The taxpayer, trustee of the Mussalli Family Trust (MFT) was in the business of operating McDonald’s Family Restaurants. As part of this business, MFT entered into several lease agreements with McDonald’s Australia Limited (MAL). The lease agreements provided MFT with an option to make a one-off non-refundable upfront payment which, if made, could make the monthly rent paid at a lower percentage. The taxpayer made the upfront payments, treating them as ‘prepaid rent’ and claimed deductions over a ten-year period (with 30 June 2012 to 30 June 2015 being the relevant years).

The tax office denied the deductions over the relevant years with the primary issue to be considered by the Federal Court being whether the payments identified as ‘prepaid rent’ were outgoings of capital or revenue.

Notably, the Court stated that the ‘prepayments of rent’ were not determinative of the true nature of the payments. The key message from the case is that you cannot deduct a loss or outgoing to the extent that the loss or outgoing is capital. The description of the loss or outgoing in the contemporaneous documentation is not determinative of the true character of the loss or outgoing. You must consider the overall advantage in making that loss or outgoing.

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