | TAXATION – appeal from the decision of the primary judge dismissing an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) – where appellant claimed deduction for a loss under Div 230 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) – whether the appellant had a “financial arrangement” as defined in s 230-45 of the ITAA 1997 |
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| Legislation: | Income Tax Assessment Act 1997 (Cth) Div 230, Subdivs 230-B, 230-G, ss 8-1, 230-15, 230-40, 230-45, 230-60, 230-85, 230-100, 230-115, 230-435, 230-445, 230-460, 701-1, 701-5, 974-30, 974-160, 995-1

Taxation Administration Act 1953 (Cth) s 14ZZ

G ambling Regulation (Amendment) Act 2004 (Vic)

Gambling Regulation Act 2003 (Vic) ss 3.4.3, 3.4.29, 3.4.30, 3.4.33, 3.4.35, 3.4A.5, 3.6.7, 4.3.12, 12.3.2

Gambling Regulation Amendment (Licensing) Act 2009 (Vic) ss 13, 25

Gaming Acts (Amendment) Act 1996 (Vic) ss 5, 6, 9

Gaming Acts (Amendment) Act 1998 (Vic)

Gaming and Betting Act 1994 (Vic) ss 13, 222

Gaming Machine Control Act 1991 (Vic) Pt 3, ss 3, 3A, 33, 33A, 35A, 135, 135A, 136, 160

State Taxation Acts (Amendment) Act 1999 (Vic) ss 5, 6 |
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| Cases cited: | Australian Competition and Consumer Commission v J Hutchinson Pty Ltd [2025] HCA 10; (2025) 99 ALJR 695

Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; (2006) 153 FCR 509

Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd [1981] HCA 4; (1981) 146 CLR 336

Inland Revenue Commissioners v Trustees of Sir John Aird’s Settlement [1982] 2 All ER 929

Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; (1946) 73 CLR 1

Tatts Group Limited v The State of Victoria [2014] VSC 302

United Energy Ltd v Commissioner of Taxation [1997] FCA 836; (1997) 78 FCR 169

Victoria v Tatts Group Limited [2014] VSCA 311

Victoria v Tatts Group Limited [2016] HCA 5; (2016) 90 ALJR 392 |
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| Division: | General Division |
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| Registry: | Victoria |
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| National Practice Area: | Taxation |
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| Number of paragraphs: | 131 |
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| Date of hearing: | 26-27 November 2025 |
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| Counsel for the Appellant: | Mr D McInerney KC, Mr A Roe and Mr A Haskett |
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| Solicitor for the Appellant: | King & Wood Mallesons |
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| Counsel for the Respondent: | Mr G Davies KC, Ms F Alpins and Mr J Phillips |
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| Solicitor for the Respondent: | Norton Rose Fulbright Australia |
ORDERS

| | | VID 348 of 2025 |
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| BETWEEN: | TABCORP MAXGAMING HOLDINGS LIMITED

Appellant | |
| AND: | COMMISSIONER OF TAXATION

Respondent | |

| order made by: | MOSHINSKY, HESPE AND BUTTON JJ |
| DATE OF ORDER: | 26 March 2026 |
THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The Appellant pay the Respondent’s costs of the appeal, as agreed or taxed.

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

REASONS FOR JUDGMENT

THE COURT:

1 This appeal concerns the application of Div 230 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). The appellant appeals the judgment of the primary judge which concluded that the appellant did not incur a loss from a financial arrangement, deductible under s 230-15(2), in the year ended 30 June 2013.

2 The appellant was the successor holder of the gaming operator’s licence that had been held by the Trustees of the Will and Estate of the late George Adams (Tatts Trustees).  The appellant claims to be entitled to a deduction for a loss under Div 230 of the ITAA 1997 from a “financial arrangement” which was said to have come into existence on the expiry of its gaming licence at midnight on 15 August 2012.  The “financial arrangement” is said to have comprised a contingent right to a terminal payment from the State of Victoria arising from an agreement made with the State in 1995 and / or the provisions of the Gambling Regulation Act 2003 (Vic) (2003 Act).  The appellant claims that the financial arrangement ceased six months after the expiry of the licence and, at that time, the appellant received nothing.  The appellant claims it provided financial benefits totalling $1,491,309,000 and received nothing when the financial arrangement ceased.

3 The appellant claims to be entitled to a deduction for a loss under Div 230 in circumstances where:

(1) The appellant had been allowed deductions under s 8-1 of the ITAA 1997 in the financial years ended 30 June 1999 to 30 June 2013 on the basis that the Additional State Payments (as defined below in [64 ]) were amounts incurred in the course of carrying on its gaming business.

(2) The appellant accepts that prior to 15 August 2012 it did not have a “financial arrangement” under Div 230 of the ITAA 1997.

(3) The appellant accepts that, as a result of amendments made to the regulation of the gaming industry from 2009, the conditions for its right to a terminal payment would not be satisfied absent a change in legislation which reversed those amendments and that accordingly, from 2009, any right to a terminal payment could not vest in the appellant in the absence of such a reversal.

Factual Background

4 The factual background is set out at PJ [5]-[88].

5 The Court draws attention to the following.

6 The State legalised gambling activity involving the use of gaming machines in 1991 by the Gaming Machine Control Act 1991 (Vic) (1991 Act).  Pursuant to the 1991 Act, two gaming operator’s licences were issued – one to the Totalisator Agency Board of Victoria (TAB) and one to the Tatts Trustees, each for a term of 20 years.  The Victorian gaming industry thus took the form of a duopoly: PJ [5].

7 In so far as the Tatts Trustees were concerned:

(1) Clause 6 of the gaming operator’s licence required the Trustees to pay to the Victorian Gaming Commission the amounts required to be paid under s 136 of the 1991 Act.

(2) The Commission had a choice between two different methods by which the amounts payable by the Tatts Trustees were to be calculated.  Those methods were set out in each of ss 136(2) and (3).  The Commission determined that s 136(3) was to apply which required that the amounts payable be determined as 66⅔% of the “daily net cash balance”.

(3) The amounts were to be reviewed before 1 November 1996: cl 8 of the gaming operator’s licence.  Where the daily net cash balance method applied, the authorised percentage of the daily net cash balance could be increased from 66⅔% to up to 75%: s 160 of the 1991 Act.

(4) From 1 July 1992 to 15 August 2012 the Tatts Trustees (and associated entities) paid the State $5,501,300,780 in amounts calculated pursuant to s 136 of the 1991 Act.

8 The TAB was also required to pay amounts under s 136 of the 1991 Act.

9 In 1993, the Victorian Government decided to privatise the TAB by way of a public float on the Australian Stock Exchange (ASX). Tabcorp Holdings Limited was listed on the ASX on 15 August 1994.  The float proceeds were paid to the State of Victoria.

10 As part of the privatisation of the TAB, Tabcorp Holdings 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).  Upon the grant of the conjoined licences, Tabcorp Holdings became liable under s 13 of the 1994 Act to pay to the State the net amount of float proceeds as a fee for the grant of the licence.  Tabcorp Holdings paid the State the sum of $597.2 million.  The State of Victoria considered that of the float proceeds it received, about $450 million was the upfront licence fee paid for the “gaming licence”.  Upon the issue of the wagering licence and gaming licence, the TAB’s gaming operator’s licence that had been issued under the 1991 Act came to an end by virtue of s 222 of the 1994 Act.

11 To maximise the proceeds of the float to the State, the 1994 Act provided that Tabcorp Holdings was to be paid a terminal payment at the expiry of its conjoined licences: s 21(1) of the 1994 Act.  The terminal payment was intended to equal the amount of the initial licence fee.  Because Tabcorp Holdings would, in substance, have a right to the repayment of the initial licence fee, the State was advised that Tabcorp Holdings would not be required to amortise the value of its licence over the term of the licence in its financial accounts.  Section 21(1) of the 1994 Act provided:

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.

12 The Tatts Trustees continued to hold the gaming operator’s licence that had been issued to them under the 1991 Act.

1995 Agreement

13 To put the Tatts Trustees on an equal footing with Tabcorp Holdings, the State agreed with the Tatts Trustees to make changes to the arrangement relating to the Tatts Trustees’ gaming business.  Relevantly, under an agreement dated 17 November 1995 between the Tatts Trustees and the State (1995 Agreement):

(1) The parties acknowledged that the 1995 Agreement constituted the review of the s 136 amounts contemplated by cl 8 of the Tatts Trustees’ gaming operator’s licence: Recital B.

(2) The authorised percentage under s 136 remained at 66⅔%.

(3) In addition to the s 136 amounts, the Tatts Trustees were to pay an annual amount (described by the High Court in Victoria v Tatts Group Limited [2016] HCA 5; (2016) 90 ALJR 392 (Tatts HCA) at 15 as “an annual licence fee”): cl 3.

(4) “[A]s compensation for the investment in infrastructure lost” should the Tatts Trustees’ gaming operator’s licence not be renewed, the Tatts Trustees were to be paid an amount described as the “Licence Value” pursuant to cl 7. Relevantly, cl 7.1 and 7.2 provided:

7.1    If the Gaming Operator’s Licence expires without a new gaming operator’s licence having issued to [the Tatts Trustees], [the Tatts Trustees] shall be entitled to be paid, by the [State], an amount of money as compensation for the investment in infrastructure lost. This amount will be equal to the Licence Value of the Gaming Operator’s Licence or the premium payment by the new licensee, whichever is the lesser.

7.2    No amount will be payable pursuant to sub-clause 7.1 if a new gaming operator’s licence is not issued to any person, or is issued to [the Tatts Trustees] or a related entity of [the Tatts Trustees].

14 Clause 7 did not provide a time frame after the expiry of the licence within which a new licence was to be issued.  As the primary judge held, and the parties accepted on appeal, 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: see Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; (1946) 73 CLR 1 at 13 (Dixon J).  The parties on appeal did not dispute that six months was a reasonable time period for this purpose.

15 Under the 1995 Agreement, the Minister for Gaming for the State of Victoria was required to cause to be drafted, and to use his best endeavours to procure the enactment of, legislation that included the payment obligation of the Tatts Trustees under cl 3 and the obligation of the State to pay the “Licence Value” as contemplated by cl 7 of the 1995 Agreement.

16 The 1995 Agreement was subject to a condition subsequent that the Tatts Trustees obtain a private binding ruling which was acceptable to the Tatts Trustees on the tax implications of the draft legislation and the 1995 Agreement: cl 2.1 of the 1995 Agreement.  The primary judge found that it was critical to the Tatts 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 in 1996) 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: PJ [28].

17 The Gaming Acts (Amendment) Act 1996 (Vic) (1996 Act) amended the 1991 Act with effect from 2 July 1996 by introducing into the 1991 Act:

(1) New s 33 to provide for the issue of a gaming operator’s licence to the Tatts Trustees or any other person on the expiration or termination of the Tatts Trustees’ existing gaming operator’s licence: s 5 of the 1996 Act.

(2) Section 33A to provide for, as a condition precedent to a grant of a licence under s 33, the payment to the Treasurer of a “premium payment” as consideration for the grant of a gaming operator’s licence: s 5 of the 1996 Act.  The premium payment was described as being “a tax”.

(3) Section 35A to provide for the payment of an amount if the new gaming operator’s licence was not granted to the Tatts Trustees or a related entity: s 6 of the 1996 Act.  This in substance, gave effect to cl 7 of the 1995 Agreement.  Section 35A relevantly provided:

35A. 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 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.

(4) New s 135A, entitled “Amounts payable by Trustees” to provide for the Tatts Trustees to be liable to pay annual amounts: s 9 of the 1996 Act. In substance, this gave effect to cl 3 of the 1995 Agreement.  Section 135A provided:

135A. Amounts payable by Trustees

(1)    In respect of the year ending on 30 June 1996, the Trustees must, in accordance with section 135C, pay to the Treasurer for payment into the Consolidated Fund the greater of—

(a)    30% of the Trustees’ net profit for that year; and

(b)    $35 000 000.

(2)    In respect of the year ending on 30 June 1997 and each year ending on a subsequent 30 June up to and including 30 June 2011, the Trustees must, in accordance with section 135C, pay to the Treasurer for payment into the Consolidated Fund the greater of—

(a)    30% of the Trustees’ net profit for that year; and

(b)    the lesser of—

(i)    an amount calculated in accordance with the formula—

$35 000 000 × A

B              ; and

(ii)    35% of the Trustees’ net profit for that year—

where—

(iii)    A is the All Groups consumer price index for all capital cities in respect of the quarter ended on 30 June of that year first published by the Commonwealth Statistician after that date; and

(iv)    B is the All Groups consumer price index for all capital cities in respect of the quarter ended on 30 June 1996 first published by the Commonwealth Statistician after that date.

(3)    In respect of the period beginning on 1 July 2011 and ending on 14 April 2012, the Trustees must, in accordance with section 135C, pay to the Treasurer for payment into the Consolidated Fund the greater of—

(a)    30% of the Trustees’ net profit for that period; and

(b)    the lesser of—

(i)    an amount calculated in accordance with the formula—

$35 000 000 × A

B              ; and

(ii)    35% of the Trustees’ net profit for that period—

where—

(iii)    A is the All Groups consumer price index for all capital cities in respect of the quarter ended on 30 June 2012 first published by the Commonwealth Statistician after that date; and

(iv)    B is the All Groups consumer price index for all capital cities in respect of the quarter ended on 30 June 1996 first published by the Commonwealth Statistician after that date.

(4)    In this section, “ net profit ”, in relation to a year or period, means the net profit (before deduction of the amounts payable under this section or section 135B) of the Trustees for that year or period from the conduct of gaming as shown in a statement of account—

(a)    prepared in accordance with generally accepted accounting principles; and

(b)    prepared in respect of the conduct of gaming for which financial statements and accounts are required to be kept in accordance with section 132; and

(c)    confirmed by the Auditor-General as fairly presenting the net profit and the results of that conduct of gaming—

or, if the Auditor-General does not, before the date on which a payment is required to be made by the Trustees under section 135C, confirm the statement of account (including the net profit), the amount determined under section 135B.

18 The Tatts Trustees obtained rulings from the Commissioner of Taxation, satisfactory to the Tatts 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.  The parties to the 1995 Agreement proceeded on the basis that the condition subsequent in cl 2 of the 1995 Agreement was satisfied.

19 In 1998, the Tatts Trustees restructured their business.  The restructure involved:

(1) The incorporation of Tattersall’s Holdings Pty Ltd as the parent company of the Tatts subsidiary operating companies. Holdings was wholly owned by the Tatts Trustees.

(2) The incorporation of three wholly owned subsidiaries of Holdings, each of which was to conduct a separate business.  The gaming business was to be conducted by Tattersall’s Gaming Pty Ltd.

(3) An agreement between the Tatts Trustees and Gaming pursuant to which, among other things, Gaming would operate the Tatts Trustees’ gaming business under an appointment as an operator in relation to the Tatts Trustees’ gaming operator’s licence. Gaming would ensure that the requirements of the 1991 Act and the Tatts Trustees’ licence were complied with, including by causing all sums of money to be paid in accordance with ss 135A and 136 of the 1991 Act as required.  From 1 July 1998, Gaming paid the fees required to be paid under ss 135 and 136 of the 1991 Act.

20 The 1991 Act was amended in May 1998 by the Gaming Acts (Amendment) Act 1998 (Vic) to permit the Minister to declare a company to be the “operator” in relation to a person’s gaming operator’s licence: s 3A of the 1991 Act.  A consequence of such a declaration was that the company declared to be an operator was required to ensure that amounts were paid in accordance with ss 135A and 136(3) of the 1991 Act.  Those amounts included a prescribed percentage of the total net cash balance during the period of all gaming machines of the gaming operator at approved venues.  On 29 June 1998, the Minister nominated Gaming as operator in relation to the Tatts Trustees’ gaming operator’s licence.

21 On 2 July 1998, the Commissioner issued an unfavourable private ruling in relation to the amounts payable under s 135A of the 1991 Act (which under the agreement between Tatts Trustees and Gaming were to be paid by Gaming).  The private ruling concluded that the “licence fees” that would be payable by the Tatts Trustees to the State under s 135A in respect of the 1999 to 2012 years were not deductible because:

(a) the payments were on capital account because “the advantage sought from the payment is the acquisition of the right to carry on the business”;

(b) the payments were “similar to the kind of ‘monopoly rent’ discussed in” United Energy Ltd v Commissioner of Taxation [1997] FCA 836; (1997) 78 FCR 169; and

(c) the licence fees were in the nature of a duty payable out of Gaming’s net profit and therefore did not satisfy the positive limbs of s 8-1.

22 Following the issue of the unfavourable private ruling:

(1) The State Taxation Acts (Amendment) Act 1999 (Vic) (1999 Act) was assented to on 8 June 1999 and relevantly commenced on 1 July 1999.  The 1999 Act amended the 1991 Act by repealing s 135A and introducing a new s 136(3A): ss 5 and 6 of the 1999 Act.  The amounts previously payable under s 135A were calculated by reference to profits.  As a result of the amendments, Gaming was obliged to make payments under s 136(3A) which were fixed by reference to a percentage (7%) of the “daily net cash balances” of the “gaming operator”.  Section 136(3A) 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.

(2) On 28 June 1999, the Tatts Trustees and the State agreed to amend the 1995 Agreement (1999 Agreement).  The 1999 Agreement amended the terms of the Tatts 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 and agreeing that the amounts payable under ss 136(3)(c), 136(3)(d) and 136(3A) of the 1991 Act were “considered to be of the same nature as each other, notwithstanding the later addition of Section 136(3A) to the [1991] Act by operation of the 1999 Act.”  By cl 4 of the 1999 Agreement, the parties confirmed the validity of the 1995 Agreement as amended by the 1999 Agreement and affirmed their obligations to perform the 1995 Agreement as amended.

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

24 In so far as Tabcorp Holdings’ conjoined licences were concerned, the right to a terminal payment was re-enacted in s 4.3.12 of the 2003 Act which provided:

4.3.12  Entitlement of former licensee on grant of new licences

(1)    On the grant of new licences, the person who was the holder of the licences last in force (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.

(2)    The person who was the holder of the former licences is entitled to the payment under subsection (1) whether or not the person was, or was entitled to be, an applicant for the new licences.

(3)    Sub-section (1) does not apply if the holder of the former licences has been wound up.

25 In so far as the Tatts Trustees’ gaming operator’s licence was concerned, s s 3.4.29, 3.4.30 and 3.4.33 relevantly 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.

26 In 2004, the Tatts Trustees decided to list a company on the ASX.  Tattersall’s Ltd (Tatts Ltd) was registered on 12 August 2004. Tatts Ltd was later named Tatts Group Ltd and then Tabcorp Maxgaming Holdings Limited (being the appellant).

27 Section 3.4.35 of the 2003 Act had precluded the holder of a gaming operator’s licence from transferring the licence to another person.  The Gambling Regulation (Amendment) Act 2004 (Vic) (assented to on 21 September 2004) amended the 2003 Act to allow the transfer of the Tatts Trustees’ gaming operator’s licence to Tatts Ltd.  New s 12.3.2 provided:

12.3.2  Transfer of Trustees’ gaming operator’s licence

(1)    Despite section 3.4.35, the Trustees may apply to the Minister for approval to transfer to Tattersall’s the gaming operator’s licence held by the Trustees.

(2)    The Minister must refer the application to the Commission for its advice as to whether the application should be granted.

(3)    Section 3.4.31 (except sub section (5)) and Division 1 of Part 4 of Chapter 10 apply to an application referred to the Commission under sub section (2) as if it were an application made to it by Tattersall's for the grant of a gaming operator’s licence and the Commission, in determining its advice, must deal with the matter accordingly.

(4)    The Commission must notify the Minister in writing of its advice and the reasons for that advice.

(5)    The Minister must determine an application by either granting or refusing the application and must notify the Trustees in writing of his or her decision.

(6)    The Minister may only grant an application if the advice of the Commission is that it should be granted.

(7)    An application may be granted subject to any conditions that the Minister thinks fit.

(8)    If the Minister grants the application, the Trustees may at any time transfer to Tattersall’s the gaming operator’s licence held by them.

(9)    If, in accordance with this section, the Trustees transfer to Tattersall's the gaming operator’s licence held by them—

(a)    the licence continues in force for the balance of its term unless sooner cancelled under section 3.4.37;

(b)    the licence is subject to the same conditions as those to which it was subject immediately before the transfer and, under section 3.4.35, is not transferable to any other person;

(c)    Tattersall’s has all the rights, liabilities and obligations under the licence and Chapter 3 and, to the extent that they relate to the gaming operator’s licence, the regulations that the Trustees had immediately before the transfer;

(d)    for the purposes of the formula in section 3.4.33(3) any reference in the definition of “B” to the former licensee includes, in relation to Tattersall’s, a reference to the Trustees;

(e)    without limiting paragraph (c), Parts 6 and 7 of Chapter 3 apply in relation to Tattersall’s as if it and the Trustees were the one gaming operator for the whole of any financial year in the course of which the transfer took effect and any relevant part of the preceding or current financial year;

(f)    Tattersall's must continue to keep and retain any records or other documents that the Trustees were required to keep and retain under sections 3.7.4 and 3.7.5 before the transfer;

(g)    despite anything to the contrary in section 3.9.1, a declaration under that section of a wholly-owned subsidiary of the Trustees as the declared operator of the licence continues to have effect if the declared operator is, on and after the transfer, a wholly-owned subsidiary of Tattersall’s.

(10)    The Trustees must immediately notify the Minister in writing of the transfer to Tattersall’s of the gaming operator’s licence in accordance with this section and of the date of the transfer.

(11)    A notification under sub-section (10) must be accompanied by a copy of the transfer instrument or by another document evidencing the transfer.

28 The prospectus for the listing issued to potential investors in Tatts Ltd included:

(1) An Investigating Accountant’s Report prepared by PriceWaterhouseCoopers.

(2) Financial information, including a pro forma Statement of Financial Position (balance sheet) as at 31 December 2004 which recorded in a note the carrying value of the gaming operator’s licence as $372.6 million.  The prospectus recorded that the carrying value of the licence had not been amortised due to the amount of the payment expected to be received from the State at the expiry of the licence not being less than the carrying value of the licence.  The directors had received an independent valuation from Ernst & Young which had estimated the present value of the future terminal payment to be $297 million as at 31 March 2005.

29 On 31 May 2005, three agreements were entered into as part of the Tatts Ltd float process:

(1) Transfer Agreement executed by the State, the Tatts Trustees, Tatts Ltd Holdings, Tattersall’s Sweeps Pty Ltd, Gaming and Tattersall’s Club Keno Pty Ltd (2005 Transfer Agreement).  Clause 10 of the 2005 Transfer Agreement provided:

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

(2) Deed of Assignment and Transfer of Gaming Operator Licence executed by the Tatts Trustees and Tatts Ltd.  Clause 4.1 provided:

With the approval of the Minister as evidenced by … his execution of the [2005] Transfer Agreement, the [Tatts] Trustees hereby assign and transfer to [Tatts Ltd] … :

(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 [Tatts] Trustees arising pursuant to the 1999 Agreement.

(3) Restructure Implementation Agreement executed by the Tatts Trustees and Tatts Ltd.  Under cl 4 of the Restructure Implementation Agreement, the Tatts Trustees agreed to sell to Tatts Ltd their “Assets”, including the Tatts Trustees’ shares in Holdings, the “Gaming Licences” and “Contracts”.  The total value of the assets transferred was agreed to be $1,201,726,202.  In consideration for the transfer of the Tatts Trustees’ assets, Tatts Ltd agreed to issue 599,999,999 ordinary shares to the Tatts Trustees (the Trustee Shares, valued at $1,106,567,997) and the assumption of liabilities valued at $95,158,205.

30 Following the transfer of the shares in Holdings to Tatts Ltd, for the purposes of Pt 3-90 of the ITAA 1997, Gaming became a subsidiary member of the tax consolidated group of which Tatts Ltd was the head company.

31 In its financial report for the year ending 30 June 2005, Tatts Ltd 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”.

32 On 10 April 2008, the State announced a fundamental restructure of Victoria’s gaming industry.  The duopoly was to come to an end and the gaming industry opened up for competition.  Neither Tabcorp Holdings’ conjoined licences nor Tatts Ltd’s gaming operator’s licence was to be renewed after those licences expired in 2012.  No new gaming operator’s licences were to be issued.  Instead, from the expiry of those licences, the right to conduct gaming operations was to be granted to holders of a new authority called a “gaming machine entitlement”.  The industry was to transition from the then current duopoly gaming operator system to a venue operator system.  On 23 June 2009, the Gambling Regulation Amendment (Licensing) Act 2009 (Vic) (2009 Act) was enacted to amend the 2003 Act.  Section 13 of the 2009 Act inserted a new s 3.4.3 into the 2003 Act which 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 Tatts Trustees] on 14 April 1992 and does not authorise the grant of any further gaming operator’s licence.

33 Section 25 of the 2009 Act inserted a new Pt 4A into Ch 3 of the 2003 Act, entitled “Gaming Machine Entitlements”.  Each gaming machine entitlement created was to be allocated to a venue operator in respect of an approved venue.  The 2009 Act did not alter the text of s 3.4.33.

34 In Tatts Ltd’s annual report for the year ended 30 June 2008, the Directors’ Report included a statement that the State had expressed the view that Tatts Ltd would not have any right to compensation when its gaming operator’s licence expired in 2012.  Note 19 to the balance sheet recognised a full impairment charge to Tatts Ltd’s brand and licence intangible assets.

35 On 7 June 2010, the Minister for Gaming created 27,500 gaming machine entitlements with an effective date of 16 August 2012.

36 Tatts Ltd’s gaming operator’s licence was extended until 15 August 2012 from its original expiry date of 14 April 2012.

Litigation between Tatts Ltd and the State of Victoria

37 After expiry of its licence on 15 August 2012, Tatts Ltd sued the State seeking payment of the amount of $451,157,286. The claim was advanced both in contract, and under s 3.4.33 of the 2003 Act. At first instance, the Victorian Supreme Court upheld Tatts Ltd’s claim based in contract, but not the claim under s 3.4.33 of the 2003 Act: Tatts Group Limited v The State of Victoria [2014] VSC 302 (Hargrave J).

Court of Appeal

38 The Victorian Court of Appeal dismissed the State’s appeal and Tatts Ltd ’s cross appeal: Victoria v Tatts Group Limited [2014] VSCA 311 (Tatts VSCA).

39 The Court of Appeal held that:

(1) The allotment of gaming machine entitlements to licensed venue operators under s 3.4A.5 of the 2003 Act did not constitute the grant of a “gaming operator’s licence to a person other than the former licensee” within the meaning of s 3.4.33(1)(b) of the 2003 Act.  The term “gaming operator’s licence” in s 3.4.33(1)(b) bore the meaning of that term as defined in s 1.3: Tatts VSCA at 51.

(2) A new gaming operator’s licence within the meaning of cl 7.1 of the 1995 Agreement is not restricted to a gaming operator’s licence issued under Div 3 of Pt 4 of Ch 3 of the 2003 Act, but extends to other forms of authority to conduct gaming operations which would otherwise be unlawful.

(3) The creation and issue of gaming machine entitlements to venue operator licensees amounted to the issue of “a new gaming operator’s licence” in that generic sense.

40 The Court of Appeal recognised (at [52]) that its construction of the 2003 Act as amended “deprives s 3.4.33(1)(b) of relevant application because of the abrogation by s 3.4.3 of the State’s ability to issue new wagering and gaming licences under Division 3 of Part 4 of Chapter 3.”  It also accepted that “to construe the expression [gaming operator’s licence] in that way deprives [Tatts Ltd’s] right to payment under s 3.4.33 of any present utility”.

41 The Court of Appeal considered that s 3.4.33 was not repealed because of “a calculated legislative intent to prevent the change in regime being seen or treated as an alteration to the rights constitutive of [Tatts Ltd’s] gaming operator’s licence” and “to eschew any idea of Tatts [Ltd] once having had a right to payment which the change in regime has now denied it” and “to repel any notion that Tatts [Ltd] may have had a legitimate expectation of compensation”: Tatts VSCA at [59].  The Court of Appeal concluded (at [59]):

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 [Ltd] 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 [Ltd], and that, since none can now issue, Tatts [Ltd] now has nothing.

(Emphasis added.)

42 The Court of Appeal further concluded (at [62]-[63]):

Parliament has determined to preclude the occurrence of the circumstance under which an entitlement to payment in s 3.4.33(1) will arise. That interpretation is unavoidable, even if the commercial outcome is thought to be manifestly unfair.

In any event, the only right which Tatts [Ltd] ever had under s 3.4.33 (or its legislative antecedents) was a right to payment when and if the State issued a further gaming operator’s licence under Division 3 of Part 4 of Chapter 3 (or its legislative antecedents) to someone other than Tatts [Ltd]. Axiomatically, that was only ever a contingent right, since the State was never under any obligation to issue a further gaming operator’s licence. Approached from that perspective, the fact that s 3.4.3 has now foreclosed the State’s ability to issue a further gaming operator’s licence does not relevantly alter the position. It means only that it is no longer possible to satisfy the contingency on which s 3.4.33 was conditioned. …

(Emphasis added.)

43 The Court of Appeal reached a different conclusion in relation to the contractual claim made by Tatts Ltd pursuant to the 1995 Agreement.  Clauses 7.1 and 7.2 of the 1995 Agreement used the term “new gaming operator’s licence”.  The Court of Appeal concluded that the term “new gaming operator’s licence” was not confined to a licence granted under Pt 3 of the 1991 Act, but extended “to any statutory authority, howsoever denominated, of which the effect would be to confer on the holder substantially the same rights as were conferred on the [Tatts] Trustees by the Gaming Operator’s Licence at the time of its expiration”: Tatts VSCA at [135].

44 The Court of Appeal concluded that a “new gaming operator’s licence” in the relevant sense was issued by the State following the expiration of Tatts Ltd’s licence, finding that upon the grant of gaming machine entitlements, as a matter of substance, the gaming operations formerly conducted by Tatts Ltd continued to be conducted by others: Tatts VSCA at [188].  The Court of Appeal further concluded that the 1995 Agreement continued to operate after the passage of the amendments made by the 1996 Act and was not spent upon the passage of the legislation provided for in cl 8 of the 1995 Agreement: Tatts VSCA at [211]. Accordingly, the Court of Appeal rejected the appeal against the primary judge’s finding in favour of Tatts Ltd on its contractual claim.

High Court

45 The State was successful in its appeal to the High Court.

46 In Tatts HCA at 6, the High Court held that Tatts Ltd was not entitled to payment on the proper construction of cl 7 of the 1995 Agreement.  In cl 7 of the 1995 Agreement “the phrase ‘new gaming operator’s licence’ … 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 [Ltd] by its gaming operator’s licence at the time of its expiration”.  A “new gaming operator’s licence” was never issued.  Because no “new gaming licence” was ever issued to any person, Tatts Ltd was not entitled to payment under cl 7 of the 1995 Agreement.

47 The High Court observed that cl 7 provided for a terminal payment to be paid to Tatts Ltd “‘[i]f the Gaming Operator’s Licence expires without a new gaming operator’s licence having issued to [Tatts Ltd]’ but for no amount to be payable if a new gaming operator’s licence was not issued at all, or was issued to Tatts [Ltd] or a related entity of Tatts [Ltd]”: Tatts HCA at [20].

48 The High Court concluded that, properly construed, 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), having regard to the text, context and purpose of cl 7 of the 1995 Agreement: Tatts HCA at [51].

49 In so far as the text of the 1995 Agreement is concerned, the High Court held as follows:

(1) The text of the 1995 Agreement included cl 1.3 which provided that words and phrases appearing in the 1995 Agreement had the same meaning as in the 1991 Act, unless the contrary intention appeared.  Section 3(1) of the 1991 Act (at the time of the 1995 Agreement) relevantly defined “gaming operator” to mean “the holder of a gaming operator’s licence under Part 3” of the 1991 Act.  There was nothing in the text of cl 7 to suggest the phrase “gaming operator” was not defined by reference to the meaning in the 1991 Act: Tatts HCA at [53].  The phrase “gaming operator’s licence” had a clear meaning under the 1991 Act.  It meant a gaming operator’s licence issued under Pt 3 of the 1991 Act: Tatts HCA at [54].  That meaning was not altered by the addition of the word “new”. When construing that phrase, it is to be presumed that the parties used the phrase consistently: Tatts HCA at [55].

(2) The methods of calculating the amounts to which Tatts Ltd could be entitled if its gaming operator’s licence expired without “a new gaming operator’s licence” being issued to it supported a conclusion that Tatts Ltd’s gaming operator licence and the “new gaming operator’s licence” referred to in cl 7 were connected instruments: Tatts HCA at [56].

(3) Clause 7.2 provided that no amount was to be payable at all if Tatts Ltd’s gaming operator’s licence expired without a new one being issued to “any person”.  The terms of cl 7.2 were “inconsistent with a suggestion that Tatts [Ltd] would become entitled to the terminal payment simply upon the expiration of its Gaming Operator’s Licence”: Tatts HCA at [58].

(4) Other provisions of the 1995 Agreement used the phrase “new gaming operator’s licence” to refer to a new gaming operator’s licence issued under Pt 3 of the 1991 Act (for example, cll 5.2 and 8.1.6): Tatts HCA at [59].

50 The context and purpose of the 1995 Agreement also supported a conclusion that the phrase “new gaming operator’s licence” in cl 7 of the 1995 Agreement 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): Tatts HCA at [61].  The High Court concluded:

(1) The 1995 Agreement was predicated on the existence of the gaming industry duopoly, as reflected in Recitals A and D and cll 6 and 5.2 and the reference to “the premium payment” in cl 7 of the 1995 Agreement: Tatts HCA at [64]-[69].  The High Court observed at [68]:

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 [Ltd]. If the duopoly were to continue and Tatts [Ltd] 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 [Ltd] 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.

(2) The terms of the Treasurer’s letter annexed to the 1995 Agreement as Sch 2 made it apparent that “[Tatts Ltd’s] entitlement to receive ‘capital compensation’ from the State was dependent upon another applicant’s successful tender for that new gaming operator’s licence on the basis that the duopoly continued” and “[r]easonable business people reading the Treasurer’s letter would not have failed to appreciate that the grant of a new licence – which was necessary to create and fund an entitlement to the terminal payment – was dependent upon the continuation of the duopoly and the concomitant commercial advantages which that entailed for the new duopolist”: Tatts HCA at [71]. Furthermore, that letter made it clear that the 1995 Agreement gave no assurance that the duopoly would be continued: Tatts HCA at [72].

(3) The context made it clear that the business protected by the 1995 Agreement was that defined by cl 1.1 of that agreement; namely, Tatts Ltd’s “gaming machine business carried on in the State of Victoria, including the acquisition, supply, installation and operation of gaming machines”.  By contrast, the authority granted by the gaming machine entitlements was linked to a venue operator’s licence and therefore limited in effect and value, both geographically and functionally when compared with the value of the authority conferred under the legislative regime which had sustained the duopoly: Tatts HCA at [73].  The protection of Tatts Ltd’s commercial interests conferred by the 1995 Agreement was limited to the period during which the duopoly continued: Tatts HCA at [74].

51 The High Court did not consider it necessary to consider the correctness of the conclusion of the Court of Appeal that the 1995 Agreement survived the enactment of the 1996 Act.  The High Court observed:

[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 … 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 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.

52 The High Court considered it unnecessary to address a contention made by the State that the provisions of the 1995 Agreement had been “abrogated by the enactment of the [2009 Act] [a ] mendments ”: Tatts HCA at [82].

53 The High Court also rejected Tatts Ltd’s claim under s 3.4.33 of the 2003 Act, for the reasons given by the trial judge and the Court of Appeal; “namely, that the precise definition of ‘gaming operator’s licence’ in s 1.3(1) as ‘a licence granted under Division 3 of Part 4 of Chapter 3’ of the 2003 Act leaves no room for an alternative, broader interpretation of ‘gaming operator’s licence’”: Tatts HCA at [84].

Division 230 of the ITAA 1997

54 Division 230 of the ITAA 1997 provides for the tax treatment of gains and losses from a taxpayer’s “financial arrangements”.  It provides for the assessability of gains and the deductibility of losses a taxpayer makes from financial arrangements (s 230-15) and for the timing for recognition of those gains and losses (s 230-40).

55 The concept of a “financial arrangement” is set out in ss 230-45 to 230-55.  Section 230-45(1) provides:

(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).

56 The term “arrangement” is defined in s 995-1 as follows:

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

57 The term “cash settlable” is defined in s 230-45(2) in the following way:

(2)    A right you have to receive, or an obligation you have to provide, a * financial benefit is cash settlable if, and only if:

(a)    the benefit is money or a * money equivalent; or

(b)    in the case of a right—you intend to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another * financial arrangement; or

(c)    in the case of an obligation—you intend to satisfy or settle it by providing money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

(d)    you have a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way); or

(e)    you deal with the right or obligation, or with similar rights or obligations, in order to generate a profit from short-term fluctuations in price, from a dealer’s margin, or from both; or

(f)    none of paragraphs (a) to (e) applies but you satisfy subsection (3); or

(g)    you are able to settle the right or obligation as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way) and you do not have, as your sole or dominant purpose for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the financial benefit as part of your expected purchase, sale or usage requirements.

A reference in paragraph (b) or (c) to a financial arrangement does not include a reference to something that is a financial arrangement under section 230-50.

Note:    Examples of dealing of the kind covered by paragraph (e) are:

(a)    dealing with the right or obligation, or similar rights or obligations, on a frequent basis, a short-term basis or on a frequent and short-term basis; and

(b)    acquiring the right or obligation, or similar rights or obligations, and managing the resulting risk by entering into offsetting arrangements that provide a profit margin.

58 Subsections 230-45(3) to (5) provide:

(3)    You satisfy this subsection if:

(a)    the * financial benefit is readily convertible into money or a * money equivalent; and

(b)    there is a market for the financial benefit that has a high degree of liquidity; and

(c)    subsection (4) or (5) is satisfied.

(4)    This subsection is satisfied if, for the recipient of the * financial benefit, the amount of the money or * money equivalent referred to in paragraph (3)(a) is not subject to a substantial risk of substantial decrease in value.

(5)    This subsection is satisfied if your purpose, or one of your purposes, for entering into the arrangement under which you are to receive or provide the * financial benefit, is to receive or deliver the financial benefit:

(a)    to raise or provide finance; or

(b)    if paragraph (a) does not apply—so that it may be converted or liquidated into money or a money equivalent (other than as part of your expected purchase, sale or usage requirements).

59 Section 230-85(a) confirms that a right for the purposes of Div 230 includes a right subject to a contingency. It provides:

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 …

60 The term “financial benefit” has the meaning given by s 974-160: s 995-1.  Relevantly, s 974-160(1) provides:

(1)    In this Act:

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.

61 Division 230 provides for seven methods which can be applied to take account of a gain or loss a taxpayer makes from a financial arrangement.  Relevantly, one of those methods is the “balancing adjustment method” provided for in Subdiv 230-G: s 230-40(1)(f).  Under that subdivision, a balancing adjustment is made if, relevantly, “all of your rights and/or obligations under a financial arrangement otherwise cease”: s 230-435(1)(b).  The method for calculating the balancing adjustment is provided for in s 230-445.  That method requires, amongst other things, that a taxpayer add up the total of the financial benefits the taxpayer provided “under the *financial arrangement”: s 230-445(1) step 2(a).

62 Section 230-60(1) sets out the circumstances in which a taxpayer is taken for the purposes of Div 230 to have had an obligation to provide a financial benefit under a financial arrangement.  It 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.

63 The exceptions to Div 230 are set out in Subdiv 230-H.  Relevantly, s 230-460 provides:

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:

…

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

…

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

…

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

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

…

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

…

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.

Tatts Ltd’s claim under Div 230

64 Tatts Ltd claims that:

(1) It had a “financial arrangement” that came into existence on the expiry of its gaming licence at midnight on 15 August 2012.  The financial arrangement was said to consist of “a contingent right” to a terminal payment, arising from the 1995 Agreement and / or s 3.4.33 of the 2003 Act.  Although Tatts Ltd framed its arguments putting its statutory and contractual “rights” on this “and/or” basis, it clarified that these bases were advanced as true alternatives.

(2) The financial arrangement ceased six months later, when the conditions for the State to be required to make the terminal payment could no longer be satisfied.  It was at that time that the right to the terminal payment “ceased” for the purposes of s 230-435(2).

(3) Tatts Ltd received nothing when the “financial arrangement” ceased in the year ended 30 June 2013.

(4) Tatts Ltd provided financial benefits under the financial arrangement that totalled $1,491,309,000.  The financial benefits said to be provided by Tatts Ltd are summarised at PJ [83].  Broadly, Tatts Ltd claims it provided two categories of financial benefits under the financial arrangement.

(a) Payments totalling $1,193,952,000 made by Gaming under ss 135A of the 1991 Act, 136(3A) of the 1991 Act and 3.6.7 of the 2003 Act, and cl 3 of the 1995 Agreement (Additional State Payments).  Tatts Ltd relied upon the entry history rule (s 701-5 of the ITAA 1997) and single entity rule (s 701-1 of the ITAA 1997) and the fact that Gaming was a subsidiary member of the tax consolidated group of which Tatts Ltd was the head company to contend that the amounts paid by Gaming are taken to have been provided by Tatts Ltd.

(b) Second, $297,357,000 being a portion of the value of the shares issued to the Tatts Trustees which was said to equal the net present value of Tatts Ltd’s entitlement to a terminal payment calculated just prior to the float.

(5) Tatts Ltd was therefore entitled to claim a deduction for a loss of $1,491,309,000 in the year ended 30 June 2013, calculated in accordance with the method statement in s 230-445(1).

Decision of the primary judge

65 The primary judge held that Tatts Ltd was not entitled to a deduction for a loss under Div 230 of the ITAA 1997.

66 The primary judge concluded that Tatts Ltd did not have a “financial arrangement” within the meaning of s 230-45 at any relevant time: PJ [153].

67 Tatts Ltd accepted that prior to the expiry of the gaming operator’s licence, s 230-45(1)(d) to (f) precluded Tatts Ltd from having a financial arrangement: PJ [119].

68 The primary judge held that Tatts Ltd did not commence to have a financial arrangement at the time the gaming operator’s licence expired because at that time it did not have a contingent cash settlable legal or equitable right to receive a terminal payment.  At the time the gaming operator’s licence expired, the right to terminal payment was not capable of arising because the duopoly regime was not to continue, as explained by the High Court in Tatts HCA at [68]-[72].  From at least the time of the enactment of the 2009 Act, the arrangement between the State and Tatts Ltd was that no new gaming operator’s licence would or could be issued: PJ [123].  On 29 June 2009, the 2009 Act inserted the new s 3.4.3 into the 2003 Act “formally preventing the issue of a gaming operator’s licence”: PJ [126].  From that time, there was no possibility that the duopoly would be maintained or that a new gaming operator’s licence would issue to anyone.  The primary judge concluded (at PJ [126]):

This meant that neither the second nor third contingency upon which Tatts [Ltd] relied (s 3.4.33(1)(b) and (c) and the equivalent parts of cl 7) would or could be satisfied.  Tatts [Ltd] had no right to receive a financial benefit under the arrangements and could not receive one.

69 The fact that s 3.4.33 of the 2003 Act had not been repealed by the 2009 Act did not assist Tatts Ltd because when that section was read with the new s 3.4.3, it would not operate to provide Tatts Ltd a payment.  The 2009 Act brought the right in s 3.4.33 to an end: PJ [127].

70 The primary judge concluded (at PJ [136]) in relation to s 3.4.33 of the 2003 Act and the 1995 Agreement:

As at 16 August 2012, under the arrangement with the State, Tatts [Ltd] 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 [Ltd] had never made a payment under a financial arrangement with the State. As at 16 August 2012, Tatts [Ltd] remained in the position that there was no financial arrangement under which it would make a payment. No financial arrangement ever existed.

71 The primary judge considered that the result was the same whether or not cl 7 of the 1995 Agreement remained operative as a source of rights, but considered that the better view was that the right to compensation provided for in cl 7 merged in or was superseded by the statutory right to payment first introduced into the 1991 Act by the 1996 Act: PJ [137].

72 The primary judge considered that s 230-85 did not support a conclusion that Tatts Ltd had a financial arrangement upon the expiry of the gaming operator’s licence.  The primary judge concluded that from the time the gaming operator’s licence expired, ss 3.4.33(1)(a) to (c) of the 2003 Act were not “contingencies” such that it could be said that, from that time, Tatts Ltd had a “contingent right” as at 16 August 2012:

(1) As at 16 August 2012, s 3.4.33(1)(a) did not provide for a contingency because the event that it provided for had already happened.  Tatts Ltd’s licence had expired: PJ [146].

(2) As at 16 August 2012, s 3.4.33(1)(b) did not provide for a contingency because the event it provided for 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 Ltd: PJ [149].  Tatts Ltd could not establish a contingency 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 [the gaming machine entitlements] 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”: PJ [150].

(3) As at 16 August 2012, s 3.4.33(1)(c) did not provide for a contingency because it was certain that the State would not grant a new gaming operator’s licence to Tatts Ltd or a related entity: PJ [152].

73 Although it followed from the conclusion that Tatts Ltd never had a financial arrangement within the meaning of s 230-45 that Tatts Ltd’s appeal under s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) was to be dismissed, the primary judge nonetheless went on to consider the balance of the issues raised before his Honour.

74 Assuming there was a financial arrangement (contrary to his Honour’s finding), the primary judge considered whether the Additional State Payments were financial benefits provided “under” the financial arrangement for the purposes of step 2(a) of the method statement in s 230-445(1), having regard to the terms of s 230-60.  The primary judge concluded:

(1) Tatts Ltd’s obligation to pay the Additional State Payments did not satisfy s 230-60(1)(a) because the Additional State Payments were not provided in relation to the financial arrangement commencing on 16 August 2012.  The primary judge considered that the Additional State Payments did not have a real or substantial connection with that financial arrangement.  The Additional State Payments were required to be made by virtue of the gaming operator’s licence and the statutory provisions for the lawful conduct of gaming.  The liability to pay the Additional State Payments arose out of the conduct of the gaming business: PJ [182]-[183].

(2) There was no financial arrangement at the time the Additional State Payments were required to be made: PJ [183].  By the 1999 Agreement, the Tatts Trustees and the State agreed that, from 1 July 1999, no further payments were made under s 135A but were to be made under s 136(3A) and those payments were to have the same character as the fees payable under ss 136(3)(c) and (d), namely, as fees payable for the lawful conduct of gaming: PJ [190].

(3) The relationship between the fees payable under s 135A and the right to a terminal payment in s 35A of the 1991 Act or cl 7 of the 1995 Agreement was “probably sufficient for the purposes of satisfying the requirement in s 230-60(1)(a) that one be ‘in relation to’ the other”: PJ [192(a)].  This was so notwithstanding that, in the course of negotiating the 1995 Agreement, the Tatts Trustees had expressly rejected a connection between the Additional State Payments and the terminal value for income tax reasons: PJ [187].

(4) The Additional State Payments did not satisfy s 230-60(1)(c) because they did not “play an integral role” in determining whether a gain or loss was made from the financial arrangement or the amount of that gain or loss: PJ [193].  The primary judge observed that the obligation to make the Additional State Payments ceased at the time the financial arrangement came into existence (which was only when the licence had expired): PJ [194].  The payments under ss 135A and 136(3A) related to the conduct of gaming under the gaming operator’s licence and were integral to the requirements that came with holding the gaming operator’s licence.  The payments “were not in any substantial, real or sufficient way also integral to the contended contingent right to a terminal payment”: PJ [195].

75 Even if it could be said that there was an obligation to provide the Additional State Payments in relation to the financial arrangement (for the purposes of s 230-60(1)(a)) and that the Additional State Payments played an integral role (for the purposes of s 230-60(1)(c)), the primary judge considered that any amount that would be apportioned to the financial arrangement commencing on 16 August 2012 would be negligible: PJ [198].  The Additional State Payments were paid as part of the lawful operation of the activities conducted under the gaming operator’s licence: PJ [199].

76 In so far as step (1)(b) of the method statement in s 230-445(1) was concerned, the primary judge concluded that the reference to “losses from the arrangement” was a reference to losses allowed under s 230-15(2): PJ [202].  The object of s 230-445 is to provide a mechanism for determining an appropriate balancing adjustment when a financial arrangement is transferred or ceases: PJ [203].  Division 230 assesses gains and allows deductions for losses from a financial arrangement.  Section 230-445 is not concerned with deductions for gross amounts claimed under s 8-1.  If Tatts Ltd was correct in its contention that Div 230 applied, the deductions that had been claimed under s 8-1 ought not to have been allowed in the years in which they had been claimed but s 230-445 did not provide a mechanism for clawing back those deductions: PJ [204]-[205].

77 The primary judge concluded that the shares issued by Tatts Ltd to the Tatts Trustees were not financial benefits provided by Tatts Ltd under a financial arrangement.  Although the primary judge considered that an issue of shares could constitute the provision of a financial benefit (at PJ [230]), there was no financial arrangement in the present case.  The Commissioner had argued that s 974-30(1) applied to Div 230 such that the issue of an equity interest could not constitute the provision of a financial benefit for the purposes of s 230-60(1): PJ [231]-[232].  The primary judge concluded that s 974-30(1) had no application because it did not define the phrase “provide a financial benefit under a financial arrangement” as that phrase appears in Div 230: PJ [237].  Division 230 makes no reference to s 974-30: PJ [238].  The Commissioner had not sought to contend that the shares issued to the Tatts Trustees were not “cash settlable” for the purposes of ss 230-45: PJ [230].

78 The primary judge concluded that if Tatts Ltd made a loss from a financial arrangement pursuant to s 230-445(1), Div 230 did not apply to that loss because of the exceptions in s 230-460(2)(e)(ii) (a right or obligation arising under an arrangement that is a licence to use goods or a personal chattel) or s 230-460(8) (a right or obligation under a guarantee or indemnity): PJ [266]-[267], [274].  The primary judge did not consider it necessary to decide whether the exclusion in s 230-460(2)(d)(ii) (a right or obligation  arising under an arrangement that, in substance or effect, depends on the use of a specific asset that is goods or a personal chattel) applied: PJ [268].

Grounds of appeal and notice of contention

79 By its notice of appeal, the appellant identified five main grounds of appeal, each of which was further particularised:

(1) The primary judge was said to have erred in concluding that Tatts Ltd did not have a financial arrangement within the meaning of s 230-45.  The primary judge should have concluded that Tatts Ltd had a financial arrangement “comprising its contingent right to a terminal payment under cl 7 of the 1995 Agreement and/or s 3.4.33 of the 2003 Act”.  That contingent right was said to be “an extant and subsisting legal right grounded in contract and/or statute, which would crystallise upon the satisfaction of certain stipulated conditions”.

(2) The primary judge was said to have erred in concluding that the Additional State Payments made by Gaming in the years ended 30 June 1999 through to 30 June 2013 were not amounts that Tatts Ltd was taken, by s 230-60(1), to have provided under the financial arrangement.  The primary judge ought to have found that the Additional State Payments were “in relation to” the financial arrangement for the purposes of s 230-60(1)(a) and played an “integral role” for the purposes of s 230-60(1)(c).

(3) The primary judge was said to have erred in applying s 230-65(2) in concluding that only a negligible amount of the Additional State Payments would be apportioned to the financial arrangement.  The primary judge ought to have found that only a nominal amount was referable to things that were not financial arrangements.  Alternatively, half of the Additional State Payments ought to have been apportioned to the financial arrangement.

(4) The primary judge was said to have erred in concluding that s 230-460(2)(e)(ii) applied to the right to a terminal payment.  The primary judge ought to have concluded that the right did not arise under a “financial arrangement” that is a “licence to use goods or a personal chattel”.

(5) The primary judge was said to have erred in concluding that the exclusion in s 230-460(8) applied.  The primary judge ought to have found that the right to a terminal payment was not a right under a guarantee or an indemnity within s 230-460(8).

80 By a notice of contention, the Commissioner contends that the primary judge erred in:

(1) finding that the relationship between the fees payable under s 135A of the 1991 Act and the right to a terminal payment (whether under cl 7 of the 1995 Agreement or s 35A of the 1991 Act) was “probably sufficient for the purposes of satisfying the requirement in s 230-60(1)(a)” of the ITAA 1997 that one be “in relation to” the other; and

(2) failing to find that the financial arrangement for which the appellant contends is excluded from Div 230 by reason of s 230-460(1) because the right or rights under the financial arrangement for which the appellant contends arose under an arrangement that in substance or effect, depended on the use of specific assets that were goods or personal chattels and gave a right to control the use of the assets, within the meaning of s 230-460(2)(d) of the ITAA 1997.

81 The first contention was ultimately not pressed.

Was there a financial arrangement?

82 Tatts Ltd cannot succeed in its claim for a deduction under Div 230 unless it had a financial arrangement.  The primary judge held that Tatts Ltd did not have a financial arrangement at any time.

Submissions of the parties on appeal

83 The appellant submits that Tatts Ltd had a “financial arrangement” under s 230-45 that was constituted by its legal right to a terminal payment.  This legal right was said to be founded in both contract (cl 7 of the 1995 Agreement, as confirmed by the 1999 Agreement) and statute (namely, in s 3.4.33 of the 2003 Act).

84 The appellant conceded that Tatts Ltd did not have a “financial arrangement” before the expiry of its gaming operator’s licence.  The financial arrangement was said to have commenced from the time of the expiry of that gaming operator’s licence at midnight on 15 August 2012 and ceased six months later.

85 The appellant contends that the primary judge erred in concluding that Tatts Ltd did not have a financial arrangement on two bases.

86 First, the primary judge was said to have erred in identifying the relevant “arrangement” for the purposes of s 230-45(1).  The appellant submits that the actions of the State in 2008 and 2009 did not modify the “arrangement” because those actions were unilateral actions and the definition of “arrangement” in s 995-1 of the ITAA 1997 was limited to a consensual dealing.

87 Second, the primary judge was said to have “erroneously elided the existence of [Tatts Ltd’s] right to the terminal payment and the probability of an amount being received under it” (emphasis original).  The appellant contends that Tatts Ltd had a right to a terminal payment that was “dually enshrined in statute and in contract”.  The legislative changes in 2008 and 2009 were relevant to the probability of Tatts Ltd receiving a terminal payment but were said not to be relevant to the existence of the right itself.  That right, both in statute and in contract, was said to have remained unchanged.

88 The appellant contends that for the purposes of Div 230, a right includes a right “subject to a contingency”: s 230-85(a).  A contingency refers to “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; (1981) 146 CLR 336 at 385 (Mason J).  Div 230 was designed to address rights to financial benefits that by their terms or nature might never eventuate.

89 The appellant submits that Tatts Ltd’s statutory right to a terminal payment continued to exist because s 3.4.33 of the 2003 Act “continued to have the force of law at all relevant times”.  The amendments made by the 2009 Act did not “negate” the statutory right because s 3.4.33 was never repealed.

90 The appellant submitted that Tatts Ltd had a “separate” contractual right to a terminal payment by virtue of cl 7 of the 1995 Agreement which remained in existence notwithstanding the 2009 Act.  Clause 7 did not merge in its statutory equivalent.  The “validity” of the 1995 Agreement was confirmed in the 1999 Agreement and in the 2005 Transfer Agreement.

Consideration

91 Division 230 applies to gains or losses made from a financial arrangement.  The circumstances in which a taxpayer has a financial arrangement are set out in s 230-45.  Unless and until those circumstances are satisfied, a taxpayer does not have a financial arrangement.

92 Section 230-45 contains two categories of circumstances.  The first category of circumstances consists of positive criteria in the sense of circumstances that must exist in order for a taxpayer to have a financial arrangement.  These positive criteria are provided for in s 230-45(1)(a) to (c) and require that the taxpayer, under an arrangement, has:

(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.

93 The term “financial benefit” has the meaning given by s 974-160: s 995-1 of the ITAA 1997.  It has an expansive meaning, covering anything of economic value.  For the purposes of Div 230, the scope of the concept of financial benefit is narrowed by the phrase “cash settlable legal or equitable right” to receive or provide the financial benefit.  Accordingly, the right to receive, or the obligation to provide, a financial benefit must be recognised by law or equity.

94 The term “cash settlable” is defined in s 230-45(2).  Relevantly, a right to receive a financial benefit is cash settlable if the benefit is money or a money equivalent.

95 A right that is “subject to a contingency” is treated as a right for the purposes of Div 230: s 230-85(a).

96 In order to have a financial arrangement, satisfaction of three positive criteria is necessary but not sufficient because of the second category of criteria provided for in s 230-45(1).

97 The second category of circumstances in s 230-45(1)(d) to (f) consists of negative criteria in the sense of circumstances which, if and whilst they exist, preclude a taxpayer from having a financial arrangement.  Those negative criteria are:

(1) the taxpayer also has 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

(2) for one or more of those rights and / or obligations:

(a) the thing that the taxpayer has the right to receive, or the obligation to provide, is not a financial benefit; or

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

(3) the one or more rights and / or obligations covered by paragraph (2) above are not insignificant in comparison with the cash settlable right, obligation or combination of the cash settlable rights and obligations.

98 Where all the circumstances for a taxpayer having a financial arrangement are satisfied, the financial arrangement is constituted by the cash settlable legal or equitable right or obligation (or combination of such rights and obligations): s 230-45(1) (concluding sentence).

99 The appellant accepted that the relevant “arrangement” was to be found in the terms of the agreements between the State and the Tatts Trustees (transferred to Tatts Ltd pursuant to the 2005 Transfer Agreement) and the terms of the relevant statute, namely the 2003 Act (as in force at 15 August 2012).

100 The appellant accepted that Tatts Ltd did not have a financial arrangement at any time during the term of the gaming operator’s licence, by reason of s 230-45(1)(d) to (f).  It followed that Tatts Ltd could not have a financial arrangement at any time prior to the expiry of that licence and could only commence to have a financial arrangement after the expiry of that licence at midnight on 15 August 2012.

101 The appellant accepted that, once the gaming operator’s licence expired, Tatts Ltd ceased to have any cash settlable legal or equitable obligation to provide financial benefits.  Whether Tatts Ltd had a financial arrangement on and from 16 August 2012 turns on whether, as at that date, Tatts Ltd had, under an arrangement, a cash settlable legal or equitable right to receive a financial benefit.  In the present case, this requires consideration of the precise nature of Tatts Ltd’s rights as at 16 August 2012 to determine whether Tatts Ltd could be said to have had, as at 16 August 2012, a “cash settlable legal or equitable right to receive a financial benefit” within the meaning of s 230-45(1).

102 If s 230-85(a) were not present, it might be said that Tatts Ltd did not have a “cash settlable legal or equitable right to receive a financial benefit” because its right to receive a payment (whether under s 3.4.33 of the 2003 Act or cl 7 of the 1995 Agreement) was subject to a condition which had not been satisfied or a proviso which applied.  In the case of s 3.4.33, the entitlement to payment was conditional on the three matters referred to in paragraphs (a), (b) and (c) of s 3.4.33(1) including, relevantly, in paragraph (b), that “the Commission grants a gaming operator’s licence to a person other than the former licensee, or a related entity of the former licensee”.  That condition had not been satisfied as at 16 August 2012; nor was it satisfied at any time during the following six months.  In the case of cl 7 of the 1995 Agreement, cl 7.2 (which may be referred to as a proviso) stated that “[n]o amount will be payable … if a new gaming operator’s licence is not issued to any person”.  That proviso operated to preclude any entitlement to payment arising as at 16 August 2012 and continued to operate in that sense throughout the six-month period following that date.  Accordingly, as at 16 August 2012, and throughout the following six months, no amount was payable under cl 7.

103 However, s 230-85(a) provides that, to avoid doubt, “a right is treated as a right for the purposes of this Division even if it is subject to a contingency”.  The appellant relies on that provision to contend that, notwithstanding the conditions in s 3.4.33(1) and the proviso in cl 7, Tatts Ltd had a “cash settlable legal or equitable right to receive a financial benefit”.  It was, the appellant contends, a right subject to a contingency.

104 In our opinion, a legal or equitable right is subject to a “contingency” for the purposes of s 230-85 if it is subject to a condition which may or may not be satisfied or a proviso which may or may not operate.  As Nourse J said in Inland Revenue Commissioners v Trustees of Sir John Aird’s Settlement [1982] 2 All ER 929 at 940 (judgment reversed on appeal but not on this point and cited with approval by French J in Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; (2006) 153 FCR 509 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. 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.

105 In the above passage, Nourse J referred to a situation where “there is no real possibility that [the relevant event] will not happen”.  In such a case, it is a “contingency without reality and substance and no contingency at all”.  The same may be said about the inverse situation, where there is no real possibility that the relevant event will happen.  In such a case, it is a contingency without reality and substance and no real contingency at all. A right that is subject to a condition that has no real possibility of being satisfied is not a right that is subject to a “contingency” within the meaning of s 230-85.  Likewise, a right that is subject to a proviso where there is no real possibility of the proviso not operating is not a right that is subject to a “contingency” within the meaning of the provision.

106 We will now examine each of the bases upon which the appellant contended that Tatts Ltd had a “cash settlable legal or equitable right to receive a financial benefit” (including by reference to s 230-85).

Statutory right to receive the terminal payment

107 The conditions which needed to be satisfied in order for Tatts Ltd to be entitled to be paid a terminal payment under s 3.4.33 of the 2003 Act were those set out in ss 3.4.33(1)(a) to (c) (which are cumulative).  For the right to payment to be a right subject to a “contingency” there needed to be a real possibility of the conditions being satisfied.

108 The real issue for present purposes concerns paragraph (b) rather than paragraph (a) or (c).  Paragraphs (a) and (c) may be treated as having been satisfied.  However, as noted above, the conditions in paragraphs (a), (b) and (c) are cumulative.

109 The condition provided for in s 3.4.33(1)(b) required the Commission to grant a gaming operator’s licence to a person other than Tatts Ltd (or a related entity of Tatts Ltd), being a licence that commences within six months after the expiry of Tatts Ltd’s gaming operator’s licence.  As the Court of Appeal held, and the High Court confirmed, s 3.4.33(1)(b) required the Commission to grant a licence under Div 3 of Pt 4 of Ch 3 of the 2003 Act to a person other than Tatts Ltd (or its related entity).

110 As at 16 August 2012, the Commission did not have power to grant a licence under Div 3 of Pt 4 of Ch 3 of the 2003 Act to anyone.  As at 16 August 2012, s 3.4.3 relevantly provided that Pt 4 of Ch 3 did not authorise the grant of any further gaming operator’s licence.  As at 16 August 2012, the condition provided for in s 3.4.33(1)(b) was not capable of being satisfied under the law as enacted and had no real possibility of being satisfied.

111 For a gaming operator’s licence to be granted (to anyone), the Victorian Parliament would have needed to pass legislation to not only make amendments to the new regulatory regime it had enacted in 2009, but to revert to the terms of the former duopoly which it had abolished and to reinstate the issue of gaming operator’s licences under Div 3 of Pt 4 of Ch 3 of the 2003 Act.  There was no real possibility of this occurring.

112 A person does not have a right to receive a financial benefit that is subject to a “contingency” for the purposes of the relevant provisions merely because it is theoretically possible that in the future a person might come to acquire a right to receive a financial benefit.  Where the right is subject to a condition relating to a legislative scheme (here, the issue of a new gaming operator’s licence under Div 3 of Pt 4 of Ch 3 of the 2003 Act), and the legislative scheme as enacted forecloses the possibility of that condition being satisfied (here, because the legislation had been amended to prohibit the issue of any new gaming operator’s licence under Div 3 of Pt 4 of Ch 3 of the 2003 Act), it cannot be said that the right to receive the financial benefit is subject to a “contingency” for the purposes of s 230-85.

113 The meaning of “gaming operator’s licence” in s 3.4.33(1)(b) as confirmed by the High Court meant that the enactment of s 3.4.3 in 2009 had the effect of depriving the Tatts Trustees (and Tatts Ltd as successor) of any right to payment which they had previously enjoyed under s 3.4.33.  The effect of the amendments made in 2009 was that, from that time, it was no longer possible to satisfy the condition on which the right to payment under s 3.4.33 depended.  From the time of those amendments, the possibility of the condition being satisfied did not exist in any real sense.  The Tatts Trustees’ rights to compensation were “emasculated” (adopting the phraseology of the Victorian Court of Appeal at [65]).

114 For these reasons, Tatts Ltd did not have, as at 16 August 2012 (or at any time during the following six-month period), pursuant to s 3.4.33 of the 2003 Act, a “cash settlable legal or equitable right to receive a financial benefit” within the meaning of s 230-45(1), even taking into account s 230-85(a).

Contractual right to receive the terminal payment

115 The 1995 Agreement (as amended) as it stood at 16 August 2012, by its terms provided that the Tatts Trustees “shall be entitled” to be paid an amount of money “as compensation” if the Tatts Trustees’ gaming operator’s licence expires without a new gaming operator’s licence having issued to the Tatts Trustees or a related entity of the Tatts Trustees (cl 7.1), but also provided that no amount would be payable if a new gaming operator’s licence is not issued to any person (cl 7.2).

116 The High Court held that, properly construed, cl 7 of the 1995 Agreement (as amended), in referring to a new gaming operator’s licence, was referring to a licence issued under Pt 3 of the 1991 Act as it might be amended, re-enacted or replaced from time to time: Tatts HCA at [51] and [75].  The High Court recognised (at [31]) that s 3.4.2 in Pt 4 of Ch 3 of the 2003 Act restated the authority conferred by a gaming operator’s licence in substantially the same terms as s 14 of the 1991 Act.  The High Court also recognised that the authority conferred by a gaming machine entitlement was more limited: Tatts HCA at [73].

117 As at 16 August 2012, Tatts Ltd did not have a “cash settlable legal or equitable right to receive a financial benefit” pursuant to the terms of cl 7 of the 1995 Agreement (including by reference to s 230-85).  That is because, as at 16 August 2012 (and during the next six months), no amount could or would be payable because no new gaming operator’s licence under Pt 3 of the 1991 Act or Div 3 of Pt 4 of Ch 3 of the 2003 Act could or would be issued.  As at 16 August 2012, s 3.4.3 of the 2003 Act prohibited the issue of a new gaming operator’s licence to anyone.

118 As at 16 August 2012 (and during the subsequent six months), Tatts Ltd did not have a legal or equitable right to be paid an amount that was subject to a “contingency” within the meaning of s 230-85.  The proviso in cl 7.2 of the 1995 Agreement operated to preclude any entitlement to payment arising.  A theoretical possibility that the Victorian Parliament might repeal s 3.4.3, reinstate the former duopoly on the same terms as it previously existed and issue gaming operator’s licences did not result in Tatts Ltd having a legal or equitable right to receive an amount that was subject to a contingency.  There was no real possibility of Tatts Ltd becoming entitled to receive an amount pursuant to cl 7 of the 1995 Agreement.

119 The appellant’s contention that the actions of the State in 2008 and 2009, and in particular the enactment of s 3.4.3 could not be taken into account because those actions did not form part of the “financial arrangement” and did not form part of the broader “arrangement” is not accepted.  First, the submission mistakenly relied upon the High Court’s decision in Australian Competition and Consumer Commission v J Hutchinson Pty Ltd [2025] HCA 10; (2025) 99 ALJR 695. In that case, the High Court observed (at 19) that:

The collocation of the words “contract, arrangement or understanding” in Pt IV of the [Competition and Consumer Act 2010 (Cth)] refers to “a spectrum of consensual dealings” between parties in which the words “arrangement” and “understanding” each describe something less than a legally binding contract …

(Citations omitted.)

The definition of “arrangement” in s 995-1 is broader.  It refers to any undertaking and any promise.  A promise or an undertaking may be unilateral, such as a promise given under deed (cf Commissioner of Taxation v Star City Pty Ltd [2009] FCAFC 19; (2009) 175 FCR 39 at 205).

120 Second, the appellant’s submission proceeds on the premise that Tatts Ltd could be said to have had legal rights under cl 7 of the 1995 Agreement that were somehow unaffected by subsequent legislative changes made to the regulation of the gaming industry.  That submission is inconsistent with the reasoning of the High Court in Tatts HCA. As the High Court explained, in order for an amount to be payable under cl 7 of the 1995 Agreement, a new gaming operator’s licence would need to be issued.  On its proper construction, the phrase “new gaming operator’s licence” in cl 7 of the 1995 Agreement meant “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)”: Tatts HCA at 51.  In other words, based on the reasoning of the High Court, the 1995 Agreement must be construed as having envisaged that the terms of the legislation could change.  The “arrangement” between the State and the Tatts Trustees was always subject to legislative change to the regulatory framework governing the gaming industry.

121 It follows that the fact that neither Tatts Ltd nor the Tatts Trustees ever assented to the State’s unilateral actions is irrelevant to the construction of the terms of the “arrangement” and is irrelevant to the determination of whether Tatts Ltd had a financial arrangement.  Tatts Ltd never had rights or entitlements that were not subject to the terms of the State legislation.

122 It is true that clause 7 of the 1995 Agreement was not removed or deleted.  But that is not to say that, as at midnight on 15 August 2012, the clause conferred a right on Tatts Ltd that was subject to a “contingency”.  The effect of the amendments made in 2009 was that the proviso to Tatts Ltd’s right to a terminal payment operated and there was no real possibility of it not operating.  From 2009, the right was neutered and “emasculated” (adopting the language of the Victorian Court of Appeal at [65]).  The fact that, as at midnight on 15 August 2012, it was theoretically possible for the law to change in the future in a way which reversed the changes made in 2009 and reinstated the earlier legislative terms did not result in Tatts Ltd having a right subject to a “contingency” as at midnight on 15 August 2012.

123 The appellant’s submission relies upon the following sentence in Tatts VSCA at [59]:

[T]he relevant provisions of the legislation evince a calculated legislative intent to prevent the change in regime being seen or treated as an alteration to the rights constitutive of [Tatts Ltd’s] gaming operator’s licence.

124 The sentence cannot be read out of context.  The Court of Appeal was there referring to the object of the “express preservation of Part 4 of Chapter 3 ‘with respect to’ [Tatts Ltd’s] licence”.  The Court of Appeal then explained that s 3.4.3 also “demonstrate[d] a legislative determination to eschew any idea of Tatts [Ltd] once having had a right to payment which the change in regime has now denied it”.  The Court of Appeal “discern[ed] a legislative resolve to repel any notion that Tatts [Ltd] may have had a legitimate expectation of compensation” and the statutory purpose was “to make clear that Tatts [Ltd] 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 [Ltd], and that, since none can now issue, Tatts [Ltd] now has nothing ” (emphasis added).

125 From the time that the State put an end to the duopoly in 2009, Tatts Ltd’s entitlement to a terminal payment under cl 7 could not and would not arise.  From that point, Tatts Ltd ceased to have a right to a payment that was subject to a “contingency”.  At the time Tatts Ltd’s licence expired in 2012, the proviso in cl 7.2 to the right to payment operated and there was no real possibility of it not operating.

126 Whether or not the 1995 Agreement had an operation independent of statute (a proposition doubted by the High Court in Tatts HCA at [78]-[81]), as at 16 August 2012, cl 7 of the 1995 Agreement did not confer on Tatts Ltd a right to receive an amount that was subject to a “contingency”.  As at 16 August 2012, Tatts Ltd was to receive nothing because the proviso in cl 7.2 operated to preclude any entitlement to payment arising and would continue to operate.

127 For these reasons, Tatts Ltd did not have, as at 16 August 2012 (or at any time during the following six-month period), pursuant to cl 7 of the 1995 Agreement, a “cash settlable legal or equitable right to receive a financial benefit” within the meaning of s 230-45(1), even taking into account s 230-85(a).

128 We note for completeness that the appellant contended in oral submissions that the phrase “subject to a contingency” in s 230-85 needed to be construed in light of Subdiv 230-B which provides for one of the methods that may apply to the recognition of gains and losses from a financial arrangement.  Subdivision 230-B applies the “accruals method” to determine the amount and timing of gains and losses.  That method is one of seven methods provided for in Div 230: s 230-40.  The accruals method applies only if the gain or loss is “sufficiently certain” at the time the taxpayer starts to have the arrangement: s 230-100(2).  The concept of a gain or loss being “sufficiently certain” is elaborated upon in s 230-115.  Sections 230-115(2) and (3) provide:

(2)    A * financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if:

(a)    it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the * financial arrangement for the rest of its life); and

(b)    at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy.

(3)    In applying subsection (2) to the * financial benefit:

(a)    you must have regard to:

(i)    the terms and conditions of the * financial arrangement; and

(ii)    accepted pricing and valuation techniques; and

(iii)    the economic or commercial substance and effect of the arrangement; and

(iv)    the contingencies that attach to the other financial benefits that are to be provided or received under the arrangement; and

(b)    you must treat the financial benefit as if it were not contingent if it is appropriate to do so having regard to the contingencies that attach to the other financial benefits that are to be received or provided under the arrangement.

129 We do not consider that there is anything in Subdiv 230-B which affects the conclusions set out above.  Subdivision 230-B sets out rules for the calculation of gains and losses from a financial arrangement on an accruals basis.  It is not the only method which applies to gains and losses from a financial arrangement: s 230-40(1).  As s 230-85 makes clear, a financial arrangement can include a right that is subject to a contingency.  If a gain or loss is not “sufficiently certain”, the realisation method applies. The fact that Subdiv 230-B contains rules to apply the accruals method to a right that is subject to a contingency based on an evaluation of whether a gain or loss from a financial benefit is “sufficiently certain” to be received does not assist in the construction of ss 230-45 or 230-85 of the ITAA 1997 and does not support a conclusion that a financial arrangement exists where there is no real possibility of a condition to payment being satisfied.  Sections 230-45 and 230-85 are sections of general application across the entirety of Div 230.

Remaining grounds of appeal and notice of contention

130 Given our conclusion that Tatts Ltd did not have a financial arrangement upon the expiry of its gaming operator’s licence, it is unnecessary to deal with the remaining grounds of appeal or the Commissioner’s notice of contention as they are all premised on the assumption that Tatts Ltd did have a financial arrangement.

Disposition

131 The appeal is to be dismissed, with costs.

| I certify that the preceding one hundred and thirty-one (131) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Moshinsky, Hespe and Button. |
Associate:

Dated: 26 March 2026

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