Capital vs revenue

Jun 2021 3 Minutes

Mussalli v FCT – Another Capital vs Revenue Decision

The recent Full Federal Court case Mussalli v FCT [2021] FCAFC 71 decided that upfront payments to secure a rent reduction were on capital account and not deductible under section 8-1.

The facts of the case are briefly summarised below.

Mr. Mussali was the controlling mind of the Mussali Family Trust (the MFT) that operated seven McDonald’s restaurants on the NSW Central Coast. The rent for each restaurant comprised of a base amount and an additional amount based on a percentage of gross monthly sales.

MFT had the option to pay a reduced rent amount for the restaurant by paying an upfront payment. The upfront payment for each franchise was calculated based on the “agreed price of the restaurant” less the value of the equipment of the restaurant. The “agreed price of the restaurant” was based on a multiple of anticipated profit of that restaurant in a single year.

The MFT exercised this option in each case and paid approximately $10.5 million in upfront payments.

The ATO issued amended assessments for the relevant income years disallowing the upfront payments as deductions under section 8-1. An objection was made by the taxpayer, which was subsequently disallowed by the Commissioner.

The case was initially decided at the Federal Court where the MFT’s appeal against the ATO’s decision was dismissed. The taxpayer ultimately lodged an appeal at the Full Federal Court.

The Full Federal Court made the following key findings in relation to the upfront payments:

  • The payments were not made to secure the right to occupy the premises and they had no relationship with the period over which any benefit associated with them was enjoyed.
  • The purpose of the payments was to obtain a more profitable business structure rather than to pay rent upfront.
  • Upon renewal or extension of the leases, no further prepayments would be payable. Further, on termination or surrender of the lease, there would be no pro-rata repayment of the prepayments.
  • The prepayments would not necessarily lead to any reduction in expenditure on revenue account. The rent payable was based on a set base rent and a percentage of turnover. If the turnover of the relevant restaurants did not exceed certain amounts, the prepayments would not achieve a reduction in rent.

Based on these key findings, the Full Federal Court unanimously dismissed the taxpayer’s appeal and disallowed a deduction under section 8-1 for the upfront payments.


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