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Is a poker machine entitlement allocated by the NSW Liquor Administration Board (the Board) to the taxpayer, a hotelier, an active asset in terms of subsection 152-40(1) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Yes. The poker machine entitlement is an active asset in terms of paragraph 152-40(1)(b) of the ITAA 1997.

The taxpayer is a hotelier who is considering selling two poker machine entitlements and forfeiting one.

On 2 April 2002 the Gaming Machines Act 2001 commenced in New South Wales. Under that Act, one poker machine entitlement was allocated to a hotel by the Board for each approved poker machine held as at 19 April 2001. There was no purchase price for an entitlement.

A poker machine entitlement allocated in respect of a hotelier's licence is transferable. A transfer must be approved by the Board. Entitlements can only be transferred by hotels to other hotels. Transfers must be in blocks of 3. For every 2 entitlements transferred, another must be forfeited into a forfeiture pool maintained by the Board.

A Capital Gains Tax (CGT) asset is an active asset at any given time according to subsection 152-40(1) of the ITAA 1997, if, at that time, the taxpayer owns it and: (a) uses it, or holds it ready for use, in the course of carrying on a business; or (b) it is an intangible asset that is inherently connected with a business that the taxpayer carries on (for example, goodwill or the benefit of a restrictive covenant); or (c) it is used, or held ready for use, in the course of carrying on a business by: (i) the taxpayer's small business CGT affiliate; or (ii) another entity that is connected with the taxpayer.

The entitlement grants the legal right to a hotelier to own and operate a poker machine. It is a CGT asset in accordance with paragraph 108-5(1)(a) of the ITAA 1997. The taxpayer is the owner of the entitlement.

The entitlement is an intangible asset that is inherently connected with the hotel business. Accordingly, the entitlement is an active asset of the taxpayer in terms of paragraph 152-40(1)(b) of the ITAA 1997.