Star City Pty Limited v Commissioner of Taxation

Explanatory Memorandum to the Tax Law Improvement Bill 1996 (Cth)

Administration of Papua and New Guinea v Daera (1973) 130 CLR 353 applied Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 followed Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 cited Calder v Commissioner of Taxation (2005) 226 ALR 643 followed Cape Flattery Silica Mines Pty Ltd v FCT (1997) 36 ATR 360 followed Chacmol Holdings Pty Ltd v Handberg (2005) 215 ALR 748 followed City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 followed Cliffs International Inc v FCT (1979) 142 CLR 140 (Stephens J dissenting) approved Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 followed Commissioner of Taxation (Cth) v Broken Hill Pty Co Ltd (2000) 179 ALR 593 considered Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 applied Commissioner of Taxation (Cth) v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 considered Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 followed Darling Casino Ltd v New South Wales Casino Control Authority (1997) 191 CLR 602 cited Duke of Westminster's Case [1936] AC 1 cited EA Greenwood (NSW) Pty Ltd v FCT 80 ATC 4039; (1980) 10 ATR 571 followed Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (No 2) (2005) 218 CLR 471 followed Esso Australia Resources Ltd v FCT (1998) 84 FCR 541 cited Farmer v Honan (1919) 26 CLR 183 considered FCT v Consolidated Press Holdings Ltd (2001) 207 CLR 235 explained FCT v Cooling (1990) 22 FCR 42 followed FCT v Mochkin (2003) 127 FCR 185 followed FCT v Payne (2001) 202 CLR 93 discussed FCT v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 discussed Federal Commissioner of Taxation v Cooper Brookes (Wollongong) Pty Ltd (1979) 10 ATR 128 cited Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 applied Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 applied Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 considered Federal Commissioner of Taxation v Spotless Services Ltd & Anor (1996) 186 CLR 404 followed Frank Lyon Co v United States (1978) 435 US 561 referred to GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 considered Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 followed JB Chandler Investment Company Ltd v Federal Commissioner of Taxation (1993) 47 FCR 588 considered John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 followed Jupiters Ltd v Deputy Commissioner of Taxation (2001) 48 ATR 511 distinguished Jupiters Ltd v Deputy Commissioner of Taxation (2002) 118 FCR 163 cited Krampel Newman Partners Pty Ltd v Commissioner of Taxation (2003) 126 FCR 561 followed L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 applied Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 followed Ocelota Pty Ltd v Water Administration Ministerial Corp [2000] NSWSC 370 cited Payne; Fletcher v Federal Commissioner of Taxation (1993) 173 CLR 1 followed Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 followed Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 followed Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 followed Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 327 considered Starr v Commissioner of Taxation 2007 ATC 4080 cited Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 applied Vincent v FCT (2002) 124 FCR 350 followed W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 cited Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 applied Walters v Commissioner of Taxation [2007] FCA 1270 followed Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 followed

STAR CITY PTY LIMITED (ABN 25 060 510 410) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 915 OF 2005 STAR CITY PTY LIMITED (ABN 25 060 510 410) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 916 OF 2005 STAR CITY PTY LIMITED (ABN 25 060 510 410) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 917 OF 2005 STAR CITY PTY LIMITED (ABN 25 060 510 410) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 918 OF 2005 STAR CITY PTY LIMITED (ABN 25 060 510 410) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 919 OF 2005 STAR CITY PTY LIMITED (ABN 25 060 510 410) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VID 920 OF 2005

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: GORDON J DATE OF ORDER: 16 NOVEMBER 2007

1. The appeal be allowed.
2. The respondent's decision of 17 June 2005 to disallow the applicant's objection dated 3 February 2004 to its assessment to tax in the year of income ended 31 December 1996 (in substitution for the year ended 30 June 1997) served by notice dated 16 December 2003 is set aside and in lieu thereof it is ordered that the objection be allowed in full and the assessment be amended accordingly.
3. The respondent pay the applicant's costs of the proceeding including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: GORDON J DATE OF ORDER: 16 NOVEMBER 2007

1. The appeal be allowed.
2. The respondent's decision of 17 June 2005 to disallow the applicant's objection dated 13 February 2004 to its assessment to tax in the year of income ended dated 30 June 2000 served by notice dated 22 December 2003 is set aside and in lieu thereof it is ordered that the objection be allowed in full and the assessment be amended accordingly.
3. The respondent pay the applicant's costs of the proceedings including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: GORDON J DATE OF ORDER: 16 NOVEMBER 2007

1. The appeal be allowed.
2. The respondent's decision of 17 June 2005 to disallow the applicant's objection dated 13 February 2004 to its assessment to tax in the year of income ended 30 June 2001 served by notice dated 22 December 2003 is set aside and in lieu thereof it is ordered that the objection be allowed in full and the assessment be amended accordingly.
3. The respondent pay the applicant's costs of the proceeding including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: GORDON J DATE OF ORDER: 16 NOVEMBER 2007

1. The appeal be allowed.
2. The respondent's decision of 17 June 2005 to disallow the applicant's objection dated 13 February 2004 to its assessment to tax in the year of income ended 30 June 2002 served by notice dated 24 December 2003 is set aside and in lieu thereof it is ordered that the objection be allowed in full and the assessment be amended accordingly.
3. The respondent pay the applicant's costs of the proceeding including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: GORDON J DATE OF ORDER: 16 NOVEMBER 2007

1. The appeal be allowed
2. The respondent's decision of 17 June 2005 to disallow the applicant's objection dated 13 February 2004 to its assessment of penalties for having a tax shortfall amount in the year of income ended 30 June 2001 served by notice dated 30 December 2003 is set aside and in lieu thereof it is ordered that the objection be allowed in full and the assessment be amended accordingly.
3. The respondent pay the applicant's costs of the proceeding including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGE: GORDON J DATE OF ORDER: 16 NOVEMBER 2007

1. The appeal be allowed.
2. The respondent's decision of 17 June 2005 to disallow the applicant's objection dated 13 February 2004 to its assessment of penalties for having a tax shortfall amount in the year of income ended 30 June 2002 served by notice dated 30 December 2003 is set aside and in lieu thereof it is ordered that the objection be allowed in full and the assessment be amended accordingly.
3. The respondent pay the applicant's costs of the proceeding including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

INDEX CONTENT PARA A Introduction [1] - [7] B The Bases on which the Litigation was Conducted [8] - [11] C The Contract Issue - The Prepayment was an obligation of Star City [12] (1) The Statutory Framework [13] - [18] (2) The Transaction Documents [19] - [20] (a) Casino Licence [21] [22] (b) Casino Duty and Community Benefit Levy Agreement [23] - [25] (c) Casino Exclusivity Agreement [26] - [28] (d) Construction Lease [29] - [31] (e) Occupational Licence Agreement [32] - [38] (f) Continuity and Co-operation Agreement [39] - [40] (g) Facility Agreement [41] (h) Freehold Lease [42] - [44] (3) Analysis [45] - [70] D The Taxation Issues (1) The Prepayment was an outgoing incurred by Star City [71] - [80] (2) The Capital / Revenue Issue [81] - [116] (3) Part IVA Issue [117] - [154] (4) Penalties [155] - [167] E Conclusion and Orders [168]

VICTORIA DISTRICT REGISTRY VID 915 - 920 OF 2005

BETWEEN: STAR CITY PTY LIMITED (ABN 25 060 510 410)

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

A. INTRODUCTION 1 On 14 December 1994, the New South Wales Casino Control Authority ("CCA") granted a casino licence to the applicant, Star City Pty Limited, previously known as Sydney Harbour Casino Pty Limited ("Star City"). Star City is a wholly owned subsidiary of Sydney Harbour Casino Holdings Pty Ltd ("Holdings"). 2 On the same date, the CCA granted a lease ("the Construction Lease"), containing an agreement to grant a further lease ("the Freehold Lease"), to Sydney Harbour Casino Properties Pty Limited ("SHCP") of Crown land at Pyrmont Bay in Sydney Harbour ("the Premises") for a cumulative term of 99 years. SHCP is also a wholly owned subsidiary of Holdings. The Construction Lease and the Freehold Lease provided that the rent for the first 12 years of that total term was $15 million per annum and thereafter $250,000 per annum. 3 It was a further term of the leases that the rent for the first 12 years would be prepaid by a payment of $120 million within 21 days of the commencement of the Construction Lease ("the Prepayment"). The Construction Lease commenced on 14 December 1994. The Prepayment was paid by Holdings to the CCA on 15 December 1994. 4 Also on 14 December 1994, SHCP and Star City entered into an Occupational Licence Agreement - Permanent Site ("the Occupational Licence Agreement") under which SHCP granted Star City the non-exclusive licence to occupy and use the Premises. 5 Star City claimed the Prepayment as a deduction under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") and / or s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") and s 82KZM of the 1936 Act as follows: Period Amount of Deduction ($) Year ending 30 June 1995 $6,509,589 Year ending 30 June 1996 $12,026,287 1 July 1996 to 31 December 1996 $6,046,002 1 January 1997 to 31 December 1997 $12,000,000 1 January 1998 to 31 December 1998 $12,000,000 1 January 1999 to 30 June 2000 $17,983,562 Year ending 30 June 2001 $12,000,000 Year ending 30 June 2002 $12,000,000

The Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner") disallowed the deductions and imposed penalties. 6 There are four issues: (1) whether the Prepayment was an obligation of Star City or, as the Commissioner contended, an obligation of SHCP ("the Contract Issue"); (2) whether the Prepayment was an outgoing incurred by Star City in gaining or producing assessable income under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act ("the Incurrence Issue")? The answer to the Incurrence Issue depends, to a significant extent, on the answer to the Contract Issue. (3) if yes to (2), whether the Prepayment was an outgoing of capital or of a capital nature (the "Capital / Revenue Issue")? (4) if the Prepayment was an outgoing incurred by Star City in gaining or producing assessable income and was not of capital or of a capital nature, did Part IVA of the 1936 Act operate to disallow the deduction ("the Part IVA Issue")? 7 For the reasons that follow, I would allow each of the appeals. The Prepayment is deductible under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act. Further, the Prepayment was not an outgoing of capital or of a capital nature and Part IVA did not apply to otherwise disallow the deductibility of the Prepayment. The Commissioner concedes that that if the Prepayment is deductible then Star City was entitled (as it did) to claim a proportion of the deduction in each year of income in accordance with the formula in s 82KZM of the 1936 Act: see [5] above.

B. THE BASES ON WHICH THE LITIGATION WAS CONDUCTED 8 Before proceeding to address each of the substantive issues, it is necessary to address the bases on which the litigation was conducted.

The documentary material 9 At the hearing, subject to some minor objections, a court book comprising 5 volumes of documents (approximately 2000 pages) was sought to be tendered by the parties by consent. I rejected the tender on that basis and required Star City and the Commissioner to address the question of the admissibility of each document by reference to the issues in the case: see s 55 of the Evidence Act 1995 (Cth). I did so because an unfortunate practice has developed of seeking to tender, often by consent, a court book (usually comprising a number of volumes) which, out of an abundance of caution on the part of the legal advisers, includes copies of a large number of documents without any apparent consideration of questions of admissibility. Documents are not admissible on that basis. Each issue needs to be considered separately. Material admissible on one issue may be inadmissible on another issue. There are no short cuts. Seeking to have the trial judge at the end of a trial work through a court book comprising a number of volumes to determine which document or documents are relevant to which issue or issues is not only unsatisfactory but inevitably leads to submissions being made based upon material which is inadmissible. The approach adopted by the parties necessarily results in these reasons for decision being longer and more detailed than they otherwise might be. I address the relevance (and admissibility) of particular documents in the context of each of the issues. 10 The Commissioner's submissions referred to and placed reliance upon some of the events that took place over a period of months in the course of the New South Wales ("NSW") Government seeking applicants to bid for the right to conduct a casino in NSW and ultimately awarding that right to the group of investors forming the Star City Consortium ("the Bid Process"). Extracting part of the Bid Process without recognising the consequences of so doing necessarily means that any assessment based on part of the Bid Process is or is very likely to be incomplete and inaccurate, yet that is what the Commissioner would have the Court do. The documents referred to by the Commissioner (and the facts said to be established by them) are incomplete and inaccurate because they were merely part of the Bid Process and, even then, a disconnected and disjointed part. The conclusions or inferences the Commissioner would have the Court draw were not open because, when viewed objectively, the Bid Process was very different from that which the Commissioner submitted it to be. The documents and facts referred to by the Commissioner had been taken out of context and, viewed objectively, did not lead to the conclusions contended for by the Commissioner. To understand the Bid Process and, in particular, the Prepayment, it is necessary in this case to have regard to the whole of the Bid Process. That is a lengthy task. The Bid Process was spread over some 9 months and involved complicated arrangements. Accordingly, I have taken the unusual step of including a summary of the Bid Process as I find it to have occurred as an annexure to these reasons rather than setting it out in this part of the reasons for decision. I do so because, as I have said, it is necessary to understand the whole of the Bid Process but to include the lengthy description of that process at this point would distract attention from the development of the reasoning that is ultimately determinative of the case.

The Prepayment 11 Both parties conducted the litigation on the basis that cl 2.1 of the Construction Lease and cl 2.1 of the Freehold Lease required SHCP to make the Prepayment which, without mutual agreement, was non-refundable. That is to say, the litigation was conducted on the basis that the agreements made between the CCA and SHCP left no room for the operation of s 144 of the Conveyancing Act 1919 (NSW). It is unnecessary therefore to examine issues of the kind considered by Hodgson CJ in Ocelota Pty Ltd v Water Administration Ministerial Corp [2000] NSWSC 370 and the authorities cited in [72] and [75] of that decision.

C. THE CONTRACT ISSUE: THE PREPAYMENT WAS AN OBLIGATION OF STAR CITY 12 On 14 December 1994, a suite of documents was signed or executed by Star City, SHCP, the CCA and the Treasurer of NSW ("the Transaction Documents"). Neither the identity of the parties to nor the express terms of the Transaction Documents are in dispute. Before identifying the Transaction Documents, it is necessary to understand the statutory framework in which they were executed.

(1) THE STATUTORY FRAMEWORK 13 In New South Wales, the conduct and playing of a game of chance or a game that is partly a game of chance and a game requiring skill and the use of gaming equipment is lawful when the game is conducted and the gaming equipment is provided in a casino by an operator that is the holder of a licence for that casino under the Casino Control Act 1992 (NSW) ("the Casino Control Act): see s 4(1) (read with s 3) of the Casino Control Act. In 1994, the Casino Control Act, so far as is relevant, contained the following provisions. 14 Part 2 of the Casino Control Act was headed "Licensing of Casino". It provided that only one casino licence could be in force at a particular time and a casino licence applied to one casino only: s 6. 15 The CCA was a statutory body created under the Casino Control Act whose objects "[were] to maintain and administer systems for the licensing, supervision and control of a casino" for stated purposes: ss 133 and 140 of the Casino Control Act. The CCA was not subject to the direction or control of the Minister except to the extent specifically provided for in ss 5, 7, 9 and 10 of the Casino Control Act. Section 5 may for present purposes be put to one side. 16 Under s 7, a Minister's direction to the CCA as to the permissible location for a casino was not permitted to specify a particular site unless the site was vested in the Crown: s 7(3). In the present case, the Premises were vested in the Crown. Under s 19, the boundaries of the casino were defined initially by being specified in the casino licence and could not extend beyond the boundaries of the location for which the casino licence was originally granted: ss 19(1) and 19(4). 17 The Casino Control Act permitted the CCA, at the direction of the Minister, to publicly invite expressions of interest for the establishment and operation of a casino (s 9) and for a casino licence (s 10). An application for a casino licence had to comply with specified requirements as to form and content: ss 10(4) and (5). A casino licence, once issued, conferred no right of property and was incapable of being assigned or mortgaged, charged or otherwise encumbered: s 21. 18 Part 8 of the Casino Control Act was headed "Casino Duty and Community Benefit Levy". A casino operator was liable for payment of any duty, levy or interest payable under Pt 8 in respect of the operator's casino licence and it was a condition of that licence that the operator had to pay those amounts: s 120. Sections 114 and 115 in Pt 8 of the Casino Control Act prescribed the duties and levies to be paid to the CCA. Section 114 imposed what was described as the 'Casino Duty'. Section 115 imposed a 'Community Benefit Levy'. Section 116 provided that any agreement or determination in relation to ss 114 and 115 was to be in writing and entered into by the Treasurer of NSW.

(2) THE TRANSACTION DOCUMENTS 19 The Transaction Documents included the following eight documents, all but two of which were executed on 14 December 1994: (1) the Casino Licence; (2) the Casino Duty and Community Benefit Levy Agreement; (3) the Casino Exclusivity Agreement; (4) the Construction Lease; (5) the Occupational Licence Agreement; (6) the Continuity and Co-operation Agreement; (7) the Facility Agreement, which was in fact executed on 22 April 1994; and (8) the Freehold Lease, which was in fact executed in 1997. 20 The Commissioner contends that none of these documents obliged Star City to make the Prepayment. However, an examination of the rights and obligations conferred and imposed on the parties to the Transaction Documents demonstrates that this view is in error. It is therefore necessary to refer to the Transaction Documents in some detail because it is only with an understanding of the rights and obligations of the parties to those documents that the Contract Issue can be resolved.

(a) Casino Licence 21 On 14 December 1994, pursuant to s 18 of the Casino Control Act, a casino licence was granted by the CCA to Star City "to operate the Casino [defined as the Temporary Site and the Permanent Site] for the period, at the location and on and subject to the conditions hereafter appearing" ("the Casino Licence"). The Casino Licence commenced on 14 December 1994 and was for 99 years: cl 3 read with cl 1.1. Consistent with s 21 of the Casino Control Act, cl 2 of the Casino Licence stated that it "[did] not confer any right of property and [was] incapable of being assigned, mortgaged, charged or otherwise encumbered." 22 Conditions attaching to the Casino Licence which were prescribed by the Casino Control Act were set out: see cll 5 and 7 to 16. One condition required Star City to "pay the amount of any duty, levy or interest payable under Part 8 of the [Casino Control] Act pursuant to section 120 [of the Casino Control Act]": cl 14.

(b) Casino Duty and Community Benefit Levy Agreement 23 As noted earlier (see [18]), the Casino Duty and the Community Benefit Levy were payable by a casino operator under Pt 8 of the Casino Control Act. On 14 December 1994, the Treasurer of NSW and Star City executed the Casino Duty and Community Benefit Levy Agreement. No other entity was a party to this agreement. 24 The recitals recorded: "A. Contemporaneously with execution of this Deed, the [CCA] granted the [Casino] Licence to [Star City]. B. Pursuant to section 120 of the [Casino Control] Act, it is a condition of [the Casino] Licence that [Star City] must pay any duty levy or interest payable under Part 8 of the [Casino Control] Act. C. Pursuant to section 114(2)(a) and section 115(2)(a) of the [Casino Control] Act, the Treasurer and [Star City] have reached agreement as to the amount of casino duty and amount of casino community benefit levy to be paid pursuant to Part 8 of the [Casino Control] Act and the times and manner … in which the same are due and payable. D. The casino duty payable pursuant to this Deed, during the period of 12 years commencing on the date upon which casino operations commence at the Temporary Casino, is payable in 3 forms: (a) a once only fixed amount, in consideration of the issue of the [Casino] Licence and the operation of the Casino Exclusivity Agreement; (b) weekly casino revenue duty payable in respect of the operation of the casino …; (c) a community benefit levy payable weekly as a percentage of Gross Revenue …" 25 The "once only fixed amount" referred to in Recital D(a) of the Agreement was called the 'Specified Payment Amount' which was defined to mean "the non-refundable lump sum casino duty referred to in clause 4 in the amount of $256,000,000". That amount was due and payable in full within 21 days of the issue of the Casino Licence: cl 4.2. Clause 4.3 stated that: "Once due and payable the Specified Payment Amount [was] not refundable in any circumstances and if any right to a refund or credit [arose] in the future in relation to the same[, Star City] waive[d] such right." The 'Specified Payment Amount' was paid by Holdings on 15 December 1994.

(c) Casino Exclusivity Agreement 26 The Casino Exclusivity Agreement was executed on 14 December 1994. The parties were the CCA and Star City. The Casino Exclusivity Agreement recorded that its execution was contemporaneous with the grant of the Casino Licence: recital A. 27 In general terms, cl 3 provided that in consideration of Star City entering into the 'Project Documents', the CCA acknowledged and agreed that the Minister had directed that the permanent site was a permissible location for the Casino and that Star City was permitted to conduct casino operations. The 'Project Documents' were defined by reference to the definition in a Compliance Deed executed on 22 April 1994 between the CCA and each of two short listed applicants for the Casino Licence to operate the Sydney Harbour Casino: cl 1.3 of the Casino Exclusivity Agreement. The Project Documents did not include the Casino Licence or the Occupational Licence Agreement. The other documents listed in [19] above were Project Documents. 28 Clause 5.1 of the Casino Exclusivity Agreement provided that if during the Exclusivity Period a 'Relevant Event' occurred, the CCA would pay to Star City an amount of damages. The Exclusivity Period was defined to mean 12 years and a 'Relevant Event' was defined to mean the grant of licence to a third party to operate another casino: cl 1.1.

(d) Construction Lease 29 The Construction Lease was executed on 14 December 1994. The lease was granted by the CCA to SHCP. It commenced on 14 December 1994. It terminated on the date the Freehold Lease commenced. Clause 2.1 was entitled "Rent" and addressed rental payment generally in the following terms: "(a) [SHCP] covenants with the [CCA] that during the Term [SHCP] will pay to the [CCA] … the Rent provided for in Schedule 1 hereto. (b) [SHCP] shall pay the Rent in the manner specified in Schedule 1 PROVIDED HOWEVER that if the [CCA] shall exercise any right to require payment in one or more instalments then the [CCA] and [SHCP] agree that the provisions of section 144 of the Conveyancing Act 1919 shall not apply. (c) The [CCA] and [SHCP] agree that notwithstanding any other terms of this Lease the one and only circumstance where Rent paid in advance is likely to be refunded is if the Parties mutually agree to terminate this Lease and that Rent paid in advance shall be refunded. (d) If Rent shall be paid in advance beyond the termination date of this Lease and [SHCP] shall be entitled to the [Freehold Lease] then Rent paid beyond the Term of this Lease shall be applied to the Rent payable under the [Freehold Lease] in accordance with Part 16 and Schedule 1 to the [annexure to the Casino Operations Agreement] Lease Terms shall likewise be completed." (Emphasis added.) 30 Schedule 1 provided specifically for the Prepayment in the following terms: "1. The Rent payable for the twelve years following the Lease Commencement Date as defined in this Lease (which period is referred to as the "Primary Rental Period"), which will be payable under this Lease and the [Freehold Lease], will be $15,000,000 per annum. 2. Notwithstanding clause 1, the Parties have agreed that the rental payable during the Primary Rental Period shall be prepaid as set out in clause 3. 3. On or before 12 noon (Sydney time) on the date which is 21 days after Lease Commencement Date, [SHCP] shall pay to the [CCA] an amount of $120,000,000 in immediately available and cleared funds in prepayment of the rental payable during the Primary Rental Period." 31 Schedule 1 to the draft Freehold Lease (the draft Freehold Lease was attached to the Construction Lease as an exhibit) provided: "1. The rental payable will be at the rate of $15,000,000 per annum for the period of … being the balance of the Primary Rental Period. 2. Notwithstanding clause 1, provided that the payment referred to in clause 2 of Schedule 1 to the Permanent Site Lease (Construction Lease) has been made, no further rental shall be payable in respect of the Primary Rental Period or any part thereof. 3. In respect of the balance of the Term, rental will be payable at the rate of $250,000 per annum."

(e) Occupational Licence Agreement 32 SHCP and Star City executed the Occupational Licence Agreement on 14 December 1994. It appears that there was, in fact, an Occupational Licence Agreement in relation to the Temporary Site and a separate Occupational Licence Agreement in relation to the Permanent Site. The title and terms of the Occupational Licence Agreement in relation to the Permanent Site which was tendered in evidence support such a view. Neither the existence of an Occupational Licence Agreement in relation to the Temporary Site, nor (if it did exist) its terms, was the subject of direct evidence or submission. Accordingly, the analysis is limited to the terms of the Occupational Licence Agreement in relation to the Permanent Site. 33 The Recitals to that Agreement recorded that SHCP had entered into the Construction Lease (recital A) and that, on the Permanent Casino being ready to commence business, the Freehold Lease would come into existence between SHCP and the CCA (recital B). The recitals recorded that SHCP and Star City agreed that Star City was or would be entitled to be the licensee of the Permanent Site on the terms and conditions set out in the Occupational Licence Agreement. 34 Clause 2.1(a) of the Occupational Licence Agreement entitled "Grant of Licence" provided that: "SHCP grant[ed] to [Star City] and [Star City] accept[ed] from SHCP a licence granting [Star City] a non-exclusive right to occupy the Permanent Site for the Term subject to the obligations and provisions set out in this Agreement." 35 The "Term" was defined in cl 3.1 to: "commence on and from the date that [Star City] is entitled to occupy the Permanent Site to enable [Star City] to comply with its pre-opening services as set out in the Casino Complex Management Agreement and will continue for the term of the Freehold Lease." 36 The Licence Fee was $1.00 per annum: cl 4.1. The Occupational Licence Agreement provided that the licence granted to Star City "under this Agreement" would terminate if the Casino Licence was cancelled or surrendered or the Construction Lease or the Freehold Lease was terminated: cl 7.1. 37 In addition to the grant of the licence, cl 5 of the Occupational Licence Agreement entitled "Obligations of [Star City]" provided: "5.1 [Star City] will ensure that (to the extent to which [Star City] is capable), SHCP does not breach any term or provisions of any agreement entered into with the Lessor of the Permanent Site, or any agreement with the [CCA] relating to the Permanent Site or the operation of the Casino Complex or the Casino Licence. Without limiting the foregoing, [Star City] will not do any act, matter or thing or omit to do any act, matter or thing whereby the Lease or the Casino Licence are liable to be terminated, cancelled, suspended or liable to disciplinary action under Section 23 of the [Casino Control] Act or adversely affected in any manner. 5.2 [Star City] will pay and be responsible to ensure payment of all rent, outgoings, insurance premiums and payments for services that may be imposed on it under the terms of the Construction Lease or Freehold Lease. [Star City] will provide such evidence as SHCP shall reasonably require of receipt of payment of each of these outgoings seven (7) days prior to the last date for payment of the same. 5.3 [Star City] will indemnify SHCP for any claims, actions, demands, losses, damages, costs and expenses for which SHCP is or may be liable or does or may suffer as a result of [Star City] not complying with its obligations under Clauses 5.1 or 5.2." (Emphasis added.) 38 Clauses 6.1 and 6.2 of the Occupational Licence Agreement imposed mutual obligations on SHCP consistent with the obligations imposed on Star City under cl 5.1 and 5.3. The terms of this agreement are considered in detail in Section C(3) below entitled "Analysis".

(f) Continuity and Co-operation Agreement 39 The Continuity and Co-operation Agreement was executed on 14 December 1994. The parties were the CCA, Star City, SHCP, Holdings and the Commonwealth Bank of Australia ("the Bank"). 40 The Continuity and Co-operation Agreement provided, in effect, that if another casino licence were to be issued to a party other than the Star City Consortium during the first 12 years of the Casino Licence, the amount payable to Star City under the Continuity and Co-operation Agreement by the CCA in consequence of the issue of that other licence would be applied towards the amount lent by the Bank to the Star City Consortium. The amount lent by the Bank was described as "Secured Moneys": see cl 14A of Continuity and Co-operation Agreement. The term "Secured Moneys" had the same meaning as in the Facility Agreement: cl 1.1 of the Continuity and Co-operation Agreement.

(g) Facility Agreement 41 The Facility Agreement was in fact executed on 22 April 1994 (as part of the Compliance Deed) and concerned the Star City Consortium's financing for the acquisition of the Casino Licence and development of the Premises. The Facility Agreement defined the term "Secured Moneys" to mean: "all amounts which at any time for any reason or circumstance in connection with this Agreement, any other Finance Document or any transaction contemplated by this Agreement or any other Finance Document, whether at law, in equity, under statute or otherwise: (a) are payable, are owing but not currently payable, are contingently owing, or remain unpaid by the Borrower to the Agent, the Participants, the Working Capital Facility Provider or any of them …" The Borrower was Star City, SHCP and Holdings.

(h) Freehold Lease 42 The Freehold Lease was executed in 1997. The relevant clauses remained cll 2.1 and 2.7 and Sch I. Clauses 2.1 and 2.7 provided: "2.1 Rent (a) [SHCP] covenants with the [CCA] that during the Term and any extension thereof and holding thereunder [SHCP] will pay to the [CCA] in Sydney free of exchange and all deductions and without demand having been made by the [CCA] therefor the Rent provided for in Schedule I hereto and varied in accordance with this Lease. (b) [SHCP] shall pay the amounts referred to in Clause 2.1(a) commencing on the Lease Commencement Date and thereafter on each anniversary of the Lease Commencement Date PROVIDED ALWAYS THAT if the [CCA] shall have made an election pursuant to Schedule 1 of the Permanent Site Construction Lease to have the rent payable during the Primary Rental Period prepaid and [SHCP] shall have done so then for the balance of the Primary Rental Period no further rental shall be payable. The Parties agree that in respect of such payment the provisions of Section 144 of the Conveyancing Act 1919 shall not apply. Furthermore the parties agree that notwithstanding any other term of this Lease the one and only circumstance where rent paid in advance is liable to be refunded is if the Parties mutually agree to terminate this Lease and that rent paid in advance is to be refunded. (c) Nothing in this Clause 2.1 shall operate to limit the operation of Clause 4.1. … 2.7 Refund of Rent If at anytime the [CCA] and [SHCP] mutually agree to terminate the Lease then the [CCA] shall refund to [SHCP] an amount being the rent paid in advance for the period from the date of termination until the expiration of the Term and in such circumstances the amount to be refunded shall be calculated on the basis that the Rent is calculated on a daily basis." (Emphasis added.) 43 Schedule I provided that: "(a) The [CCA] and [SHCP] acknowledge that the [CCA] made an election contemplated by clause 2 of Schedule 1 to the Permanent Site Lease (Construction Lease) and [SHCP] made the payment contemplated by that clause. No rental shall be payable by [SHCP] under this Lease in respect of the balance of the Primary Rental Period; (b) In respect of the balance of the Term, rental will be payable at the rate of $250,000 per annum." (Emphasis added.) 44 The 'election' made by the CCA referred to in cl 2.1(b) and para (a) of Sch I to the Freehold Lease was made by the CCA. It was, however, contemplated by cl 2.1(b) of the Construction Lease and not cl 2 of Sch 1 to the Construction Lease: see [29] and [30] above.

(3) ANALYSIS 45 The Contract Issue ultimately turns on the proper construction of the Occupational Licence Agreement. The Commissioner contends that it did not impose any liability on Star City in respect of the Prepayment. Star City contends otherwise. 46 It was common ground that the obligation to pay rent, including the Prepayment, was imposed by the Construction and Freehold leases on SHCP, at least in the first instance. Star City was not a party to either the Construction Lease or the Freehold Lease. As noted above in [29], cl 2.1 of the Construction Lease provided in part: "(a) [SHCP] covenants with the [CCA] that during the Term [SHCP] will pay to the [CCA] … the Rent provided for in Schedule 1 hereto. (b) [SHCP] shall pay the Rent in the manner specified in Schedule 1 PROVIDED HOWEVER that if the [CCA] shall exercise any right to require payment in one or more instalments then the [CCA] and [SHCP] agree that the provisions of section 144 of the Conveyancing Act 1919 shall not apply." (Emphasis added.) 47 Also as noted above in [30], Sch 1 provided specifically for the Prepayment in the following terms: "1. The Rent payable for the twelve years following the Lease Commencement Date as defined in this Lease (which period is referred to as the "Primary Rental Period"), which will be payable under this Lease and the [Freehold Lease], will be $15,000,000 per annum. 2. Notwithstanding clause 1, the Parties have agreed that the rental payable during the Primary Rental Period shall be prepaid as set out in clause 3. 3. On or before 12 noon (Sydney time) on the date which is 21 days after Lease Commencement Date, [SHCP] shall pay to the [CCA] an amount of $120,000,000 in immediately available and cleared funds in prepayment of the rental payable during the Primary Rental Period." 48 Three things may be noted about the Construction Lease. First, the Prepayment was referable to both the Construction Lease and the Freehold Lease (see cl 2.1 and Sch 1). Secondly, it was the CCA's right (and only the CCA's right) to elect to receive the Prepayment in one or more instalments. The CCA in fact elected to receive the Prepayment by one instalment. Thirdly, as noted earlier, a draft of the Freehold Lease was an exhibit to the Construction Lease. Clauses 2.1 and 2.7 of the draft Freehold Lease addressed the question of the prepayment of rent. Clause 2.1 stated that SHCP would pay to the CCA the rent in Sch 1, provided that if SHCP had paid to the CCA the payment referred to in cl 2 of Sch 1 to the Construction Lease (the Prepayment), then no further rental was payable. The Prepayment was not refundable unless the parties mutually agreed to terminate the lease: cll 2.1(b) and 2.7. 49 The relevant provisions of the Freehold Lease as ultimately executed in 1997, cll 2.1 and 2.7, and Sch I, were in conformity with the Construction Lease and draft Freehold Lease provisions, also imposing an obligation to pay rent on SHCP and stating that the right to seek the first 12 years' rent as the Prepayment was at the election of the CCA: see [42]-[43] above. 50 Star City submitted that, notwithstanding the terms of the Construction and Freehold Leases, the obligation to pay rent was in fact on Star City and not SHCP due to cl 5 of the Occupational License Agreement, which as noted above (at [32]-[38]), provided: "5.1 [Star City] will ensure that (to the extent to which [Star City] is capable), SHCP does not breach any term or provisions of any agreement entered into with the Lessor of the Permanent Site, or any agreement with the [CCA] relating to the Permanent Site or the operation of the Casino Complex or the Casino Licence. Without limiting the foregoing, [Star City] will not do any act, matter or thing or omit to do any act, matter or thing whereby the Lease or the Casino Licence are liable to be terminated, cancelled, suspended or liable to disciplinary action under section 23 of the [Casino Control] Act or adversely affected in any manner. 5.2 [Star City] will pay and be responsible to ensure payment of all rent, outgoings, insurance premiums and payments for services that may be imposed on it under the terms of the Construction Lease or Freehold lease. [Star City] will provide such evidence as SHCP shall reasonably require of receipt of payment of each of these outgoings seven (7) days prior to the last date for payment of the same. 5.3 [Star City] will indemnify SHCP for any claims, actions, demands, losses, damages, costs and expenses for which SHCP is or may be liable or does or may suffer as a result of [Star City] not complying with its obligations under Clauses 5.1 or 5.2." (Emphasis added.) 51 The crux of the issue is the antecedent of the pronoun "it" in cl 5.2. The Commissioner submitted that "it" clearly refers to Star City, while Star City contended that "it," when viewed in context, clearly refers to SHCP. While the Commissioner's view may have superficial appeal, it must be rejected upon closer inspection. 52 Clause 5.2 cannot be considered in isolation. The whole of the Occupational Licence Agreement is relevant together with the other documents to which it refers and which were executed "contemporaneously": Chacmol Holdings Pty Ltd v Handberg (2005) 215 ALR 748 at [63] - [78] (per North and Dowsett JJ) (collecting and discussing authority for the proposition that contemporaneously executed contracts forming part of the same transaction should be construed as one instrument). It was not suggested that anything turns on the order in which documents were executed or that "contemporaneously" means anything more precise than "bearing the same date". The other documents fitting this description of being executed "contemporaneously" include the documents listed in [19] above as having been executed on 14 December 1994. Further, construction of an agreement as a whole necessarily involves giving effect to each part of it in relation to all other parts of it: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (per Gibbs J) and Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [15]-[16]. 53 Applying those principles to cl 5.2 of the Occupational Licence Agreement, I reject the Commissioner's construction of cl 5.2. It is inconsistent with the terms of the Occupational Licence Agreement read as a whole and the other agreements executed contemporaneously, lacks commercial reality and, no less importantly, would leave cl 5.2 of the Occupational Licence Agreement with no work to do. 54 First, as noted, Star City was not a party to either the Construction Lease or the Freehold Lease. Each lease was granted by the CCA to SHCP. It was not in dispute that the lease of the Premises was granted to SHCP, and not Star City, at the insistence of the lender, the Bank, which required the lease to be held by a company other than the holder of the Casino Licence. The Bank required this because the Casino Licence, by its terms, conferred no proprietary rights in Star City (see [21] above) and thus no security could be taken over the Casino Licence. As a result, the income earning entity (the holder of the Casino Licence) was not the entity that held the lease. 55 The Occupational Licence Agreement entered into by Star City (the holder of the Casino Licence) and SHCP (the holder of the lease) was the method by which two issues were resolved - to permit Star City to occupy the Premises and, at the same time, to be responsible for the costs attached to the Lease. The Occupational Licence Agreement was necessary. Without it, Star City was not entitled to occupy the Premises to conduct the casino. Without being responsible for the costs attached to the Lease, Star City would have been generating substantial revenues but occupying the Premises for $1.00 per annum: see Occupational Licensing Agreement cl 4.1 (reciting the annual License Fee) at [36] above. Such a position would have lacked commercial reality. 56 Reading the Occupational Licensing Agreement as a whole and with the contemporaneously executed Transaction Documents, the word "it" in the third line of cl 5.2 is not ambiguous. It can only be construed as referring to SHCP, not Star City. 57 In response, the Commissioner submitted that the obligation imposed by cl 5.2, if any, was conditional due to the phrase "may be imposed" so that the sentence should be read: "[Although no obligations are (currently) imposed on Star City by the Leases], Star City will pay … [any obligations that are imposed in the future]." In other words, the work to be done by cl 5.2 was that of a safety valve. Again, having regard to the terms of the Occupational Licence Agreement and the Leases, this submission is without foundation. The use of the word "may" in cl 5.2 is not in the future or probabilistic sense of "it may rain tomorrow"; rather, "may" is used in its concessive sense to concede a present, unconditional state of affairs: see Macquarie Dictionary (definition of "may") at [4]. Understood properly, then, the meaning of the clause is "whatever payment obligations may be [ie, conceding that payment obligations are in fact] imposed on SHCP by the leases, Star City will pay them." 58 In short, "may" serves to create a comprehensive obligation, assigning to Star City any and all of the specified obligations (ie, rent, insurance premiums, etc.) that were or might be imposed on SHCP under the Construction Lease or the Freehold Lease. Indeed, why would Star City need to provide evidence to SHCP of payment of outgoings unless the outgoings were in the first instance the responsibility of SHCP? 59 Finally, the Commissioner's reference to and reliance upon the parties' prior and subsequent conduct is misplaced. Where, as here, the language in context is not ambiguous, the Court may not look at the prior and subsequent conduct of the parties to interpret the Occupational Licence Agreement: Administration of Papua and New Guinea v Daera (1973) 130 CLR 353 at 446 (per Gibbs J); Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348 (per Mason J) and L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261; cf Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 327; Farmer v Honan (1919) 26 CLR 183 at 197. Such conduct cannot be used to generate disputes about the meaning of unambiguous terms. Such an approach would be inconsistent with the "general test of objectivity [that] is of pervasive influence in the law of contract": Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (No 2) (2005) 218 CLR 471 at [31]-[36] and, in particular at [34] quoting Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549 (per Gleeson CJ). 60 In the event that I am wrong in my views on the relevance of this conduct to the disposition of the Contract Issue, then I consider that the particular conduct relied upon by the Commissioner (ie, the 13 December 1994 letter; the 1995 Star City Tax Return; the 20 September 1996 Arthur Andersen memorandum; the amended 1995 Star City financials issued in May 1997; and the 10 June 1998 Amending Deed with its 11 March 1998 covering letter: see Annexure at [59]-[64]) does not lead to the conclusion asserted by the Commissioner. 61 As to the evidence of prior conduct (the 13 December 1994 letter), although the Commissioner submitted that the letter explicitly states that SHCP was the party liable for the Prepayment, the inferences that the Commissioner sought to draw from the letter are not open on the face of it. First, the letter was sent by Star City to the Treasurer of New South Wales, as the CCA's nominated recipient of the Prepayment. The letter was not a communication between the parties to the Occupational Licence Agreement. As such, it is not relevant to the proper construction of cl 5.2 of the Occupational Licence Agreement. It does not and cannot provide evidence of the objective factual background known to the parties at or before the date of the Agreement. The letter does not form part of the relevant factual matrix in which the Agreement was set which might highlight the context in which the words were used and the purpose for which they were chosen: Codelfa Construction at 401. 62 Secondly, the letter was concerned with and addressed an issue separate from the use to which the Commissioner sought to put it. The letter dealt with the method by which the Prepayment was to be paid. The fact that the letter described that issue in a particular way does not point to the conclusion that the Commissioner sought to draw from it - that the party obliged to make the payment had been absolved of liability or was not in fact liable. 63 Thirdly, even if the letter were to be considered as part of some relevant factual matrix, it would not assist in resolving the question of the proper construction of the Occupational Licence Agreement. The letter was an attempt by Star City to gain leverage in its bargaining with the CCA in circumstances where it was the preferred candidate for the grant of the casino licence and, if successful, would be required to pay the Prepayment. The letter was an attempt by Star City to secure repayment of the Prepayment if a possible legal challenge to the grant of such a licence, by an opposition bidding consortium associated with the late Mr Kerry Packer, had been successful. Such a challenge was made although it was unsuccessful: Darling Casino Ltd v New South Wales Casino Control Authority (1997) 191 CLR 602. Negotiations of this nature are evidence of no more than the expectations of the parties and cannot be used to construe the meaning of the written agreement: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606 and Codelfa at 352. 64 In relation to the correspondence and conduct which post-dated execution of the Occupational Licence Agreement (ie, the 1995 Star City Tax Return; the 20 September 1996 Arthur Andersen memorandum; the amended 1995 Star City financials issued in May 1997; and the 10 June 1998 Amending Deed with its 11 March 1998 covering letter), the Commissioner contended that, individually and collectively the evidence showed that: (1) if Star City and SHCP had shared a common intention or assumption that the word "it" was always intended to refer to SHCP, then Star City would have sought an order for rectification and it never did; (2) the Amending Deed did not purport to rectify the terms of the Occupational Licence Agreement and did not operate retrospectively; and (3) even if the Amending Deed was intended to operate retrospectively, it could not have that effect because it was not possible to amend a provision in an attempt to impose a liability on Star City for the obligations of another party (SHCP) which was no longer in force at the time of the amendment. The argument was that the Prepayment was made in satisfaction of Star City's obligations under the Construction Lease which ended when the Permanent Site opened for business in November 1997: see definition of "Term" in cl 1.1 of the Construction Lease. 65 The foundational premise of the Commissioner's argument is that the subsequent amendment to cl 5.2 of the Occupational License Agreement is (conclusive) evidence that the clause (and specifically the word "it") meant something else prior to the amendment. However, the evidence relied upon does not support the premise. Taken as a whole, the amendment and the documents leading to it establish no more than what was already obvious - namely, that cl 5.2 was not artfully drafted. 66 The documents do not, however, support the view that the word "it" in cl 5.2 was originally meant to, or did, refer to Star City rather than SHCP. On the contrary, the Arthur Andersen memorandum makes clear that the original accounting treatment (ie, reflecting the Prepayment as an obligation of SHCP rather than Star City) "d[id] not reflect the legal documentation and its intention, as [Star City] is the entity responsible for payment of this amount pursuant to the Occupational Licence Agreement," (emphasis added) and that the amendments do not change, but rather "reflect the true intentions of the deeds". 67 Accordingly, even if evidence of subsequent events is relevant to the construction of cl 5.2 of the Operating License Agreement, it does not support the Commissioner's contention that the word "it" originally referred to Star City. 68 The Commissioner next submitted that even if "it" in cl 5.2 were construed as referring to SHCP and even if "may" were construed as imposing an unconditional obligation on Star City, Star City was not liable to make the Prepayment because the Occupational Licence Agreement was not in force at the time the Prepayment was made on 15 December 1994. This submission fails to take account of the distinction between the grant of the licence and the balance of the terms of the Occupational Licence Agreement. The licence itself commenced on and from the date that Star City was entitled to occupy the Permanent Site to enable it to comply with its pre-opening services as set out in the Casino Complex Management Agreement and would continue for the term of the Freehold Lease: cl 3.1 read with the definition of "Term" in cl 1.1. However, the other obligations - including the payment of rent - were imposed on Star City from the date of the execution of the Occupation Licence Agreement, 14 December 1994. 69 The Commissioner's contention that this distinction is somehow negated by the definition of "Licence" as "this Licence" in the Occupational Licence Agreement must also be rejected. There is nothing to suggest that the terms "Licence" and "Agreement" are used interchangeably in the Occupational Licence Agreement. The Occupational Licence Agreement was not limited to the grant by SHCP to Star City of the licence to occupy the Premises: cll 2.1(a) and 4.1. The balance of the Occupation Licence Agreement recorded other and separate obligations that the parties had agreed would be imposed on Star City and SHCP respectively: cll 5 and 6. 70 In short, the Prepayment was an obligation of Star City because under the Occupational License Agreement Star City - not SHCP - was responsible for all rent, outgoings, insurance premiums and payments for services under the Construction Lease or Freehold Lease on and from 14 December 1994, being the date of execution of the Occupational Licence Agreement and the day before the Prepayment was paid to the CCA.

(1) The Prepayment was an Outgoing incurred by Star City 71 Section 51(1) of the 1936 Act applied in the income years ending 30 June 1995, 1996 and 1997. It provided, so far as is relevant, that: "All … outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are … outgoings of capital, or of a capital … nature …." 72 Section 8-1 of the 1997 Act applied to the balance of the income years in dispute. It provides, so far as is relevant, that: "(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or ..." 73 The differences in language between the two sections are not material: s 1-3 of the 1997 Act; the Explanatory Memorandum to the Tax Law Improvement Bill 1996 at 42; and Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 at [90] ("Citylink (High Court)"). 74 The sections contain two "positive limbs": outgoings are deductible to the extent that they are incurred in gaining or producing assessable income (the first limb) or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income (the second limb): Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57; FCT v Payne (2001) 202 CLR 93 at 98; Fletcher v Federal Commissioner of Taxation (1993) 173 CLR 1 at 16-17 and John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 40. The sections also relevantly contain one "negative limb": outgoings are not deductible to the extent that they are outgoings of capital or of a capital nature. 75 In relation to the "positive limbs", the Commissioner contended the Prepayment was not deductible on the basis that it was not a loss or outgoing incurred by Star City because: (1) the Prepayment was made by Holdings from an account held by it with the Bank on 15 December 1994; and (2) at the time that Holdings made the Prepayment, no enforceable obligation existed between Star City and Holdings with respect to the Prepayment. These contentions should be rejected. 76 A taxpayer incurs an outgoing when a liability exists to which the taxpayer is definitively committed and which is able to be identified by reference to a jurisprudential characterisation of relevant obligations: Citylink (High Court) at [122]-[127] and the authorities cited. As the "Contract Issue" analysis at [45] to [70] demonstrates, the Prepayment was a liability which existed and to which Star City was definitively committed. Star City incurred the Prepayment. 77 There was no dispute that Holdings paid the Prepayment to the CCA on 15 December 1994. However, the fact of payment by Holdings cannot be and is not determinative of the question whether Star City incurred the Prepayment. The question was whether the Prepayment was a liability which existed and to which Star City was definitively committed. It was: the Occupational Licence Agreement recorded Star City's liability. Moreover, Holdings, having paid the Prepayment, recorded an inter-company loan of $120m between Holdings and Star City which arose by way of: (1) SHCP's obligation to make the Prepayment under the Construction Lease; and (2) Star City's obligations to make the Prepayment on behalf of SHCP under the Occupational Licence Agreement. The source and terms of the 'finance' for the Prepayment are irrelevant. Many transactions are completed on the basis of a payment direct from a financier to a vendor. The fact that Holdings made the Prepayment does not detract from or alter the conclusion that Star City incurred the Prepayment. 78 The Commissioner also submitted that at the time of the Prepayment, no enforceable obligation existed between Star City and SHCP with respect to the Prepayment. As noted earlier, that contention proceeds from what I hold to be the misconstruction of the terms of the Occupational Licence Agreement. On 15 December 1994, the date of payment of the Prepayment, SHCP was obliged to pay the Prepayment to the CCA under cl 2.1 and Sched 1 of the Construction Lease and Star City was obliged to "pay and be responsible to ensure payment of all rent, outgoings, insurance premiums and payments for services that may be imposed on [SHCP] under the terms of the Construction Lease": cl 5.2 of the Occupational Licence Agreement. Star City's obligation arose on 14 December 1994, the day before the Prepayment: see [68]-[70] above. 79 The Occupational Licence Agreement recorded the agreement obliging Star City to pay the Prepayment. Star City was "definitively committed" to the outgoing, the Prepayment: Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506. That outgoing was incurred by Star City in its capacity as the holder of the Casino Licence entitling it to operate the Casino for which it required premises from which to conduct that activity. The Prepayment was thus an outgoing incurred by Star City in gaining or producing assessable income under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act. 80 Subject to the next issue, there was no dispute between the parties that, if the Prepayment was an outgoing incurred by Star City in gaining or producing assessable income under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act, then a proportion of the Prepayment was allowable as a deduction from the assessable income of Star City for each year of income in the Primary Rental Period in accordance with s 82KZM of the 1936 Act: see [5] above.

(2) The "Capital / Revenue Issue" 81 In relation to the "negative limb" of s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act, the Commissioner submitted that even if the Prepayment was an outgoing incurred by Star City in gaining or producing assessable income, the Prepayment was on capital, not revenue, account and therefore not deductible under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act. This argument also fails. 82 The classic test for resolving the distinction between capital and revenue is that stated by Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363: "There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment." See also Citylink (High Court) at [147] and GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137.

(a) The Character of the Advantage Sought 83 An examination of the character of the advantage sought is assisted by asking two questions: (1) what was the Prepayment really paid for? and (2) is what it was really paid for, in truth and in substance, a capital asset?: Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 and Sun Newspapers Ltd at 359-360. The advantage must be identified and characterised. The answer to those questions is not assisted by an analysis of the contractual right or rights secured under the contract, as distinct from the activity itself: see FCT v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 at 99 (per Davies, Gummow and Hill JJ) citing Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648. As Dixon J said in Hallstroms, the answer: "...depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." See also Citylink (High Court) at [148] (per Crennan J) (with whom Gleeson CJ, Gummow, Heydon and Callinan JJ agreed). 84 Payments, even recurrent payments, that are the consideration for acquisition of ownership of a capital asset are usually characterised as an affair of capital. However, rent is not an instalment payment in respect of the purchase of a capital asset: each amount of rent is for the use of a capital asset for a particular defined period and is therefore, and for that reason, on revenue account. 85 This distinction between acquisition and use was articulated by Dixon J in Sun Newspapers: "whether on the one hand [the payment] is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing" (363). More recently, the test was re-stated by Stephen J in his dissenting judgment in Cliffs International Inc v FCT (1979) 142 CLR 140 at 160 where his Honour said: "The important distinction between ... [recurrent capital outgoings] … and instances of leases of land or the licensing of patents is that in those cases rent or royalties are paid for the right to occupy or use the property or rights of another. But here the vendors, upon exercise of the option, retained nothing and the taxpayer thereafter made no use of anything to which the vendors retained any claim." See also Gibbs ACJ in Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 655. 86 This distinction between purchase and use explains why interest and rental outgoings are on revenue account, even though each can be said, in one sense, to secure capital advantages, namely a principal sum for use in a business and possession of a structural asset such as land or a building: see Cape Flattery Silica Mines Pty Ltd v FCT (1997) 36 ATR 360 at 373. 87 The Commissioner contended, however, that the Prepayment: (1) formed part of the consideration for the grant of the Casino Licence; (2) was made for the purpose of obtaining a lease of the Permanent Casino Site; and / or (3) was made in order to obtain the exclusivity of the casino licence in the first 12 years of operation, and was therefore an affair of capital. 88 The Commissioner put those contentions on two bases: first, by reference to the transaction documents and secondly, by reference to other "contemporaneous" documents. The contentions are rejected on both bases. Transaction Documents 89 The Prepayment payable and paid under the Leases formed just one element of the business transaction. The Commissioner referred to a number of aspects of the Transaction Documents in support of his contention that the Prepayment had more of the characteristics of a capital payment than of rent: (1) under the Construction Lease and the Freehold Lease, the Prepayment was a lump sum, non-refundable and paid rent in advance at an annualised rate of $15 million for each of 12 years; (2) under the Freehold Lease, the rent payable by Star City after the Primary Rental Period was $250,000 per annum; and (3) the Prepayment was made at the same time and to the same entity as the 'Specified Payment Amount' of $256m (see [24]-[25] and [30] above). In my view, these aspects do not (individually or collectively) support the contention that the character of the Prepayment is a capital payment. 90 With respect to the first point, it is true the Prepayment was a one-off payment which was refundable only in very limited circumstances. But SHCP took the lease for 99 years and Star City was committed to the operation of the Casino at those Premises for the duration of its licence. Moreover, both cl 2.1(c) of the Construction Lease and cl 2.1(b) of the Freehold Lease provided that the Prepayment was refundable if the Parties mutually agreed to terminate the Lease. Thus the refundable nature of the Prepayment (even though limited) was tied to the Lease, not the Licence. 91 In Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at [77], Hill J after referring to W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290, said that: " … it cannot be said that the question whether a payment is a one-off payment or whether it is a recurrent payment is a matter irrelevant to whether the outgoing is capital. In a case such as the present where the payment operates to create the capital of a trust fund the outlay will ordinarily be seen as capital both because of the lasting qualities enjoyed and the fact that what is being made is a final payment to secure future benefits. However, if a contribution is one of a number of 'recurrent' contributions for employees, so that it can be seen to be part of the ordinary flow of business expenditure of a taxpayer, the character of the outlay will take on a different complexion. It is important to bear in mind that the evidence of Mr Medich was that he and his brother wanted to draw money out of Walstern and establish a fund for investment and that it was decided to do so by contributing two amounts of $1 million. This evidence is highly significant in determining whether the contributions were recurrent or really represented a once and for all contribution of $2 million to set up a fund although made in two annual instalments each of $1 million." 92 Although the Prepayment was a one-off payment and was non-refundable in the manner described, it is necessary (as Hill J described) to go further and examine the character of the advantage sought in making the Prepayment: (1) what was the Prepayment really paid for? and (2) is what it was really paid for, in truth and in substance, a capital asset? 93 The Prepayment was described in the Construction Lease and the Freehold Lease as being referable to the 'Primary Rental Period': see Construction Lease, Sch 1.1 ([30] above) and Freehold Lease, Sch I(a) ([43] above). The 'Primary Rental Period' was 12 years. The rent payable was expressed as an annual rent of $15,000,000 each year. The rent for the 'Primary Rental Period' was prepaid by the Prepayment of $120,000,000, being the net present value of 12 years rent at $15,000,000 per annum: Construction Lease at Sch 1.3. The rent of $15,000,000 per annum was fair market rent. 94 The fact that the rent was paid by way of a lump sum does not detract from the fact that rent was paid to secure the use of the Premises for the period to which the payment related. Unlike the vendors in Cliffs International and Colonial, here the State retains title to that part of the profit-yielding structure from which Star City derives its income; the Premises were merely made available for use by SHCP for the duration of the Primary Rental Period. In addition to not receiving title to the Premises at the end of the lease term, SHCP received no option to purchase (whether at a below-market price or otherwise), and it was not suggested that 99 years constitutes all or a major portion of the life of the Premises. 95 In short, the Prepayment did not secure any enduring asset: neither Star City nor any other entity acquired the land or the buildings which comprised the Premises: see South Australian Battery Makers at 655 (per Gibbs ACJ). 96 Instead, the payment secured the use of the Premises for the purposes of generating income from the casino. There was no allegation and could be no allegation that the Prepayment of rent was a sham. The two leases (the Construction Lease and the Freehold Lease) were necessary and existed, the rent was an agreed amount, was payable and was paid. Although labels can never be determinative (Jupiters Ltd v Deputy Commissioner of Taxation (2002) 118 FCR 163 at [26]; South Australian Battery Makers at 655 and Commissioner of Taxation (Cth) v Broken Hill Pty Co Ltd (2000) 179 ALR 593 at [36]), the Prepayment was in this case, as it was described - a prepayment of rent. 97 It is true that under the Freehold Lease, the rent payable by Star City after the Primary Rental Period was $250,000 per annum. But contrary to Commissioner's arguments, the difference in the rate of rental does not reveal that the land was of no more than nominal value during the Primary Rental Period. The explanation for the difference in rate of annual rental offered by Star City Consortium (and accepted by the CCA) is no doubt (as the Commissioner accepted) connected with the period of exclusivity of the casino licence ending at the point at which the rate of rental changes: see Casino Exclusivity Agreement, cll 1.1 and 5.1 (see [28] above). 98 Finally, the fact that the Prepayment was made at the same time and to the same entity as the 'Specified Payment Amount' does not support the contention that the Prepayment was in the nature of a capital payment. The two amounts were both paid on 15 December 1994. That is not surprising. The transaction settled on that day. The two amounts were paid to the same entity. That also is not surprising. The NSW Government was the ultimate entity granting the Casino Licence (through the CCA) and the landlord of the Premises. 99 The Occupational Licence Agreement and the Leases, and if necessary the other Transaction Documents, read as a whole, do not suggest that the Prepayment was in the nature of a capital payment. The Prepayment did not create or secure any lasting interest. It was not a final payment made to secure a future benefit. It was, as is described, a payment for rent which is one of a number of recurrent expenses forming part of the ordinary flow of business expenditure of Star City.

Surrounding Circumstances or Background--The "Bid Process" 100 In support of the contention that the Prepayment was in the nature of a capital payment, the Commissioner also relied on the "surrounding circumstances" or "background", arguing that the legal agreement pursuant to which the Prepayment was made did not reflect the whole arrangement between the parties: City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 at [46] ("City Link (Federal Court)"). The "surrounding circumstances" or "background" were said by the Commissioner to comprise documents temporally proximate to the Transaction Documents containing descriptions of the Prepayment and the benefit sought to be obtained from making it. Three documents in particular were referred to by the Commissioner: an explanatory memorandum produced by Star City's legal advisors on 19 April 1994, three days before Star City made its final offer; a letter written by Star City's legal advisors to the NSW State Revenue Office on 27 April 1994 (five days after Star City made its final offer); and a letter written by Star City to the NSW Treasurer on 13 December 1994, the day before the Transaction Documents were executed: see Annexure at [42]-[44], [50]-[51] and [59]-[60] 101 The "surrounding circumstances" or "background" relied on by the Commissioner is irrelevant to the proper characterisation of the Prepayment because the advantage sought by the Prepayment is capable of identification and characterisation by reference to the Leases and the Occupational Licence Agreement and, if necessary, the Transaction Documents as a whole: City Link (Federal Court) at [44]-[45], approved by Citylink (High Court) at [120], [151] and [154]. 102 Moreover, even if the "surrounding circumstances" or "background" were examined, they do not alter the identification of, or the character of, the advantage sought by the Prepayment. The three documents referred to in [100] above cannot be said to constitute the "whole factual matrix of which the [Leases and the Occupational Licence Agreement] forms part": FCT v Cooling (1990) 22 FCR 42 at 51-53 citing Duke of Westminster's Case [1936] AC 1. The documents by their nature and content do not form part of the factual matrix. None of the documents was sent by one contracting party to any other contracting party or was executed by the contracting parties. I considered the letter sent by Star City to the NSW Treasurer on 13 December 1994 in pars [61] to [63] above. The issues identified in relation to that document apply equally to the 19 April 1994 and 27 April 1994 letters. Moreover, even if the documents did form part of the factual matrix, they form just that - only part. It is not open to either party to pick and choose from the factual matrix. 103 In further support of the submission that Prepayment was an affair of capital, the Commissioner also relied on the May 1993 Invitation Document (see Annexure at [1]-[4]), which referred to the possibility of "an up-front capitalised lease prepayment." (Emphasis added.) However, the content of this document does not assist the Commissioner. First, the use of the label "capitalised" is irrelevant; it is the substance of the transaction which governs, not the form. 104 Second, from the outset, not only was the need for a lease recognised, but the CCA stipulated that rent was a matter of negotiation to be determined on a "fair" market rent. The possibility of "an up-front capitalised lease payment" was expressly referred to together with the requirement for a net present value ("NPV") calculation to ensure that the rental was a "fair" market rental. That was what ultimately occurred. Moreover, as the Brief expressly provided, what each of the payments was for was identified separately: see Annexure at [6]-[7]. 105 The Commissioner also submitted that the 22 April 1994 Final Offer (see Annexure at [47]-[49]), which expressed the two payments - the 'Specified Payment Amount' and the Prepayment - as forming part of the "Total Cash Offer," supported the view that the Prepayment was not a revenue outgoing but a capital outgoing paid to acquire the Casino Licence. In response, two points should be noted. First, it is not surprising that the Final Offer was expressed in those terms. It was what the CCA required each bidder to do: see Annexure at [33]. Secondly, and no less importantly, the terms of the Final Offer, like the First Offer, provided for the two payments. In each offer, there was the lump sum payment on the grant of the casino licence. In each offer, there was the payment of rent for the leases. The difference between the offers was that the First Offer provided for the payment of $102m for rent for the Temporary Casino and a nominal rent for the Permanent Casino whereas the Final Offer provided for rent of $10.6m for the Temporary Casino and an upfront capitalised payment of rent for the first 12 years of the Permanent Casino. The choice as to which option was to be adopted was a decision for the CCA. At this time, the leases attached to the Compliance Deed expressly provided that it was the CCA's, and only the CCA's, decision whether it elected to receive the rent for the Permanent Casino upfront or by one of the three instalment options there set out: compare Annexure at [40] with Annexure at [58]. 106 In support of the contention that the Prepayment was of a capital nature, the Commissioner next sought to rely upon the reference in the 6 May 1994 (see Annexure at [57]) announcement of the Star City Consortium as the preferred bidder for the casino license. In particular, the Commissioner noted that the total financial offer of $376 million (which includes the $256 million Specified Payment Amount and $120 million Prepayment) was referred to as being for "the casino licence," which it was argued would tend to support the view that the Prepayment was not a revenue outgoing (rent) but was a capital outgoing (ie, part of the consideration for the acquisition of the casino licence). The irrelevancy of the document to the question of characterisation is self evident - it was a press announcement by the CCA designed to inform the general public of which consortium had been successful and to trumpet the total amount of money expected to follow into the state's coffers. An announcement for public relations purposes does not and cannot alter the legal characterisation of the Prepayment. 107 The Commissioner next sought to draw support for his characterisation of the Prepayment from the May 1994 government analysis of the bids and Star City's 3 May 1994 letter in response (see Annexure at [52]-[56]). At no time did the Star City Consortium offer to pay, or was it obliged to pay, the Casino Duty - Base Amount. It was not a duty or levy imposed by the Casino Duty Act: see Casino Control Act ss 114 to 117. The Casino Duty Base - Amount was a proposal created by the CCA or its advisers: see Annexure at [30] and [40]. At no time did the Star City Consortium adopt that proposal and at no time did the CCA insist upon or otherwise pursue it. Further, Star City wrote in the terms that it did at the request of the CCA. Finally, as the terms of cl 3 of Sch 1 of the Construction Lease and the letter make clear, it was for the CCA to elect whether to receive the rent by way of the Prepayment or by one of the instalment methods stipulated in the Schedule. 108 Given those circumstances, the Commissioner can draw no support for his contention that the Prepayment was an affair of capital from the fact that the amendments required were those outlined. At all times, it remained the decision of the CCA about the amount of, and form in which they received the payment of, rent under the lease for the Premises from which the Casino was to be operated. So much was made clear by the terms of the letter of 3 May 1994: see Annexure at [56]. The amendments required to the Transaction Documents depended upon the decision of the CCA about how the rent was paid and when. Each of those matters was for the CCA to decide and each was the decision of the CCA alone. 109 The Commissioner made a number of arguments founded ultimately in the decision of Dowsett J in Jupiters Ltd v Deputy Commissioner of Taxation (2001) 48 ATR 511, affirmed by (2002) 118 FCR 163. Those arguments picked up the language of Dowsett J in his reasons for decision and sought to apply it to the facts of this case. So, for example, it was said that there was not, in this case, "hard bargaining" about the terms of the lease and, in particular, the rental payments: cf Jupiters at [56]. 110 Several points must be made about these contentions. First, the findings of fact made in one case provide no guidance to the decision in another. Yet, in essence, that is the path the Commissioner's argument by reference to Jupiters would have me take. Secondly, and no less fundamentally, the Commissioner's contention that Star City and the CCA did not undertake a real commercial negotiation should be rejected. Taken as a whole, the negotiations between the parties are properly described as "hard bargaining". It would be wrong to approach that negotiation piecemeal and say of part of it that Star City was free to choose its own terms and in that particular respect simply because the particular point was not shown to be the subject of extended debate or negotiation. As it happens, however, both the amount to be paid as rent and the terms on which rental would be paid were points of critical centrality in the negotiations between Star City and the CCA and matters about which the CCA (not Star City) had the ultimate decision. The Commissioner's contention that the rent payable during the "Primary Rental Period" was not the result of hard bargaining is without foundation: cf JB Chandler Investment Company Ltd v Federal Commissioner of Taxation (1993) 47 FCR 588 at 598 and Jupiters at [56]. 111 A summary of the Bid Process is set out in the Annexure to these reasons. In referring to these facts and matters, I should not be taken as accepting that separately or collectively they form part of the "factual matrix" or assist in the identification or characterisation of the advantage sought by the Prepayment: see [129] below. All the documents contain are successive statements by parties to a difficult and complex commercial negotiation and, in particular, the stance each took in the bidding process at that time. The documents record nothing more that the state of the negotiations as they developed. 112 This description of the history of the negotiations between the parties reveals that each side of the negotiation (unsurprisingly) sought to obtain the best commercial result it could. For the State parties (the CCA and the Treasury), commercial considerations required payment of as much money as could be obtained as soon as it could be obtained. But there are two considerations that remained consistent: the Casino would operate on leased land owned by the State and rent would be paid for use of those Premises. The outgoing now in question is the payment that was made for the use of those Premises for 12 years. 113 The "surrounding circumstances" or "background" (out of which the Commissioner sought to pluck three documents) do not support the contention of the Commissioner that the Prepayment was in the nature of a capital payment. In particular, the description of the history of the negotiations between the parties does not provide any support for the Commissioner's contention that the Prepayment: (1) formed part of the consideration for the grant of the Casino Licence; (2) was made for the purpose of obtaining a lease of the Permanent Casino Site, namely a premium; or (3) was made in order to obtain the exclusivity of the casino licence in the first 12 years of operation, and was therefore an affair of capital.

(b) The Manner in which the Advantage is to be used 114 Having identified the nature of the advantage, I turn now to parts two and three of Dixon J's three-part capital versus revenue test. The manner in which Star City uses the advantage is occupation of the Premises whilst engaging in the activities which are directed to obtaining the ordinary income of Star City throughout the 'Primary Rental Period'. For each year of that period, the advantage is consumed within Star City's business, so that after that year, no part of that advantage is retained.

(c) The means adopted to obtain the Advantage 115 Finally, the means adopted to obtain the advantage was both a recurrent outgoing and a lump sum payment. This is not a case of a single lump sum spread over a period of years: rather it is a case where an annual sum is incurred, the payments totalled and then discounted for payment up front. As the CCA stipulated, the amount was a "fair" market rent supported by independent advice: see [93] above.

(d) Conclusion 116 Neither the character of the advantage sought by the Prepayment, the manner in which that advantage was used or the means adopted to obtain that advantage support the Commissioner's contention that the Prepayment had more of the characteristics of a capital payment than of rent. The Prepayment was on revenue account, not capital account, and was deductible under s 51(1) of the 1936 Act and / or s 8-1 of the 1997 Act and s 82KZM of the 1936 Act.

(3) Part IVA Issue 117 The Commissioner contends that if the Prepayment is deductible under s 51(1) of the 1936 Act (or s 8-1 of the 1997 Act) and s 82KZM of the 1936 Act, those deductions should be denied under Part IVA of the 1936 Act. That contention is also rejected.

(a) Statutory Framework 118 For Part IVA to apply, it is necessary to identify the tax benefit that has been obtained, or would but for s 177F(1) be obtained, by Star City in connection with a scheme to which Part IVA applies. 119 "Scheme" is defined in s 177A(1) of the 1936 Act as meaning: "(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct." See also ss 177A(3), (4) and (5) of the 1936 Act. 120 In relation to a "tax benefit", it is necessary to refer to s 177C(1) of the 1936 Act which provides, so far as is relevant: "(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or … and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: … (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; and …" 121 Finally, it is necessary to refer to s 177D of the 1936 Act which provides, so far as is relevant: "This Part applies to any scheme that … is entered into after 27 May 1981 … where: (a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi); it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."

(b) Schemes 122 Alternative schemes within the meaning of ss 177A(1) and 177D of the 1936 Act were relied upon by the Commissioner: a Wide Scheme and a Narrow Scheme. Star City did not dispute that each scheme identified by the Commissioner was capable of being a scheme for the purposes of Part IVA. 123 The Wide Scheme identified by the Commissioner comprised the following steps: (1) the receipt by the Star City Consortium in March and April 1994 of taxation advice from Arthur Andersen concerning: (a) the deductibility of the Second Specified Amount Duty then provided for under the draft Casino Duty and Community Levy Agreement; and (b) the possibility of instead making that payment by way of rent for the Permanent Casino Site; (2) the removal from the draft Casino Duty and Community Levy Agreement of reference to the payment of the Second Specified Amount Duty and a Casino Duty - Base Amount; (3) the insertion in the draft Construction Lease and draft Freehold Lease of provision for an upfront prepayment by SHCP of $120 million in lieu of "rent" for the first 12 years; (4) the execution by SHCP and by the CCA of: (i) the Construction Lease on 14 December 1994; and (ii) the Freehold Lease in 1997, which included provision for an upfront prepayment by SHCP of $120 million in lieu of "rent" for the first 12 years; (5) the execution by SHCP and Star City of the Occupational Licence Agreement on 14 December 1994; (6) the making of the Prepayment to the CCA on 15 December 1994. The Narrow Scheme identified by the Commissioner comprised steps (1), (3), (4) and (5) above. 124 Whether the scheme identified by the Commissioner is a scheme within the meaning of s 177A is a question of fact: Walters v Commissioner of Taxation [2007] FCA 1270 at [59]-[60]. Where there is no evidence of an express agreement or arrangement, the question is whether an inference as to the existence of a scheme can be drawn from all the facts proved: EA Greenwood (NSW) Pty Ltd v FCT 80 ATC 4039 at 4041-2; (1980) 10 ATR 571 at 573-574 citing Federal Commissioner of Taxation v Cooper Brookes (Wollongong) Pty Ltd (1979) 10 ATR 128 (Full Court of the Federal Court). 125 As Gummow and Hayne JJ said in Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at [43]: "This definition [of scheme] is very broad. It encompasses not only a series of steps which together can be said to constitute a 'scheme' or a 'plan' but also (by its reference to action in the singular) the taking of but one step." 126 The Commissioner is under no obligation to show a series of steps to prove a scheme. However, if (as here) he elects to rely upon multiple actions, there must be a connection between those actions because otherwise they do not constitute "a scheme, plan or course of action": Commissioner of Taxation (Cth) v Peabody (1994) 181 CLR 359 at 382-384 and Hart at [43] and [55]. A series of disjointed or unconnected steps could not amount to a scheme. That is because the existence of a scheme and its identification for the purposes of s 177A is a question of fact to be determined by the evidence: it is not a question of abstracting bits from what actually happened. 127 That the series of steps identified must constitute of itself one and only one "scheme", "plan" or "arrangement" (see ss 177A(3) and (5) and FCT v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 254 [52] and 264 [96]) is made clear by the fact that the dominant purpose under s 177D of the 1936 Act is usually determined at the time the scheme is entered into: FCT v Mochkin (2003) 127 FCR 185 at [45]; Vincent v FCT (2002) 124 FCR 350 at 372-373. In other words, the scheme must be identified and the identified scheme must exist from the outset. 128 Although Star City conceded that each scheme identified by the Commissioner was capable of being a scheme for the purposes of Part IVA, I do not consider either 'scheme' identified by the Commissioner is a scheme within the meaning of s 177A. There is no evidence of an express agreement or arrangement. There is no basis, whether as alleged or at all, to draw an inference as to the existence of the scheme. Each 'scheme' identified by the Commissioner is no more than an incomplete and inaccurate historical record of some of the events which occurred in a period spanning some 9 months; it is at best, a series of disjointed or unconnected steps. 129 With respect to the existence of a scheme within the meaning of Part IVA, the parties referred to various documents in support of multiple contentions. A brief summary of the facts and matters referred to by one or both of the parties is set out in the Annexure as the "Bid Process": see Annexure at [1] to [60]. In referring to these facts and matters for purposes of determining whether a scheme existed for purposes of Part IVA, I should not be taken as accepting that separately or collectively they form part of the "factual matrix". 130 As a review of that Bid Process demonstrates, the terms and structure of the overall transaction were reviewed, reconsidered and discussed over a period of months by the CCA and the Star City Consortium individually and collectively. In particular, the summary shows that: (1) there always had to be a lease of the Premises; (2) from the outset and at all other times, the CCA retained the right to require payment of the rent in one or more instalments: see by way of example, the Invitation Document at Annexure at [3], the Brief at Annexure at [7]-[8], the Construction Lease at [29]-[30] above, the draft Freehold Lease at [31] above and the Freehold Lease at [42]-[44] above; and (3) the State of New South Wales, not surprisingly, was at all times trying to maximise its commercial outcome and, to that end, adopted what in hindsight was an increasingly demanding stance about the terms on which the transaction had to be concluded. 131 For the Commissioner's identification of each 'scheme' to succeed, the facts must permit the inference to be drawn that there existed and remained throughout the period identified by the Commissioner a scheme to obtain a tax benefit (a proportion of the Prepayment claimed as a deduction in each year of income in accordance with the formula set out in s 82KZM of the 1936 Act) notwithstanding the objective facts and matters set out above. No suc h inference is open to be drawn. 132 As Gummow and Hayne JJ said in Hart at [52]: "There is no doubt that 'tax laws affect the shape of nearly every business transaction' (Frank Lyon Co v United States (1978) 435 US 561 at 580, cited in Spotless (1996) 186 CLR 404 at 416). But as was said in the joint reasons in Spotless (at 416) "A particular course of action may be, to use a phrase found in the Full Court judgments, both 'tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a 'scheme' for the 'dominant purpose' of enabling the taxpayer to obtain a 'tax benefit'. (Emphasis added.)" Always the question must be whether the terms of the Act apply to the facts and circumstances of the particular case." 133 The question is whether the terms of Part IVA apply to the facts and circumstances of the present case, a case where the 'business transaction' was the Star City Consortium bidding for and being awarded the Casino Licence. From the outset, it comprised a number of necessary and essential components including the Casino Licence, the Construction Lease and the Freehold Lease. Components made necessary and essential by, inter alia, the Casino Control Act and by the fact that the Premises were vested in the Crown. As I have said earlier, for the State parties (the CCA and the Treasury), commercial considerations required payment of as much money as could be obtained as soon as it could be obtained. For the Consortium, the goal was to be the successful bidder. But there are two considerations that remained consistent from the outset: the Casino would operate on leased land owned by the State and rent would be paid for use of those Premises. To suggest that there was a scheme (either the Wide or Narrow Scheme) is to ignore the objective facts. Neither of the schemes identified by the Commissioner existed as a matter of fact. Moreover, neither of the schemes existed from the outset.

(c) Tax Benefit 134 In addition, even if one or more of the schemes was capable of being a scheme for the purposes of Part IVA, Star City did not obtain a tax benefit in relation to it. The Commissioner contended that in determining the answer to that question, it was necessary to construe and apply Pt IVA according to its terms: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 414 and Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at [51]. So much may be accepted. 135 The process of identifying a 'tax benefit' is prescribed by s 177C. It requires an assessment of what might reasonably be expected to have happened if the scheme had not been entered into or carried out. This process has been described as the identification of the 'alternative postulate': Hart at [66] and Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 at [204]. This is an objective assessment: Calder v Commissioner of Taxation (2005) 226 ALR 643 at [95]; Macquarie at [212]; Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 at [64]-[65]. 136 The Commissioner submitted that only one alternative was available to Star City and it involved three parts: (1) the payment of a 'Specified Payment Amount'; (2) the payment of a 'Casino Duty - Base Amount'; and (3) the payment of nominal rent for the Permanent Casino Site. 137 In support of this 'alternative', the Commissioner referred to 9 events in the history of the negotiations between Star City and the State parties - the Bid Process. However, as stated, the overall purpose of the Star City Consortium as objectively reflected in the Bid Process was to obtain a grant of a casino licence. If the Star City Consortium was to be awarded the licence, they had to take a lease from the State of the casino premises and pay rent for those premises. And as noted earlier, the CCA and the Treasury were concerned to have the licensee pay as much money as could be negotiated as soon as could be. Any assessment of the 'alternative postulate' must take proper account of both those facts. 138 The critical document or event relied upon by the Commissioner was said to have occurred on 24 February 1994 when the CCA released the second draft of the Casino Duty and Community Levy Agreement. Clause 4 of that draft provided for the payment of the "First Specified Amount Duty" and the "Second Specified Amount Duty" and for the second amount to be commuted to a non-refundable lump sum payment: see Annexure at [30]. The second and third events were said to follow - the seeking of advice from Arthur Andersen with respect to deductibility of the two amounts and the advice in fact provided by Arthur Andersen on 15 March 1994: see Annexure at [31]-[32]. The Commissioner contended that the advice was significant because although the advice was not followed, "it raise[d], apparently for the first time and in the context of tax structuring, the possibility of omitting the Second Specified Amount Duty and replacing it with a form of commuted 'rental payment'". As the analysis of the Bid Process demonstrates, that contention is incomplete and, for that reason, inaccurate. It is incomplete because it omits, at the very least, the facts referred to earlier: see [130] above. 139 The fourth event was the further draft advice provided by Arthur Andersen on 17 March 1994: see Annexure at [34]. The Commissioner contended that "the structure recorded was that ultimately adopted by [Star City] and approved by the [CCA]." The Commissioner placed particular emphasis on the passage in the letter which stated that "the alternative proposed will more explicitly recognise the payment as a rental payment". 140 The fifth event comprised the letters in early April 1994 from Arthur Andersen which were provided to the CCA summarising 9 alternatives for the structure of the Star City bid. The sixth and seventh events followed - the CCA indicating that it would only accept the first alternative (see Annexure at [35]-[39]) and, on the same day, circulating the third draft of the Casino Duty and Community Levy Agreement which deleted the "Second Specified Amount Duty" and inserted a clause providing for the "Casino Duty - Base Amount". The "Casino Duty - Base Amount" was commuted to an annual amount payable at the same time as the "First Specified Amount Duty". 141 The Commissioner contended that the Star City Consortium was then faced with two possible approaches - make a payment referable to the "Casino Duty - Base Amount" then provided for in the third draft of the Casino Duty and Community Levy Agreement or make the Prepayment. 142 On 8 April 1994, the Commissioner contended that the eighth event occurred - Star City chose to make the Prepayment and not payment of the "Casino Duty - Base Amount" and executed the Compliance Deed to which the draft of the Casino Duty and Community Levy Agreement was attached: see Annexure at [40]. That draft continued to provide for payment of the "Casino Duty - Base Amount". The Commissioner further contended that it was clear from the ninth and tenth events - the terms of the Final Offer and the advice provided by Arthur Andersen on the same day, 22 April 1994 (see Annexure at [45]-[49]) - that Star City's bid comprised two up-front lump sum payments - the Specified Payment Amount and the Prepayment. 143 Finally, the Commissioner sought to rely upon the following documents as further evidence of its contention that the "Casino Duty - Base Amount" was seen as an alternative to the Prepayment: (1) the letter from Star City to the CCA of 3 May 1994: see Annexure at [56]; (2) the amendment of the Compliance Deed on 6 October 1994 to remove the Casino Duty Base Amount and include the payment of substantial rent: see Annexure at [58] above; (3) the CCA's analysis of the competing bid and, in particular, the fact that the competing bid retained the Casino Duty - Base Amount and did not provide for the payment of substantial rent: see Annexure at [52]-[55]. 144 As noted earlier, the Commissioner's reliance upon and characterisation of these events is inaccurate. As the summary of the Bid Process (the 'surrounding circumstances' or 'background') records, the Star City Consortium did have a choice - continue to make its bid by offering the Specified Payment Amount of $256m and rent for the leases or to amend its bid to include the Specified Payment Amount of $256m, the Casino Duty - Base Amount and nominal rent. The Star City Consortium chose not to amend its bid. But that is not the end of the analysis for the purposes of identifying the tax benefit for the purposes of s 177C. The question posed by s 177C is what might reasonably be expected to have happened if the scheme had not been entered into or carried out? 145 The 'only' alternative relied upon by the Commissioner is not something which in the words of s 177C "might reasonably be expected to have happened if the scheme had not been entered into or carried out". Three alternative methods for payment of the rent were suggested by the Star City Consortium. The CCA exercised the right it retained from the outset to elect to receive the payment of rent upfront. The 'only' alternative relied upon by the Commissioner was not one of the alternative methods proposed by the Star City Consortium. Moreover, it was not an alternative that the CCA required. The objective facts do not support the contention that it might reasonably be expected that if the scheme had not been entered into or carried out, Star City would have paid the Casino Duty - Base Amount. The fact that the competing bidder offered to pay the Casino Duty - Base Amount is interesting but irrelevant to the question, determined objectively, what might reasonably be expected if the scheme had not been entered into or carried out. 146 The alternative postulate must be reasonable. It must be demonstrated that it was reasonable to expect not only that Star City could have structured the alternative in the manner contended but also that the CCA would have accepted that alternative. Only if both conditions are satisfied, might it reasonably be expected that that other arrangement might have happened. In the present case, neither condition is satisfied. The Star City Consortium did not offer it and, no less importantly, the CCA did not seek it or choose it. Thus, there was no relevant tax benefit under either scheme.

(d) Section 177D(b) factors 147 In light of the conclusions about the scheme and the alleged tax benefit, it is unnecessary to consider the s 177D(b) factors separately. As will appear from what I have said in relation to the scheme and the alleged tax benefit, the provisions of Pt IVA are not engaged in this case. The commercial arrangements ultimately made between the Star City Consortium and the NSW State authorities were the result of prolonged and detailed bargaining. Looking back it might be possible to say that the negotiations might have followed a path different from the path that they did. But that does not result in the application of Pt IVA. 148 Section 177D(b) is not directed at attributing a purpose to "the scheme": Hart at [63]. The test of purpose is objective. Actual subjective purposes are irrelevant: Hart at [65]. And if there is more than one purpose, the question is whether the taxation benefit purpose was the "ruling, prevailing or most influential purpose": Spotless at 416. 149 Moreover, as Gummow and Hayne JJ said in Hart at [53]: "The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Pt IVA applies. Simply to show that a taxpayer has obtained a tax benefit does not show that Pt IVA applies." 150 The fact that the Consortium's advisers referred to taxation considerations including the non-deductibility of the "Second Specified Payment Amount" and the deductibility of the Prepayment is not surprising. It would be surprising, if not negligent of them, if they did not. And the terms in which they referred to these issues does not assist the Commissioner. As Gummow and Hayne JJ said, 'tax laws affect the shape of nearly every business transaction'. 151 It goes without saying that any rational economic actor will endeavour to minimise the tax consequences of a business transaction. For that reason, it must be shown not just that a tax benefit was received, but also that the "dominant purpose" of the transaction was to obtain the tax benefit. In this case, an objective consideration of the Bid Process and Transaction Documents reveals no such dominant purpose on the part of Star City. 152 The Commissioner's arguments in favour of the application of Pt IVA assume a degree of unilateral freedom on the part of the Star City Consortium to frame the arrangement in terms of its choice which the history of the Bid Process denies: see Annexure at [1] to [60]. Throughout the negotiations, there were two considerations that remained consistent: the Casino would operate on leased land owned by the State and rent would be paid for use of those Premises. 153 Thus, from the outset, the transaction comprised a number of necessary and essential components including the Casino Licence, the Construction Lease and the Freehold Lease. Components made necessary and essential by, inter alia, the Casino Control Act and by the fact that the Premises were vested in the Crown. It is also important to re-emphasize that for the State parties (the CCA and the Treasury), commercial considerations required payment of as much money as could be obtained as soon as it could be obtained. 154 For the Consortium, the goal was to be the successful bidder and to obtain the Casino Licence. This necessarily required structuring the transaction in a manner acceptable to the State. To suggest that the dominant purpose of the transaction generally or specifically was for Star City to obtain a tax benefit is to ignore the facts that the form and manner of the transaction were in large part constrained by considerations not subject to Star City's control. Part IVA does not apply.

(4) PENALTIES 155 Having determined that the Prepayment is deductible under s 51(1) of the 1936 Act or s 8-1 of the 1997 Act together with s 82KZM of the 1936 Act, the question of penalties and interest does not arise. However, for the sake of completeness I should address the question of the appropriate level of penalties even if I had concluded that the Prepayment was not deductible or that if it was deductible, Part IVA applied to otherwise disallow the deduction. 156 Two separate penalty regimes are relevant: one for the years prior to the year ending 30 June 2000 ("the s 226 Regime") and one for the year ending 30 June 2000 and later years ("the TAA Regime"). Penalties were imposed as follows: Proceeding number Year of income or substituted accounting period Amount claimed as deduction and subject of Part IVA determinations Taxable income assessed Tax assessed Penalty Amount Section relied upon to impose penalty in objection decisions 915 of 2005 y/e 30/6/95 $6,509,589 n/a n/a n/a n/a 915 of 2005 y/e 30/6/96 $12,026,287 n/a n/a n/a n/a 915 of 2005 6 months ending 31/12/96 in substitution for y/e 30/06/97 $6,046,002 $7,490,134 $2,696,448 $1,348,224 i.e. 50% of the tax assessed s 226, alternatively s 226L of the 1936 Act (36% rate) 916 of 2005 y/e 31/12/97 $12,000,000 n/a n/a n/a n/a 916 of 2005 y/e 31/12/98 $12,000,000 n/a n/a n/a n/a 916 of 2005 18 months ending 30/6/00 in substitution for y/e 30/06./00 $17,983,562 $59,075,316 $21,267,113 $10,633,555 s 226, alternatively s 226L of the 1936 Act 917 of 2005 (tax); 919 of 2005 (penalty) y/e 30/6/01 $12,000,000 $12,000,000 $4,080,000 $2,040,000 i.e. 50% of the tax on $12,000,000 s 284-145(1) of the TAA 918 of 2005 (tax); 920 of 2005 (penalty) y/e 30/6/02 $12,000,000 $70,963,074 $21,288,922 (30% rate) $1,800,000 i.e. 50% of the tax on $12,000,000 s 284-145(1) of the TAA

The s 226 Regime - years prior to the year ending 30 June 2000 157 The Commissioner imposed penalties at the rate of 50% under s 226 of the 1936 Act on the grounds that Part IVA applied and that it was not reasonably arguable that Part IVA did not apply: s 226(2)(a) of the 1936 Act. Of course, if Part IVA did not apply, there could be no penalty under s 226 of the 1936 Act. 158 Even if contrary to the views I have earlier expressed, Part IVA applies, a penalty may only be imposed at a rate of 50% if Star City's position was not reasonably arguable. Whether or not a position is reasonably arguable was explained by Hill J in Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at [108] in the context of s 226K in the following terms: "Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of 'authority' a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless 'about' as likely to be correct as the correct view. A question of judgment is involved." 159 In the present case, the Commissioner sought to impose penalties at 50% under s 226L of the 1936 Act. Section 226L provided: "Subject to this Part, if: (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and (c) the scheme was a tax avoidance scheme within the meaning of section 224(1); and (d) none of the scheme sections applies in relation to the scheme; the taxpayer is liable to pay, by way of penalty, additional tax equal to: (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct - 25% of the amount of the shortfall or part; or (f) in any other case - 50% of the amount of shortfall or part." 160 Three issues are significant: first, the intended operation of s 226L by reference to the definition of "scheme sections" in s 226L(d); secondly, the definition of "tax avoidance scheme" in s 226L(c) and, finally, whether Star City's position was "reasonably arguable" for the purposes of s 226L(e). 161 As was explained by Ryan J in Krampel Newman Partners Pty Ltd v Commissioner of Taxation (2003) 126 FCR 561 at [120], s 226L applies: "the same level of penalty as ss 224, 225 and 226 for schemes entered into for the sole or dominant purpose of avoiding tax, but in respect of which the Commissioner has not applied any of the anti-avoidance provisions because the schemes are ineffective under the ordinary provisions of the [1936 Act or the 1997 Act] eg s 51 [of the 1936 Act]." (Internal citation and quotation marks omitted.) See also Starr v Commissioner of Taxation 2007 ATC 4080 at [45]. 162 The "scheme sections" is a reference to ss 224, 225, 226 or 226AA of the 1936 Act. In other words, s 226L applies where there is a scheme entered into for the sole or dominant purpose of avoiding tax which is ineffective because of the ordinary provisions of the tax acts (such as s 51(1) of the 1936 Act) rather than one of the anti-avoidance provisions (such as Pt IVA of the 1936 Act). 163 Secondly, the term "tax avoidance scheme" in s 226L(c) is defined in s 224(2) of the 1936 Act. It means: "a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax." 164 Accordingly, s 226L is concerned with schemes where the taxpayer's actual sole or dominant purpose is to obtain a tax benefit: Starr v Commissioner of Taxation 2007 ATC 4080 at [52]. If, contrary to the views I have expressed earlier, the Prepayment was not deductible under s 51(1) of the 1936 Act or s 8-1 of the 1997 Act, the evidence does not support the contention that Star City's actual sole or dominant intention was to obtain a tax benefit. On the contrary, its sole and dominant purpose was to be the successful bidder for the casino licence. A necessary precondition to the application of s 226L is not satisfied. 165 The third requirement - that Star City's position is not reasonably arguable is also absent. I consider that, viewed objectively, Star City's arguments were open to be argued on rational grounds to be correct. Accordingly, at the most, the appropriate penalty rate is 25%.

The TAA Regime - year ending 30 June 2000 and later years 166 The Commissioner imposed penalties under s 284-145 of Part 4-25 of the Taxation Administration Act 1953 (Cth) ("the TAA") on the basis that but for the application of Pt IVA of the 1936 Act, Star City would have obtained a scheme benefit from a scheme. The Commissioner considered that there was no basis for reduction of penalty from the "base penalty amount" under s 284-160(a)(i) because a reasonably arguable position did not exist. Accordingly, the Commissioner imposed penalties at a rate of 50%. 167 If Part IVA did not apply, there could be no penalty under s 284-145 of the TAA. However, even if Part IVA did apply, Star City's position was reasonably arguable. The applicable "base penalty amount", at the most, ought to have been 25% under s 284-160(a)(ii) of the TAA.

E. CONCLUSIONS AND ORDERS 168 In each of the matters VID 915-920 of 2005, I would allow the appeals. I will allow the parties to submit orders to give effect to these reasons for decision. I certify that the preceding one hundred and sixty-eight (168) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Counsel for the Applicant: G J Davies QC A T Broadfoot

Solicitor for the Applicant: Allens Arthur Robinson

Counsel for the Respondent: N J Williams SC A J Payne D F C Thomas

Solicitor for the Respondent: Australian Government Solicitor

(i) The Invitation Document - May 1993 1 In May 1993, pursuant to a direction issued by the Minister under ss 9 and 10 of the Casino Control Act, the CCA issued an "Invitation Document" which invited expressions of interest for the establishment and operation of a Temporary Casino to be followed by a Permanent Casino under ss 9(1) and (4) and invited applications for a Casino Licence under s 10(1) of the Casino Control Act. 2 In addition to the proposed casino, the successful bidder was required to develop on the Premises an international hotel of approximately 600 rooms as well as convention / conference facilities, car parking, entertainment, food and beverage, retail and sporting and recreational facilities such as swimming pools and gymnasiums. 3 The Invitation Document stated, inter alia, that the Minister had directed the CCA that the Permanent Casino was to be located at the Premises which were described as being in State ownership. The Financial Information was described in the Invitation Document in the following terms: "3. FINANCIAL INFORMATION 3.1 LAND TENURE The Permanent Casino Site will be available for use pursuant to a lease for 99 years. 3.2 CASINO LICENCE-DURATION It is proposed that the duration of the Casino Licence, shall, subject to the [Casino Control] Act, be for the period commencing on the date of commencement of operations of the Temporary Casino and end at a time determined by the [CCA] in consultation with the Applicant. The [CCA] will consider submissions from Applicants as to the Casino Licence Period. 3.3 EXCLUSIVITY Section 6 of the [Casino Control] Act provides for there to be only one Casino Licence to be in force at any particular time. The Licence to operate the Temporary Casino followed by the Permanent Casino will be the only Casino Licence issued in the State of New South Wales by the [CCA]. In addition, the Minister has indicated that the [CCA] may conduct negotiations with Applicants and their Close Associates for the purpose of the [CCA] entering into binding contractual agreements on behalf of the State (subject to the Minister's approval under the [Casino Control] Act) to the effect that no other casino will be licensed to operate in the State of New South Wales within the period of 12 years from the date of commencement of Casino operations at the Temporary Casino. … 3.4 CASINO DUTY Section 114 of the [Casino Control] Act provides that a casino duty is to be paid to the [CCA] in respect of the Casino Licence. The [Casino Control] Act provides that the duty is to be: · As agreed from time to time by the Treasurer (a Minister) and the Casino Operator; or · In the absence of agreement, as determined by the Treasurer from time to time. … Invitees considering the lodgement of Expressions and Applications should note that the following rates of duty and other payments have been advised by the Treasurer in respect of the Casino: · Duty at a base rate of 20.0% of gross revenue of the Casino from gaming in relation to table games applied to that gross revenue up to A$200 million annually (indexed to Sydney CPI). · Duty at 22.5% of gross revenue of the Casino from gaming in relation to gaming devices. · "Super" profits duty applied to gross revenue of the Casino from gaming in relation to table games in excess of A$200 million annually (indexed to Sydney CPI), the duty to be set at the base rate listed above, plus 1% for each $5 million in excess of A$200 million with a maximum rate set at 45%. · A once only non-refundable lump sum payment on the grant of the Casino Licence, the nature and timing of which is to be subject to a competitive bid. The lump sum payment will not necessarily be the determinant of a successful Application. However, benefits to the State arising out of the size and proposed timing of the payment will be significant factors in the [CCA's] assessment of the Applications. · Additional duty, payable weekly and as set out in Table 1 … 3.5 COMMUNITY BENEFIT LEVY Section 115 of the Act provides that a Casino community benefit levy is to be paid to the [CCA] in respect of the Casino Licence. … 3.6 OTHER FEES Invitees should be aware that a number of other monetary outgoings may be determined in relation to the Casino Complex … Payment of rent under the lease of the Permanent Casino site would be a matter for negotiation, but will be determined on a "fair" market rent basis with the option of paying by annual lease payments reviewable every two years and adjusted upwards in line with property value increases or by way of an up-front capitalised lease payment." (Emphasis added.) 4 The Invitation Document also contained a proposed time line for prospective bidders to submit their bids. It was a staged approach. After filing an expression of interest and paying a fee, an applicant was forwarded a detailed brief.

(ii) The Brief - July 1993 5 In July 1993, the Brief was issued by the CCA. Only Pts A, F and G were provided to the Court. Part F was headed "Corporate and Financial - Casino Complex". Section F1:1 was headed "Exclusivity" and again stated that: "1.1 Section 6 of the [Casino Control] Act provides for there to be only one Casino Licence to be in force at any particular time. The Casino Licence to operate the Temporary Casino followed by the Permanent Casino will be the only Casino Licence issued in the State by the [CCA]. 1.2 In addition, the Minister has authorised the [CCA] to conduct negotiations with Applicants and Close Associates and other Relevant Parties for the purpose of the [CCA] entering into agreement(s) on behalf of the State … to the effect that no other casino will be licensed to operate in the State within the period of 12 years from the date of commencement of Casino operations at the Temporary Casino." 6 Section F1:2 was headed "Casino Duty and Other Payments". After setting out, in summary form, the 'Casino Duty', paras 2.12 and 2.13 stated: "2.12 In addition to the Casino Duty, the Successful Applicant will be required to make the following non-refundable payment by way of lump sum: 2.12.1 a minimum of 15% of total payment within 21 days of granting of the Casino Licence; 2.12.2 a minimum of 30.0% of total payment before commencement of operations of the Temporary Casino; and 2.12.3 full payment on commencement of Permanent Casino Operations. 2.13 In evaluating the Applications, the [CCA] will compute the NPV of the payments, and use this measure for comparing Applications. The [CCA] has a preference for lump sum cash payments." 7 Section F1:3 described the Community Benefit Levy that was payable. Section F1:4 described the Special Employee Licence Fees that were payable. Section F1:5 addressed 'Other Fees' which included additional statutory charges relating to development and building consents (para 5.2) and the lease of the permanent casino site (para 5.3). Para 5.3 was in the following terms: "5.3.1 A 99 year Lease of Permanent Casino Site based on a "fair" market rent to be determined by an independent valuation. 5.3.2 Payment of the rent under the Lease of Permanent Casino Site would be a matter for negotiation, but will be determined on a "fair" market rent basis with the option of paying by annual lease payments reviewable every two years and adjusted upwards in line with property value increases or by way of an up-front capitalised lease payment. 5.3.3 If Applicants are proposing to pay by way of an up-front capitalised lease payment, Applicants are required to forecast the "fair" market rental on the Permanent Casino Site including an NPV calculation." (Emphasis added.) 8 Section F1:9 was headed "Contractual Arrangements" and stated that agreement in relation to certain material documents was likely. The 'material documents' were listed and included - in the following order - Agreement for Lease, Lease of Permanent Casino Site, Exclusivity Agreement, Casino Licence, Casino Duty Agreement, Community Benefit Levy Agreement, Compliance Deed(s). A more detailed overview and description of the terms of the contractual arrangements was set out in Section G. For present purposes, it is sufficient to note that: (1) in relation to rent for the Construction Lease, section G3:1.18 stated that "[t]he rent paid in advance [was] not refundable to the developer upon termination of the [Construction Lease] unless the termination [was] by consent between the [CCA] and the developer"; and (2) in relation to rent for the Freehold Lease between the CCA and the lessee, section G4:1.3 stated that: "The lessee is obliged to pay total rent in advance and all rates, taxes and charges (including utilities) imposed or levied in respect of the Permanent Casino Site. The rent shall not be refundable if the Lease of Permanent Casino Site is terminated unless it is terminated by mutual agreement between the [CCA] and the lessee." (Emphasis added.) 9 Section F:2 headed "Principal Corporate and Financial Requirements" provided "Applicants with a framework and directions to assist in completion of readily comparable Applications". The first area that had to be addressed was as follows: "1.1.1 Financial Offer The [CCA] wishes to understand the value of each Applicant's financial offer including the terms and the risks associated with that offer being realised." 10 Accordingly, each applicant had to complete certain tables and calculate the net present value of the financial offer: Section F2:2 of the Brief. The approach to be adopted by the CCA in considering the Applications was further explained in section F:3 in the following terms: "1.1 In considering Applications, the [CCA] will have regard to the sufficiency of financial offers made. Those components of the Application to be taken into consideration for this purpose will be: 1.1.1 the amount offered as a non-refundable lump sum payment or payments; 1.1.2 the forecast Casino Duty payable; 1.2.3 the forecast Community Benefit Levy payable; 1.2.4 such other financial benefits the Applicant may choose to offer. 1.2 The Applicant should clearly identify the amounts for each of Sections F3:1.1.1, F3:1.1.2, F3:1.1.3 and F3:1.1.4 above together with a total for the same. 1.3 One measure to be adopted by the [CCA] in its evaluation of the financial value of each Applicant's offer will be the [CCA's] assessment of the NPV of each offer. The Application should include a detailed NPV calculation including any expected amounts for the Casino Duty and Community Benefit Levy indicating by item the gross value, proposed timing for payment, source of cash flows and an analysis of the cost of capital applied to compute the NPV for the period of 12 years from the date of commencement of Casino operations at the Temporary Casino." 11 Section F:11 was headed "Application Requirements" which set out the tables applicants were required to compete. Table F11:2 was headed "Casino Licence and Payments" and, consistent with the Casino Control Act, required details of the various forms of payment that would have to be made including a lump sum payment on grant of the Casino Licence, the proposed rental for the lease of the Permanent Casino Site and the terms of the lease payment as well as other duties and levies. The following chart was included in the Brief: CASINO LICENCE AND PAYMENTS UNITS TEMPORARY CASINO PERMANENT CASINO a. Lump sum payment on grant of Casino Licence $ b. Terms of payment for lump sum payment on grant of Casino Licence month/year c. Licence exclusivity term# years 12 years from the date of commencement of operations of the Temporary Casino d. Licence exclusivity area area NSW e. Licence term (to be nominated by Applicant) years f. Term of Lease of Permanent Casino Site and any Government owned property for the Temporary Casino, if applicable years 99 years from when the Successful Applicant takes possession of the Permanent Casino Site g. Rental payment proposed for Lease of Permanent Casino Site and any other Government site, if applicable $ h. Terms of lease payments Month/year i. Casino Duty p.a. % 20 20 j. Casino Duty payable $ weekly in arrears weekly in arrears k. Community Benefits Levy % 2 2 l. Community Benefits Levy payable weekly/other weekly in arrears weekly in arrears % m. Casino Duty and Community Benefits Levy paid on $ Gross Revenue Gross Revenue Gross Revenue / other

12 Consistent with the Invitation Document, the Brief again recognised the need for a lease and stipulated that rent was a matter of negotiation to be determined on a "fair" market rent. Prepayment of rent remained a possibility but an additional requirement was now proposed by the CCA - the rent was to be a non-refundable up-front payment: compare [8] with [3] above. As with the Invitation Document, the payments to be made for rent were separately identified and separately allocated. 13 After the Brief was issued, applicants raised a number of questions about the Brief and related matters. These issues were dealt with in various Addenda. Not all Addenda were before the Court. In relation to the issues which were the subject of this proceeding, Addenda 17 (3 November 1993), 18 (5 November 1993) and 20 (15 November 1993) were issued before the Star City Consortium lodged their First Offer. 14 Two aspects of Addendum No. 17 should be noted. First, it confirmed that the period of exclusivity to be provided under s 142 of the Casino Control Act was 12 years from the commencement of casino gaming operations in a Temporary Casino and that the period would not be extended beyond 12 years. Secondly, in relation to the payments under the 99 year lease for the Permanent Casino Site addressed in Section F1:5.3 of the Brief, the addendum stated: "The payment of the rent under the lease of the Permanent Casino Site would be a matter of negotiation, but will be determined on a "fair" market rent basis with the option of paying by annual lease payments reviewable every two years and adjusted upwards in line with property value increases or by way of an up-front capitalised lease payment. The [CCA] has had discussions with the Valuer General for a valuation for land tax purposes. When the land tax amount is determined, all Applicants will be advised. The Applicants will have to submit a fair market value for the site in their application to be submitted in November. Applicants may need to seek independent advice on the fair market value of the site." (Emphasis added.) 15 The issue of an up-front payment was addressed in Addendum No. 18. In response to a question about how the CCA would view public benefit inclusions that are capital intensive in comparison to up-front payments, the CCA said: "[The CCA] will have a higher consideration of the up-front payment than the provision of public benefit inclusions which are expected to be met by the Applicant through Section 94 Contributions, Affordable Housing Levy and conditions of development consent." 16 Consistent with the Brief, the Addenda reiterated that there would be a lease and that the rent was a matter of negotiation to be determined on a "fair" market rent. Not only was an up-front capitalised lease payment a possibility but it the CCA encouraged it. It was, and ultimately remained, non-refundable.

(iii) Star City's First offer - 22 November 1993 17 On 22 November 1993, the Star City Consortium lodged their First Offer. The First Offer was said to be "in compliance with all the requirements set out in the Brief to Applicants issued by the [CCA]." 18 The Financial Offer was summarised in the following terms: "$ Million 1. Payment within 21 Days of the issue of the Licence 35.0 2. Payment before the commencement of the operations of Temporary Casino 15.0 3. Lease rental payments for the Temporary Casino premises 102.0 4. Supplementary Profits tax on the Temporary Casino 54.0 TOTAL CASH OFFER $206.0 N.P.V July 1994 $185.0 5. Value to the NSW Government of Residual Building Works on Temporary Casino site $51.2" 19 The First Offer did not provide for any rental payments for the Permanent Casino Site. However, it did provide for lease rental payments for the Temporary Casino of $102m. The Temporary Casino was to operate until the Permanent Casino was constructed - a period of about 2 years. In other words, the First Offer included, as one of its components, the payment of rent of $102m for a period of two years. This aspect of the First Offer was subsequently queried by the CCA on 22 December 1993: see [23] below.

(iv) Addenda Nos 22, 23 and 25 - December 1993 and January 1994 20 Addenda Nos 22 and 23 were issued on 13 and 21 December 1993 respectively. A number of issues were addressed. Addendum No 22 stated that, consistent with s 156 of the Casino Control Act, the CCA would not entertain any proposal for compensation in whatever form where the Casino Licence conditions were varied or the Casino Licence was suspended or cancelled in accordance with the Casino Control Act. 21 Addendum No 23 referred to discussions the CCA held with applicants regarding the nature and payment of the "premium". The "premium" was the amount referred to in section F1:2, para 2.12 of the Brief: see [6] above. The CCA said it would welcome definitive statements from each of the applicants describing their preferred categorisation and treatment of the premium. Upon receipt of the statements, the CCA said it would further consider the issue and revert to the applicants. 22 The CCA addressed this issue by Addendum No. 25 dated 7 January 1994. The Addendum stated: "Applicants have raised the possibility of paying the non refundable lump sum payment in various tax efficient forms and in particular in a series of variously characterised instalments supported by bank irrevocable Letters of Credit. The [CCA] has now received advice from Treasury that their preference is for lump sum cash payments payable in accordance with the Brief requirements. Any arrangements involving discounting of instalment payments to establish equivalent lump-sum payments may in their opinion fall within Local Council guidelines. Applicants which include in their 10 January 1994 Financial Offer the non refundable lump sum payment in tax efficient forms involving instalments must in addition provide the Financial Offer they are prepared to make strictly in accordance with the requirements of the Brief … ."

(v) Clarification of Initial Offer 23 On 22 December 1993, the CCA sought clarification of Star City's interpretation of the lease rental for the Temporary Casino and its definition of "outgoings" and requested separate identification of the lease rental and the outgoings to be included in the rental. Star City responded in Appendix C of its Supplementary Offer dated 10 January 1994.

(vi) Supplementary Offer - 10 January 1994, 11 January 1994 and 13 January 1994 24 Star City submitted its Supplementary Offer on 10 January 1994. The Financial Offer was in the same form as its Initial Offer although the total cash offer had increased by $15 million. The amount offered as rental payments for the Temporary casino ($102 million) did not change. 25 Annexure C to Star City's Supplementary Offer described the Lease Rental for the Temporary Casino in the following terms: "The rentals proposed in our offer of 22 November 1993 are net rentals. All outgoings such as council rates have been accounted for separately in the operational costs of the Temporary Casino. … At this time [Star City] has not sought specific tax advice pertinent to the Sydney Casino Project. This advice will be sought and can be provided to the [CCA] following shortlisting on 24 January 1994. The offer by [Star City] is based on previous written advice received from Arthur Andersen in August 1993 for the Melbourne Casino Project. In summary, this advice is as follows: -- a. The rental which is to be paid in respect of the temporary casino licence has been treated as an allowable deduction for the year in which it is paid. The rent can be justified provided that it is clear that [Star City] will generate a profit during the temporary casino period. The financial projections indicate that this will be the case and so there is support for the amount to be claimable as an income tax deduction. …" A schedule of lease rental payments for the temporary casino was attached to the Supplementary Offer. The monthly lease rental proposed was $3.4 million for the period from 1 May 1995 up to and including 1 October 1997. The lease rental payments then proposed totalled $102 million. There was no rent expense in any of the subsequent years or for the Permanent Casino. 26 On 11 January 1994, the Supplementary Offer was amended. The Star City Consortium informed the CCA that should the CCA not wish to accept the payments in its letter of 10 January 1994, then the Consortium was prepared to pay, in a lump sum, the equivalent of the July 1994 value of those amounts. 27 On 13 January 1994, in response to a request for clarification from the CCA, the Star City Consortium provided further information about the rent proposed for the Temporary Casino. CCA's clarification read: "The "super rent" proposed for the Temporary Casino appears to incorporate the rental stream for both the Temporary and Permanent Casinos. Please clarify that the "super rent" payment stream is in lieu of annual rental payments for both the Temporary and Permanent Casinos for the entire period of the respective leases." 28 In response, the Star City Consortium stated that: "The rent proposed for the Temporary Casino is solely for the Temporary Casino and will be paid whilst the Temporary Casino is operating. The rent proposed for the Permanent Casino site is a nominal amount to be paid over the lease period."

(vii) Addendum No 27 and CCA's letter of 25 January 1994 29 On 24 January 1994, two events occurred. The CCA announced that Star City was on the short list of candidates and issued Addendum No 27. That Addendum identified matters of a non-legal nature, which the CCA wished to discuss. On 25 January 1994, the CCA sent a letter to the Star City Consortium enclosing, in agenda form, the matters the CCA's advisory panel wished to discuss with the Consortium. Under the heading "Significant Issues - Commercial", the CCA listed some of the key matters it wished to have confirmed. The list, in part, read: · "Alternative Casino Duty arrangements including but not limited to: - commitment of [Star City] to minimum levels of Casino Duty; - alternative Duty structures. · The sufficiency of that non-refundable lump sum. · Other financial benefits offered being: - fixed Casino Duty - lump sum rental payments in particular whether such payments are refundable and/or the acceptability of such payments to the NSW Government."

(viii) Draft Casino Duty and Community Levy Agreement - 24 February 1994 30 On 24 February 1994, a second draft of the Casino Duty and Community Levy Agreement was released by the CCA. Clause 4.1 of this second draft was headed "First Specified Amount Duty and Second Specified Amount Duty". It provided that: "4.1 The Licensee shall pay to the [CCA] the First Specified Amount Duty and the Second Specified Amount Duty. 4.2 The First Specified Amount Duty is due and payable by way of instalments of the following percentages on the following dates: … 4.3 The Second Specified Amount Duty is due and payable by way of instalments in the percentages (amounts) and on the opposite and corresponding dates specified in Column 1 and Column 2 of Schedule 2 respectively. 4.4 The Treasurer and the Licensee have agreed to commute the Second Specified Amount Duty in the amount of $[ ] to a net present value amount of $[ ] payable on [ ]. 4.5 Once due and payable the First Specified Amount Duty and the commuted net present value amount of the Second Specified Amount Duty are not refundable in any circumstances and if any right to a refund or credit shall arise in the future in relation to the same the Licensee waives such right." 31 Leighton Properties Pty Limited, a member of the Star City Consortium, sought advice from Arthur Andersen about the second draft of the Casino Duty and Community Levy Agreement and, in particular, the deductibility to Star City of the amounts to be paid under cl 4 of that agreement. On 15 March 1994, Arthur Andersen wrote, in part, in the following terms: "Clause 4.1 of the Agreement provides that the Licensee shall pay to the [CCA] the First Specified Amount Duty and the Second Specified Amount Duty. The First Specified Amount Duty is due and payable by way of three instalments in accordance with the timeframe set out in clause 4.2 of the Agreement. We understand that this amount was originally designed to represent a payment premium for the grant of the Casino licence. Clause 4.3 of the Agreement provides that the Second Specified Amount Duty is due and payable by way of instalments in accordance with the percentages / amounts and corresponding dates to be specified in Schedule 2 to the Agreement. We understand that this amount was originally intended to represent payment for rent over the period of the licence but that, in subsequent negotiations with NSW Treasury, the NSW Treasury had indicated that they would prefer that the Second Specified Amount Duty be viewed as representing a tax payable by the Licensee of the Casino, not necessarily based upon the gross revenue or turnover of the Casino. Clause 4.4 of the Agreement provides that the Treasurer and the Licensee have agreed to commute the Second Specified Amount Duty to a net present value amount to be paid by a date yet to be specified. Once due and payable, the First Specified Amount Duty and the commuted net present value amount of the Second Specified Amount Duty are not refundable. Deductibility of Payments The First Specified Amount Duty represents payment for a premium for the grant of the Casino licence. This payment is clearly of a capital nature as it represents an initial outlay by the Company for the acquisition of a valuable asset, namely, the licence rights to the Sydney Casino. Given that the payment will be of a capital nature, the Company cannot, claim a deduction to the payment and the Australian Income Tax Assessment Act. However, the classification of the Second Specified Amount Duty as either of capital or revenue nature is not so clear. As outlined above, the Second Specified Amount Duty will represent a tax levied on the licensee of the Casino. If these payments were made by the Company on a periodic basis over the duration of the licence then the payments would probably not be considered as being of a capital nature and would be deductible to the Company on the basis they would be incurred in the carrying on of the company's casino business for the purpose of producing assessable income. However, the fact that the payment is commuted, and the manner in which it is documented in the Agreement raises a significant risk that the payment will be considered to be of a capital nature and, as such, non-deductible to the Company." 32 The advice concluded by suggesting an alternative approach in relation to the Second Specified Amount Duty as follows: "A possible alternative approach to the above arrangements in respect of the Second Specified Amount Duty would be to exclude this payment from the Agreement and to agree that the Licensee would pay a minimum amount of rent on a periodic basis over the duration of the licence. The Company could then arrange for an independent party (eg. a financial institution) to make an offer to purchase the stream of rental payments from the NSW Treasury for a fixed / specified amount. This offer could be submitted as part of the Company's tender documents. The NSW Treasury could still obtain the benefit of an up front lump sum payment in respect of the rentals and the company could then obtain a deduction on a periodic basis for its rental payments."

(ix) Addendum No 36 - 16 March 1994 33 Prospective bidders were required to provide their Financial Offer on 22 April 1994. On 16 March 1994, the CCA issued Addendum No 36 to assist in the preparation of that offer. Attachment 2 headed "Financial Offers" stated, in part, that: "Part F2: 1.1.1Financial Offer The [CCA] wishes to understand the value of each Applicant's Financial Offer including the terms and the risks associated with that offer being realised. Part F3: 1.1 In considering the Applications, the [CCA] will have regard to the sufficiency of financial offers made. Those components of the Applications to be taken into consideration for this purpose will be: 1.1.1 the amount offered as a non-refundable lump sum payment or payments; 1.1.2 the forecast casino duty payable; 1.1.3 the forecast community benefit levy payable; 1.1.4 such other financial benefits as the Applicant may choose to offer. Part F3: 1.1.4 Such Other Financial Benefits As The Applicant May Choose To Offer The [CCA] will only accept financial benefits which meet the following tests: · they are cash benefits; · they are certain as to amount and timing, i.e. fixed amounts must be specified as well as the proposed dates of payment; · if the amounts specified are proposed to be paid on a date or dates other than in accordance with the following payment schedule, being: - 15% - 21 days after the Licence Issue Date; - 30% - on or before the Temporary Casino Commencement Date; and - 55% - on or before the Permanent Casino Commencement Date. (the "15-30-55 Payment Schedule") the offer must include an option for the [CCA] to obtain payment of a commuted present value of the proposed payment stream in accordance with the 15 - 30 - 55 Payment Schedule. The amount which would be payable in accordance with the 15 - 30 - 55 Payment Schedule must be clearly specified and a detailed calculation showing the gross amount, proposed payment dates, discount rate and present value must be provided. · the amounts offered must be expressed as being non-refundable irrespective of when they are paid, that is, irrespective of whether the amounts offered are paid on the Applicant's proposed payment terms or the 15 - 30 - 55 Payment Schedule. · the payments must not be subject to any reduction in the event and income-tax deduction is not obtained by the Applicant for any proposed payment, that is, the tax risk for payments which are potentially deductible by Applicants must remain with the Applicant. · the payments must not be in excess of amounts which would otherwise be reasonable in the circumstances; for example, rental payments in excess of an appropriate market value rental will not be accepted by the [CCA] as forming part of the financial offer. The [CCA] will not become involved in artificial financial arrangements. …" (Emphasis added.)

(x) Arthur Andersen draft advice - 17 March 1994 34 On 17 March 1994, Arthur Andersen prepared further draft advice for the Star City Consortium. The draft advice, in part, read: "We refer to our letter dated 15 March 1994 and to your recent discussions with Don Green of this office regarding the deductibility to [Star City] of the amounts which are required to be paid under clause 4 of the Casino Duty and Community Levy Agreement ("the Agreement"). Background We understand that [Star City] is currently considering an alternative to the proposal which was commented on in our letter of 15 March 1994. Under this alternative proposal, the Second Specified Payment Amount Duty currently provided for in clause 4 of the Agreement would be omitted from the Agreement. We understand that the Second Specified Payment Amount Duty was originally intended to represent payment for rent over the period of the Exclusive Licence and the alternative proposed will more explicitly recognise the payment as a rental payment. Under the proposed alternative, [SHCP] would enter into a 99 year lease with the NSW Government for the premises upon which the Casino is to be located. [SHCP] would then sublease the premises to [Star City]. For the first 12 years of the lease term (i.e. the period coinciding with the exclusive licence), the rental payments would be approximately $15 million per annum. The rental payments would be approximately $250,000 for the remainder of the lease term. The leases would, however, contain two prepayment options providing for rental payments in respect of the first 12 years of the lease to be prepaid on certain dates at a discount to reflect the time value of money. … Deductibility of Rental Payments … Periodic payments of rent will generally be regarded as being of a revenue nature and deductible to [Star City] on the basis that the payments will have been incurred by [Star City] in the carrying on of their business for the purpose of producing assessable income. Therefore, [Star City's] rental payments in respect of years 13 to 99 (inclusive) of the lease term should be deductible to [Star City] on an annual basis. Provided the proposed payments for which [Star City] will become liable under its ... lease Agreement are genuine lease rental payments incurred for the quiet possession and enjoyment of the leased premises, we believe that it is arguable that the prepayment under the prepayment option exercisable under the lease should also be of a revenue character and hence deductible notwithstanding that the period for which the prepayment is made is 12 years. In order to be considered as a genuine lease rental payment, we suggest that the rent should be reasonable (sic) justifiable on principles which an independent valuer would use in the given circumstances. If the rental payments under the lease agreement could not be so reasonably justified, an inference may be raised that the purpose for which the rental payments were agreed to be paid was something other than the quiet possession and enjoyment of the leased premises. … … [T]here remains some risk that the ATO could seek to treat the prepaid rental as of a capital nature and, as such, non-deductible. This would be on the basis that the prepayment of the first 12 years' rental lacks a significant (although not necessarily determinative) characteristic of a revenue nature, namely, that of periodicity." (Emphasis added.)

(xi) Letter from Arthur Andersen to the CCA - 6 April 1994 35 On 6 April 1994, Star City forwarded a letter from Arthur Andersen to the CCA. The Arthur Andersen letter detailed 6 alternatives for payments by Star City which were intended to form part of Star City's financial bid. Alternative 1 was entitled "Rental Payments under Lease Agreement". It stated: "[SHCP] would enter into a 99 year lease with the [CCA] for the premises upon which the Casino is to be located. [SHCP] would then sublease the premises to [Star City]. For the first 12 years of the lease term (i.e. the period coinciding with the exclusive licence), the rental payments would be approximately … per annum accruing annually. The rental payments would be approximately … per annum, accruing annually for the remainder of the lease term. The lease would however contain two prepayment options exercisable by the [CCA], providing for rental payments in respect of the first 12 years of the lease to be repaid on certain dates. The prepayment options would be exercisable within a short period, say 3 months, after the commencement of the lease. Exercise of the first prepayment option would result in the company prepaying the first 12 years rental on a single specified prepayment date, say, one month after exercise. Exercise of the second prepayment option would result in the prepayment of the first 12 years rental over three specified dates; being the dates of commencement of construction of the temporary casino, commencement of operation of the temporary casino and commencement of operation of the permanent casino, respectively. To cover the event that the rental payments would become refundable in the future (whether by operation of law or by a judgment of a Court), [Star City or Holdings], would agree to indemnify the [CCA] for any loss which it suffers should the rental payments actually become refundable …" 36 On 7 April, a further letter containing two further alternatives was provided by Star City to the CCA. 37 The CCA responded to both letters. In response to the alternative described in [35], the CCA stated: "As you would be aware, the Brief contemplates the payment by the Applicant of a "Fair Market Value Rent" either annually or as a commuted lump sum. Attachment 2 to Addendum No. 34 defines the characteristics that payments must possess to be considered as forming part of the Financial Offer. The Treasury have verbally advised the [CCA's] consultants that payments of the type contemplated under Alternative 1 will be acceptable provided that they are supportable as being a "Fair Market Value Rent". In proposing payments in excess of the Valuer General's upper estimate of $80 million as the value of the Casino Site as a casino, you will need to provide appropriate third party evidence from a qualified source. Treasury also advised that a proposed payment should not grossly exceed the above assessment of $80 million." 38 In relation to Alternative 3, entitled "Structured Rental Payments for Temporary Casino", the letter stated: "… We have previously advised you that neither the rent paid in relation to the Temporary Site nor the residual value of improvements to the Temporary Site will be considered as forming part of the Financial Offer." 39 Finally, in relation to the Casino Duty and Community Levy Agreement, the letter stated that "[y]ou should note that the Second Specified Amount Duty in the [Casino Duty and Community Levy Agreement] has been re-drafted." As noted earlier (see [30]), the Second Specified Amount Duty was first inserted into the second draft of the Casino Duty and Community Levy Agreement.

(xii) Draft 3 of the Casino Duty and Community Levy Agreement - 8 April 1994 40 Draft 3 of the Casino Duty and Community Levy Agreement was issued by the CCA on 8 April 1994. It retained the First Specified Amount Duty as a non-refundable payment payable by way of instalments: cl 4. However, the Second Specified Amount Duty was deleted and replaced by a "Casino Duty - Base Amount": cl 5. Clause 5 of Draft 3 provided: "5.1 [Star City] shall pay to the [CCA] the Casino Duty - Base Amount in the amounts and on the dates specified in Column 1 and column 2 of Schedule 3 respectively. 5.2 [Star City] acknowledges and agrees that payment of the Casino Duty - Base Amount does not depend upon Gross Revenue received during any of the periods specified in Schedule 3. 5.3 Notwithstanding clause 5.1, the Treasurer has determined to commute the Casino Duty - Base Amount in the annual amount of $[ ] to a present value amount of $[ ] ("Commuted Casino Duty - Base Amount") payable on the following dates: (a) at least 15% on or before 12 noon (Sydney time) on the date which is 21 days after the Licence Issue Date; (b) at least 30% on or before the Temporary Casino Commencement Date; and (c) the balance on or before the Permanent Casino Commencement Date. 5.4 Once due and payable the Casino Duty - Base Amount is not refundable in any circumstances and if any right to a refund or credit shall arise in the future in relation to the same [Star City] waives such right." 41 Neither the Second Specified Amount Duty nor the Casino Duty - Base Amount, formed part of the Invitation Document, the Brief or the First Offer made by the Star City Consortium.

(xiii) Explanatory Memorandum - 19 April 1994 42 The Consortium's legal advisers prepared an Explanatory Memorandum in relation to the Documentation and Structure of the transaction for the directors and staff of Holdings. The Final Version of the Explanatory Memorandum was dated 19 April 1994 and described the transaction as follows: "This is an extremely complex transaction. The interaction between the parties and the various agreements is considerable, and it is not possible to consider any particular agreement or provision thereof in isolation. All form part of a carefully constructed and co-ordinated whole. This summary outlines in general terms the roles of the parties, the purposes of each document and give a brief overview of the structure and the roles of the documents and the parties therein and their relationship to each other. Reliance should not be placed on this summary alone in understanding the transaction. Detailed consideration and interpretation of the provisions of all relevant documents referred to in this summary will be required in many instances to answer questions, provide information or ensure that decision making is fully informed."

43 Against the background of those warnings, the Explanatory Memorandum described the Permanent Site Freehold Lease in the following terms: "This is a Lease to be entered into between the CCA and SHCP for the lease of the Permanent Casino Site for a term of 99 years. Rental payable under this Lease reflects in part a tax effective payment of part of the premium for the issue of the Licence to CCA and is determined as part of the overall financial structuring of the bid. The terms and conditions of the Lease are extremely simple. … In essence, the only significant potential event of default is a failure to pay rental under the Permanent Site Lease." (Emphasis added.) 44 Although the Commissioner placed considerable emphasis on the highlighted passage, it is not immediately apparent what legal use the Commissioner sought to have me make of it. Whether the statements made in the Explanatory Memorandum were legally accurate and complete is a matter ultimately for the Court, not for one of the parties' advisers.

(xiv) Arthur Andersen Advice - 21 and 22 April 1994 45 On 21 and 22 April 1994, Arthur Andersen provided separate letters of advice to the Star City Consortium. The first provided an indicative assessment of an appropriate annual ground rental for the Casino Site of between $16.9 million and $21.11 million. 46 The second advice concerned the taxation treatment of two payments - the First Specified Amount Duty in cl 4 of the Community Benefit Agreement and the Rental Payments under the Construction Lease and the Freehold Lease. The second letter stated, in part, that: "… First Specified Amount Duty … Clause 4.1 of the … Casino Duty and Community Benefit Agreement, provides for the payment by [Star City] ... to the [CCA] of the First Specified Amount Duty. The First Specified Amount Duty is $256,000,000, for Offer 1, and $291,000,000 for Offer 2. … [T]his payment is of a capital nature as it represents an initial outlay by [Star City] for the acquisition of a capital asset, namely the licence to operate the Sydney Casino. … Permanent Site (Construction Lease) - Rental Payments … Clause 1 of Schedule 1 of the Permanent Site (Construction Lease) specifies that the rent payable under that Lease and the … Freehold Lease …, for the 12 years following the Lease Commencement Date (referred to as the "Primary Rental Period") will be $15,000,000 per annum. Notwithstanding clause 1, clause 2 provides that the rental payable during the Primary Rental Period may be prepaid at the election of the [CCA]. This election must be made by the [CCA] giving written notice to the Lessee not less than one month prior to the grant of the Casino Licence. In making its election under clause 2 of Schedule 1, the [CCA] may require the Lessee to make a single prepayment due on a specified date or to make a series of prepayments due on the dates specified in that clause. Schedule 1 of the …Freehold Lease … recognises that, if an election is made pursuant to clause 2 of Schedule 1 of the …Construction Lease … to have the rental payable during the Primary Rental Period prepaid, then no further rental will be payable for the balance of the Primary Rental Period. … Schedule 1 of the … Freehold Lease further provides that an annual rental of $250,000 will be payable for the balance of the 99 year term (i.e. after the expiration of the Primary Rental Period). … … [W]here the [CCA], as Lessor under the … Construction Lease, makes an election under clause 2 of Schedule 1 of that Lease, [SHCP] will be required to prepay the rental for the Primary Rental Period in accordance with that clause. Provided the prepaid rental period for which [SHCP] will become liable under the lease are genuine rental payments incurred for the quiet possession and enjoyment of the rental property, we consider that it is strongly arguable that the prepayment of rental under clause 2 would be of a rental character and hence deductible under sub-section 51(1) of the [1936 Act]. …"

(xv) Holdings' Directors Meeting and Final Offer - 22 April 1994 47 On 22 April 1994, the Board of Directors of Holdings considered the Explanatory Memorandum dated 19 April 1994 and resolved that Holdings enter into the Sydney Casino Documents. 70 documents were tabled. 48 On the same day, the Star City Consortium submitted its Final Offer. The Final Offer was made up of two alternative offers. The first offer was: " $ Million 1. Payment within 21 Days of the issue of the licence 256.0 2. Prepayment of the Rental for the Permanent Casino Site within 21 days of the issue of the licence 120.0 TOTAL CASH OFFER $376.0 N.P.V July 1994 $365.0 3. Lease rental payments on Temporary Casino Total Rental Payment 10.6 4. Value to the NSW Government of Residual Building Works on Temporary Casino site $45.2" 49 The alternative offer was in the following terms: " $ Million 1. Payment within 21 Days of the issue of the licence 43.65 2. Payment before the commencement of the operations of the Temporary Casino but no later than 31 July 1995 87.30 3. Payment before the commencement of the operations of the Permanent Casino but no later than 31 December 1997 160.05 4. Prepayment of the Rental for the first 12 years of the Permanent Casino Site within 21 days of the issue of the licence 120.0 Note: Above dates have been calculated on the Assumption of the granting of the licence by 28 October 1994 TOTAL CASH OFFER $411.01 N.P.V July 1994 $365.00 Other financial benefits to NSW Government 3. Lease rental Payments on Temporary Casino TOTAL RENTAL PAYMENT 10.6 6. Value of NSW Government of Residual Building Works on Temporary Casino site $45.2"

(xvi) Letter to State Revenue Office - 27 April 1994 50 On 27 April 1994 (five days after Star City made its final offer), a letter was sent by Star City's legal advisers to the NSW State Revenue Office. The letter stated, in part, that: "The abovementioned Casino Licence is to be granted for a consideration consisting of a licence "premium" which may be paid by the licence holder in a variety of means depending upon the optimum tax and commercial position for it and ongoing taxes and duties. Our client is proposing to pay portion of the licence premium as consideration for the grant of the licence and portion as rent pursuant to the [Permanent Lease] referred to below. … (iv) [Permanent Lease] This Lease is the principle (sic) lease document and will [be] expressed to be for a term of 99 years. … We confirm that in clause 2.1 of the Lease, the Lessee may prepay a lump sum portion of the rental that would otherwise be payable over the term. We confirm that commercially, payment is intended to be a portion of the licence premium to be paid to the [CCA]. You will note however that under clauses 2.6 and 2.7 of the commuted lump sum is refundable in circumstances of the early termination of the Lease." … In our view therefore, the [Permanent Lease] is dutiable at the rate of 0.35% on the total rental for the terms and no amount paid or payable under the Lease is dutiable as a premium." (Emphasis added.) 51 The Office of State Revenue responded the following day. The Office agreed with Star City's legal advisers in relation to the Construction Lease and the Permanent Lease and, in particular, confirmed that no amount payable under the lease was to attract duty as a premium.

(xvii) Government Assessment of Competing Bids - May 1994 52 On 2 and 3 May 1994, the NSW Treasury, the CCA and the CCA's advisers (County Natwest) assessed the respective bids. The written record of that analysis was said to contain information confidential to the NSW Government. Three parts of the non-confidential section of the analysis are worth restating. First, the advice the NSW Treasury provided to the CCA was recorded in the analysis in the following terms: "Prior Treasury advice to CCA As part of discussions seeking clarification of bid documents for applicants, Treasury advised the following to the CCA or their nominated representatives: · Any prepayment of rental as a lump sum payment must have regard to a "reasonable" valuation of the site. An upper limit of $125M in present value terms was agreed. Where valuations above the Valuer-General's estimated range of $40M to $80M were involved, an independent valuation supporting the higher estimate would need to be provided by the applicant." 53 Secondly, the analysis described the bids and the focus of the NSW Treasury as follows: "NATURE OF THE BIDS: Bids from two applicants have been received: 1. Darling Casino Ltd, (DCL); and 2. [Star City] The financial components of the bids of interest to the Treasurer include the lump sum payments and the estimates of casino duties and levies flowing to the NSW Government. …" 54 Thirdly, the analysis summarised the components of the Star City bid as including: "… · $256M non-refundable lump sum payable 21 days after the licence issue or $291M payable on the 15/30/55 schedule; and · $120M permanent casino ground rent payable 21 days after the licence issue plus $0.25M per annum from 2006 to 2093. … [Star City] have chosen to include capitalised group rent payments for 12 years, with a present value of $120M, in their lump sum payment, following advice they received from their financial adviser, Arthur Andersen, that the annual ground rental amount would be likely to be acceptable to the Australian Taxation Office (ATO) as an operating cost deduction. It should be noted that ground rent payments are made directly to the CCA and are not part of the Treasurer's Agreement. It is Treasury's understanding that these payments are to be transferred by the CCA directly to the Consolidated Fund. …" 55 The CCA obtained a report from County Natwest on the Financial Offers which stated, in part, that: "[Star City] has chosen not to include any amounts as Casino Duty Base Amount on the advice of their taxation consultants (Arthur Andersen) that such payments would be denied as deductions under the income tax law. The risk for the tax deductibility of the Permanent Casino Rent remains with [Star City], i.e. the Financial Offer remains the same irrespective of the tax status of the Permanent Casino Rent. The Permanent Casino Rent has been supported by a rent valuation. The prepayment is within the parameters discussed and agreed as acceptable by Treasury." (Emphasis added.) 56 On 3 May 1994, a the request of the CCA, Star City wrote to the CCA setting out the amendments to the Transaction Documents executed on 22 April 1994 which would be required if the CCA accepted one of Star City's offers and clarifying some of the terms of each offer. In relation to Offer 1 (see [48] above), Star City stated that if that Offer was accepted, they would agree to the following amendments being made: "(a) Casino Duty and Community Benefit levy Agreement: … (iii) Clause 5 is to deleted and related definitions and other references to "Casino Duty - Base Amount" are to be deleted throughout the document. (b) Permanent Site Construction Lease: … It should be noted that the balance of the amount payable as rent under paragraph 1 of the Schedule after expiration of the term of this Lease will continue to be payable as Rent under the Permanent Site Freehold Lease for the remainder of the 12 year period constituting the Primary Rental Period. The completed copy of Schedule 1 to the Permanent Site Freehold Lease enclosed with our Submission reflects this, making it clear that these payments continue in addition to the annual rental of $250,000.00 payable under the latter Lease. However, if the rental payable under the Primary Rental Period is pre-paid at the election of the [CCA] in exercise of the option granted to it under Clause 2 of Schedule 1 in accordance with Clause 3(a) or (b) of Schedule 1, then this obligation will be satisfied prior to commencement of the Term of the Permanent Site Freehold Lease. For the avoidance of doubt, we state that it is our intention that Clause 3 of Schedule 1 of the Permanent Site Construction Lease be completed so as to provide that payments of rent thereunder are to be made as follows: (i) If the [CCA] elects to receive pre-payment of rent in accordance with paragraph 3(a) the payment will [be] made in full on the date which is 21 days after the Licence Issue Date. (ii) If the [CCA] elects to receive pre-payment of rent by instalments in accordance with paragraph 3(b): (A) the payment to be made in accordance with Clause 3(b)(i) will be made on the date which is 21 days after the Licence Issue Date; (B) the payment to be made in accordance with Clause 3(b)(ii) will be made on the earlier of the Lease Commencement Date for the Temporary Site Sub-Lease (as defined in the Temporary Site Construction Sub-Lease) and the date which is nine (9) months after the Licence Issue Date; and (C) the payment to be made in accordance with Clause 3(b)(iii) will be made on the earlier of the Lease Commencement Date for the Permanent Site Lease (Freehold Lease) (as defined in the Permanent Site Construction Lease) and the date which is thirty-eight (38) months after the Licence Issue Date. …" (Emphasis added.)

(xviii) CCA Announcement of Star City as the Preferred Applicant - 6 May 1994 57 On 6 May 1994, the CCA announced publicly that Star City was the preferred applicant for the Casino Licence. The CCA made that announcement after it and it alone made the decisions about how the rent was paid, when and in what amount. The announcement stated, in part, that: " …one of the factors in favour of the [Star City Consortium] was that it had an impressive financial offer for the casino licence of $441 million. The offer would be payable in three instalments up to the commencement of operations of the Permanent Casino in approximately 3.5 years. The group also submitted an attractive alternative offer of $376 million payable in full 21 days after the issue of the casino licence, which is expected to occur by November this year. The CCA prefers this offer."

(xix) Amendments to the documents exhibited to the Compliance Deed 58 On 6 October 1994, the Compliance Deed was amended by the "First Amending Deed". So far as is relevant, the First Amending Deed records that the draft Casino Duty and Community Benefit Agreement was amended by deleting all references to the "Casino Duty-Base Amount" and by inserting in the definition of the "Specified Payment Amount" the sum of $256 million. The First Amending Deed also records that the Casino Operations Agreement and Sch 1 to the Construction Lease and the Freehold Lease were amended to delete the reference to the CCA making an election to have the rent payable during the Primary Rental Period prepaid and, in lieu, inserting a clause which provided for or acknowledged rent for the Primary Rental Period of $15m per annum and the ability of SHCP to prepay that liability by the Prepayment of $120m.

(xx) Letter sent by Star City to the NSW Treasurer - 13 December 1994 59 On 13 December 1994, the day before the Occupational Licence Agreement was executed, Star City sent a letter to the NSW Treasurer. 60 The letter was in the following terms: "SYDNEY HARBOUR CASINO [Star City] is currently the Preferred Applicant for the issue of a casino licence by the [CCA] pursuant to the Casino Control Act… As you will be aware, [Star City], if the [CCA] ultimately determines to grant it a casino licence, will be required to pay to the [CCA] the sum of $256,000,000.00 as the specified Payment Amount pursuant to the terms of the Casino Duty and Community Benefit Levy Agreement which will be entered into between you and [Star City] at that time. The [CCA] has informed us that, if that sum becomes payable, we are, if it so directs, to pay it to you instead of the [CCA]. Further, [SHCP], a related corporation of [Star City], will, if the [CCA] determines to issue a licence, enter into as lessee a lease of the Pyrmont site on which the Permanent Casino is to be constructed with the [CCA] as lessor (the "Permanent Site Construction Lease"). Under the terms of that lease, which is a lease for the period of the construction of the Permanent Casino following which it will be superseded by a long term lease, SHCP has agreed to prepay rental to the [CCA] in an amount of $120,000,000.00. The [CCA] has informed us that, if the prepaid rental becomes payable, we are, if it so directs, to pay it to you instead of the [CCA]. In relation to these payments, we wish to record that: (a) we will comply with the directions of the [CCA] if they are made; (b) the rental prepaid under the terms of the Permanent Site Construction Lease only reflects the value of the Permanent Casino site if a casino licence is issued and, as such, forms part of the premium paid by [Star City] to obtain the licence if the [CCA] determines that it will issue the licence to [Star City]. [Star City] will loan $120,000,000.00 to SHCP for the purpose of allowing it to prepay the rental under the Permanent Site Construction Lease and SHCP will only be able to repay that loan if the licence is granted."

(xxi) Subsequent Events - 1995 Star City Tax Return; 20 September 1996 Arthur Andersen Memorandum; 1995 Star City Tax Return as amended in May 1997; 10 June 1998 Amending Deed and 11 March 1998 Covering Letter Thereto 61 The Commissioner referred to the 1995 Annual Return of Star City in which there was no reference to the Prepayment and a subsequent memorandum prepared by Arthur Andersen dated 20 September 1996. After referring, inter alia, to the Construction Lease and the Freehold Lease and two Occupational Licence Agreements, the Arthur Andersen memorandum recorded that: "1. LEGAL POSITION 1.1 Rent and Outgoings … Pursuant to these [Occupational Licence] [A]greements, [Star City] agrees to 'pay and be responsible to ensure payment of all rent, outgoings, insurance premiums and payments for services that may be imposed on it under the terms' of the leases as mentioned above. The wording of the above clause of both Occupational Licence Agreements does not appear to be correct. A review of the various lease agreements as mentioned above impose all such obligations on SHCP, rather than [Star City]. We have discussed the wording of this clause with Ian Johnston of Dunhill Madden Butler. Ian has agreed that the relevant clause (5.2) of both Occupational Licence Agreement's (sic) should read as follows: "[Star City] will pay and be responsible to ensure payment of all rent, outgoings, insurance premiums and payment for services that may be imposed on SHCP" Ian has advised that the agreements should be amended. He indicated that this will require [CCA] approval but not Ministerial approval. He does not see that this should be a problem and believes that the amendments should be made to reflect the true intention of the deeds. 1.2 Permanent Site Rent Assuming that this amendment is made, we note that under the [Freehold] Lease, a payment of rental of $120m liable to be made in advance in respect of the first 12 years of the lease has been made. Rent in relation to the permanent site will be $250,000 per annum thereafter. Under the terms of the Occupational Licence Agreement, [Star City] is required to pay all rent and outgoings imposed on [Holdings] under the terms of the lease agreements. However, we note that the audit workpapers indicate that [Holdings] actually made the payment of the rental in advance in relation to the permanent site. For accounting purposes, when the above amount was paid by [Holdings], an inter-company loan entry was made between [Holdings] and [SHCP] in relation to this amount on the basis that [Holdings] had paid it on behalf of [SHCP]. … This accounting treatment does not reflect the legal documentation and its intention, as [Star City] is the entity responsible for payment of this amount pursuant to the Occupational Licence Agreement. Accordingly, the accounting entries should be adjusted to reflect that [Holdings] paid rental on behalf of [Star City] rather than [SHCP]. … … 1.3 Temporary Site Rental We note that rental for the temporary site is satisfied by the construction costs of the Temporary casino site. We understand … that the payments in respect of the temporary casino construction were paid by [Star City]. For accounting purposes, an inter-company loan entry was made between [Star City] and [SHCP] in relation to the payments, so that the rent expense is reflected in the books of [SHCP]. This is incorrect, as the rent expense is imposed on [Star City], and not [SHCP], pursuant to the Occupational Licence Agreement. Accordingly, these accounting entries should be reversed immediately, so that the temporary site rental is expensed in the books of [Star City], and not [SHCP]. …" (Emphasis added.) 62 Consistent with the legal advice and the Arthur Andersen memorandum two events occurred. First, amended audited accounts for Star City for the 1995 year were issued in May 1997. The amended audited accounts recorded that: "We have previously audited the financial statements of [Star City] for the year ended 30 June 1995, and have issued out report thereon dated 20 September, 1995. As indicated in Note 1 to the financial statements, due to an inconsistent interpretation of the Occupational Licence Agreements that exist between [Star City] and [SHCP], the current year amounts were restated to reflect the true intention of the agreements. Accordingly, we hereby withdraw our auditors' report on the financial statements referred to above, and replace it with this one, dated 20 March, 1997." 63 Secondly, an Amending Deed was executed by Star City and SHCP on 10 June 1998 ("the Amending Deed"). The Commissioner contended that the Amending Deed and the correspondence forwarding a draft of it to the CCA provided further support for its construction of cl 5.2. The covering letter from Holdings to the CCA was dated 11 March 1998 and stated, in part, that: "The wording in Clause 5.2 of that Occupational Licence Agreement has caused some confusion in the past. The reference to "it" in the second line of the clause has been read both as a reference to Star City as well as SHCP. To avoid uncertainty in the future, our clients wish to remove the ambiguity by stating that the reference to "it" is in fact a reference to "SHCP". To this end, we have prepared a short Amending Deed which will make this change. …" 64 The Amending Deed was in the following terms: "A. The parties to this Deed entered into an Occupational Licence Agreement in respect of the Permanent Site dated 14 December 1994 (the "Occupational Licence Agreement") pursuant to which SHCP and Star City agreed that Star City would be entitled to be licensee of the Permanent Site on the terms and conditions set out therein. B. SHCP and Star City wish to make certain amendments to the text of the Occupational Licence Agreement and have for that purpose agreed to enter into this Amendment Deed. NOW THIS DEED WITNESSES: … 2. Amendment to Occupational Licence Agreement 2.1 The Occupational Licence Agreement is amended by deleting the word "it" in the second line of Clause 5.2 and substituting therefore the abbreviation "SHCP". 3. Miscellaneous 3.1 To the extent that the consent or approval of SHCP or Star City is required to the amendment to the Occupational Licence Agreement set forth in Clause 2 of this Amending Deed, that consent is hereby given and both SHCP and Star City ratify the amendment and confirm their respective obligations under the Occupational Licence Agreement as so amended. …"