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[2001] FCA 365
Federal Court of Australia
2001-04-03
Sundberg J, Emmett J, Brennan J, Aickin JJ, Dixon J
Original judgment source is linked above.
INTRODUCTION 29 For many years the respondent ("the taxpayer") has manufactured energy cables, tubes and pipes used in the business of facilitating the transmission of electronic communications and in the merchandising of electrical, electronic and lighting products. It occupied factory premises on land at Port Kembla owned by it and on adjacent land owned by its wholly owned subsidiary, Austral Bronze Metal Manufacturers Pty Ltd ("Austral Bronze"). Various items of heavy plant and equipment used by the taxpayer in its manufacturing operations were located in the factory ("the plant"). In April 1988 the taxpayer sold the plant to the State Bank of New South Wales ("the Bank"), and the Bank leased it back to the taxpayer in consideration of payment by the taxpayer of regular half yearly amounts of rent. In respect of its years of income ended 31 December 1988 to 31 December 1995 inclusive the taxpayer claimed the rental payments as allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 ("the Act"). The appellant ("the Commissioner") disallowed the deductions on several alternative bases. He also concluded that insofar as the payments constituted allowable deductions, the taxpayer had obtained, or but for the operation of s 177F of the Act would obtain, a tax benefit in connection with a scheme to which Part IVA of the Act applies, and determined under s 177F that the payments were not allowable as deductions. The taxpayer unsuccessfully objected to the amended assessments issued by the Commissioner, and its appeals to the Court were allowed by Emmett J. His Honour concluded that the rental payments were deductible under s 51(1), and that the Commissioner was not justified in making a determination under s 177F(1)(b). Emmett J set aside the Commissioner's objection decisions and remitted the matters to him for redetermination in accordance with his Honour's reasons for judgment.
THE SALE AND LEASEBACK ARRANGEMENTS 30 The arrangements between the taxpayer and the Bank ("the arrangements") were evidenced by the following documents:
· Invoice dated 12 April 1988 addressed by the taxpayer to the Bank
Credit Purchase Agreement and Invoice 31 The Credit Purchase Agreement recited that the Bank had agreed to purchase the goods described in the schedule (in the Agreement called the "scheduled items") from the taxpayer and had agreed to lease them back to the taxpayer. Clause 2.1 of the Agreement was in part as follows: "On a date to be agreed upon in writing (the 'Delivery Date'), the Vendor as beneficial owner shall sell and the Purchaser shall purchase all the Vendor's right, title and interest to each scheduled item… in the following manner:-
2.1.1. the Vendor shall deliver each scheduled item to the Purchaser by the delivery…prior to the Delivery Date to the Purchaser of:-
2.1.1.1. an invoice from the Vendor to the Purchaser (which invoice shall give full particulars of the scheduled item including its cost as well as stating the serial or other appropriate identification number for such item, where applicable) …
2.1.2. as from the Delivery Date the Vendor acknowledges that the Vendor holds the Goods as bailee for the Purchaser;
2.1.3. property in each scheduled item shall thereupon pass to the Purchaser upon and by virtue of delivery of such scheduled item being made in accordance with sub-clause 2.1.1 hereof and not by virtue of this Agreement …
By clause 2.2 the Bank agreed to pay the purchase price of the goods by instalments: $48,000,000 on the Delivery Date, $1,000,000 on the date being six months and one day from the date of the Agreement, and $1,000,000 on the date being six months and seven days from that date. By clause 4.3.6 the taxpayer warranted: "that the Goods, notwithstanding its construction, manner of fixture to the land upon which the Goods are or shall be installed is and shall always be severable from the Premises and therefore will not either at law or equity form part of the Premises in the nature of a fixture and that title in and to the Goods and each and every part thereof shall at all times be and remain in the Purchaser."
By clause 4.3.7 the taxpayer agreed that while the goods remained on the factory premises it would place on them "a plaque identifying the Goods and the rights of the Purchaser in and to the Goods". Pursuant to clause 2.1.1 the taxpayer issued an invoice to the Bank. Lease 32 By clause 2.1 of the Lease the Bank leased to the taxpayer the goods described in the schedule for the term of five years from 30 March 1988 at the rent payable by half‑yearly instalments of $5,265,784.65. The goods so described are the same as those the subject of the Credit Purchase Agreement. The taxpayer was entitled to renew the lease for two further terms of five years each: clause 12.1. Clause 4.2 provided that the taxpayer "has not and will not (apart from these presents) have any right or property or interest in the Goods other than as bailee only". By clause 4.9 the taxpayer acknowledged that the goods at all times remained personal property. Clause 10 contained a list of "repudiation events" the occurrence of one or more of which entitled the Bank to sue for damages or repossess the goods. By clause 11.1 the taxpayer covenanted that if upon the sale of the goods by the Bank at the end of the term the Bank obtained a price that was less than the residual value thereof ($18,750,000), the taxpayer would pay the Bank the deficiency by way of indemnity for the capital loss so sustained. Clause 13.5 provided that the lease did not confer on the taxpayer any option to purchase the goods on the expiration of the term or at any other time. Landlord's Waiver 33 The parties to the Landlord's Waiver are the taxpayer and Austral Bronze (described as "Landlord"), the taxpayer (described as "Lessee"), Permanent Registry Ltd (described as "Mortgagee") and the Bank (described as "Lessor"). Clause 2 was in part as follows:
"In consideration of the Lessor agreeing to lease to the Lessee the Goods (herein referred to as the 'Lease') which are installed or are to be installed in the Premises which are or are to be occupied pursuant to an agreement between the Landlord and the Lessee (hereinafter called the 'Occupancy'), the Landlord and the Mortgagee hereby agrees with the Lessor:- 2.1. to the Occupancy;
2.2. that the Landlord and the Mortgagee has no right, title or interest to or in the Goods nor shall the Landlord and the Mortgagee acquire any right, title or interest to or in the Goods by virtue of the Occupancy;
2.3. that notwithstanding that the Goods may be wholly or partly fixed or annexed to the Premises no part of the Goods shall be treated as a fixture;
2.4. after the occurrence of a Repudiation Event (as that expression is defined in the Lease) under the Lease, the Lessor its agents, employees and servants shall have full right and licence to enter the Premises, for the purpose of repossessing the Goods and removing them from the Premises at any reasonable hour during the term of such Occupancy…
2.5. that the Goods are and shall at all times remain the property of the Lessor…"
Completion 34 The first instalment of the purchase price payable under the Credit Purchase Agreement ($48,000,000) was applied by the taxpayer as to $27,000,000 in repaying short term loans. $5,265,784.65 was applied in payment of the first of the instalments under the Lease. $5,000,000 was invested in the short term money market, and the balance was applied in paying dividends. By an agreement made on 19 April 1993 the Lease was amended. The term was changed to ten years ending on 18 April 1998. The half yearly instalments were changed to $1,667,990.17 payable on 19 April and 19 October in each of the years 1993 to 1997. The residual value was changed to $7,031,250. By a further agreement made on 20 April 1998 the term of the lease was amended to five years commencing on 20 April 1998 and terminating on 19 April 2003. A new schedule of instalments was inserted. The residual value became $2,636,718.75. BEFORE THE PRIMARY JUDGE Background to the arrangements 35 The primary judge recorded in detail the events leading up to the making of the arrangements. What follows is an abbreviated account. On 5 March 1987 Mr J B Anderson, who was the taxpayer's Corporate Taxation Manager, sent Mr J A Allen, its Executive Director ‑ Finance, a memorandum in which he reported on a meeting he had had with Macquarie Bank Ltd about "discussing suitable ways in which the Group might improve its taxation position". The memorandum referred to a sale and lease back of plant as a "tax effective fund‑raising proposal". The benefits of the proposal were said to include reducing after‑tax financing costs. Mr Anderson noted that the
"profit and loss is also enhanced because the company obtains a tax deduction for the whole of the lease payment including that part which is effectively a repayment of principal, ie (a contribution to the re‑purchase of the plant and equipment)".
The memorandum contained a comparison of the effect on profit and loss of a straight borrowing and a sale and leaseback over a six year period. The comparison indicated that there was an advantage for the lease to the extent of 3.5% in the effective pre‑tax borrowing rate in respect of a transaction that generated $10,000,000 in cash. In September 1987 Mr Allen authorised Macquarie Bank to begin implementing the proposal subject to approval of the taxpayer's board. He asked Macquarie to obtain indicative quotes using a principal sum of $50 million. 36 At a meeting of directors of the taxpayer held on 23 November 1987 consideration was given to a memorandum prepared by Mr Allen. The memorandum recorded that Macquarie had submitted a proposal that would have these effects on the Group:
· increased reported profit after tax · improved balance sheet · lower after‑tax finance costs · reduced income tax payable and improved cash flow · reduced effective rate of tax on pre‑tax profits.
The memorandum described the characteristics of a sale and lease back, noting that the taxpayer could not have an option to purchase the plant at the termination of the lease since this would cause the lease to be treated as a hire purchase agreement. The consequence of the lease was that the taxpayer's security for retaining the plant on termination would be dependent on the "business reputation" of the lessor and the restricted saleability of the rather special purpose plant. The writer noted the financial advantages of lease back as opposed to conventional borrowing, and the tax advantages of the proposal. He recorded that the taxpayer's lawyers had advised that payments under the lease would be fully deductible. On 22 February 1988, after considering a further memorandum from Mr Allen recommending approval of the proposal put forward by Macquarie, the directors gave their approval. 37 During March 1988 a valuation of the plant that was to be the subject of the arrangements was obtained from Mason Gray Strange Valuations Vic Ltd. On a going concern basis a value of $50,755,000 was attributed to the plant. The valuation was said to exclude building installations, concrete floor, under floor excavations, overhead cranes, concrete support structures and pitworks. 38 After examining memoranda dealing with the directors' consideration of the taxpayer's security for retaining use of the plant at the end of the lease, and considering the evidence given by Mr Allen and other directors, the primary judge concluded that the directors were aware of the risk that the taxpayer would not be able to reacquire the plant, but regarded it as minimal or theoretical. Taxpayer's need for finance 39 After considering memoranda passing between officers of the taxpayer relating to the financing of future acquisitions, the possibility of the taxpayer acquiring the interests of minority shareholders in subsidiaries, and the evidence of certain of the directors as to the relationship between future acquisitions and acquiring funds by the sale and leaseback arrangements, the primary judge said:
"The facts that I have recited indicate that the proposed sale and leaseback transaction was perceived by the directors of the Taxpayer as being part of the financial structure of the Taxpayer. It is clear that there had been a significant increase in short term debt during 1987 as a consequence of the acquisitions of minority shareholdings. It is true that the possibility of a sale and leaseback transaction was mooted early in 1987 before the acquisitions became a likelihood. Nevertheless, the mandate to Macquarie Bank of 30 September 1987 was not given until after the meeting of directors of 21 September 1987, when the Board was informed that the position concerning the possible sale of the outstanding interest in Austral Standard Cables Pty Ltd might be becoming a possibility.
It is clear that the Taxpayer had a need for medium to long term funds in order to discharge the short term borrowings that had been undertaken in order to fund the acquisitions of minority interests and increases in receivables and inventories during the 1987 year. While consideration of a sale and leaseback transaction progressed during the first part of 1987 before there was a consideration at Board level of the need to arrange medium to long term finance, that could be taken as prudent planning. A prudent industrialist may well examine tax effective means of raising finance before the need for finance actually arises."
"the contemporaneous materials in evidence support a conclusion that, by the time the Arrangements were approved at Board level, the directors were mindful of the need to replace short term debt with medium to long term finance. In any event, an objective assessment of the financial position of the Taxpayer indicated that replacement of short term debt with medium to long term finance of at least $50,000,000 would be a sensible step for the Taxpayer to take in the first half of 1988."
The plant and equipment 40 Before the primary judge the Commissioner contended that the plant consisted of fixtures. This, it was submitted, meant that the Credit Purchase Agreement was ineffective to vest any title in the Bank. Accordingly the lease could not confer on the taxpayer any right in respect of the plant. It followed that the payments made by the taxpayer under the Lease could not be characterised as payments made under a lease for the purpose of securing the right to use property owned by the Bank as lessor. This submission led the primary judge to make a careful examination of each item of plant with a view to deciding whether it was or was not a fixture at the date of the sale and leaseback. His Honour noted that because all items of plant were securely attached to land otherwise than by resting on their own weight, the taxpayer had the onus of establishing that they were not fixtures. His Honour then examined in turn what he called the two objective circumstances relevant to determining the intention with which the object was affixed to land ‑ the degree of annexation and the object of annexation. As to the former, after noting that the common method of attachment was that the items in question were bolted into concrete footings, and the gaps between the footings and the items were filled with concrete grouting, his Honour acknowledged that expert evidence called by the taxpayer had demonstrated that the plant and equipment could, as a practical matter, be removed, although such removal would: · cause not inconsiderable damage to the floor of the factory premises · necessitate dismantling part of the buildings (including cutting cross‑supports in the walls) to enable access to various items · involve some necessary scrapping of components of the services relating to the manufacturing lines · take considerable time, in some cases several months, to complete. 41 The primary judge also noted that the plant was incorporated to a high degree with other items within the factories. On the basis of the foregoing he concluded that there was an "extremely significant degree of attachment" of the plant to the land, and that this weighed heavily in the balance toward a conclusion that the intention, objectively ascertained, in placing the items on the land was that they were intended to become part of the land. 42 His Honour then considered the object of annexation. He noted that the items in question could, if properly maintained, last indefinitely, although they could become redundant overnight by a major technological advance. This, in his view, led to the conclusion that the plant was installed with the intention that it would remain in place indefinitely, rather than for a purpose that had a limited life span. His Honour acknowledged that it was necessary that the plant be attached to the land in a manner that would steady it, ensuring quality of the ultimate product, and for safety reasons, and that this suggested they were affixed for the better enjoyment of the items themselves, rather than for the better enjoyment of the land. However, he appears to have decided that in fact they were affixed for the better enjoyment of the land as a factory. He concluded that as at 19 April 1988 the items were fixtures. Effect of the Arrangements 43 The primary judge rejected the Commissioner's contention that because the plant and equipment were fixtures, the instruments were ineffective to achieve their stated objects. He accepted that the Bank could not acquire a legal interest in the plant since it would form part of the land to which it was attached. Nevertheless he regarded the Credit Purchase Agreement as effective to vest in the Bank an "interest in the nature of property which should be characterised as equitable". This equitable interest was sufficient, in his Honour's view, to support "the 'leasing' by the Bank of the Plant and Equipment to the Taxpayer and the 'taking on lease' of the Plant and Equipment by the Taxpayer." Loan of $50,000,000 44 His Honour then dealt with the Commissioner's submission that the arrangements had all the characteristics of a loan, and that the Bank had in substance lent $50,000,000 to the taxpayer, with the result that payments under the Lease were in part repayments of principal. His Honour examined each of the fourteen matters relied on by the Commissioner to support his submission, and concluded that the submission was not made out. After noting that the Commissioner had, realistically, not attacked the instruments as a sham, his Honour said:
"there is no basis for concluding that the payments in question should be characterised otherwise than as payments made pursuant to the obligations imposed by the Lease in order to secure to the Taxpayer the right to use the Plant and Equipment free of any risk that the Bank might exercise such rights as it may have to the Plant and Equipment as owner, whether legal or equitable. There is no basis for concluding that the Arrangements should be treated as constituting a loan and the regular payments characterised as repayment of principal and payment of interest under such a loan."
Collateral advantage 45 The primary judge then considered the Commissioner's contention that, whether or not the items of plant were fixtures, some part of the regular payments made by the taxpayer secured to it a collateral advantage of a capital nature and therefore represented outgoings of a capital nature. The collateral advantage over the five year term was the difference between the sum of $50,000,000 paid by the Bank and the residual value of $18,750,000. This contention was based on the claim that the plant and equipment was unlikely to have decreased in value and that the taxpayer could be expected to have reacquired it from the Bank at the expiration of the term. His Honour rejected the contention on the ground that while as a practical matter it might well be that the plant would not be sold to anyone other than the taxpayer at the end of the term, that was a consequence of the nature of the items, and not something secured by the payments themselves. There was no legal entitlement conferred on the taxpayer to acquire them.
Part IVA 46 The only issue in dispute before the primary judge under this head was whether, having regard to the matters listed in s 177D(b), it would be concluded that the dominant purpose of any of the persons who entered into or carried out the scheme constituted by the arrangements was to ensure that the taxpayer would secure a deduction in relation to the relevant years of income, when the whole or part of that deduction would not have been allowable had the scheme not been entered into and carried out. After considering each of the matters to which he was required to have regard, his Honour determined that it would not be concluded that any of the relevant persons (the taxpayer, Austral Bronze, the directors of the taxpayer and Austral Bronze or the Bank) entered into or carried out the arrangements for the dominant purpose of enabling the taxpayer to obtain a tax benefit. This conclusion was based largely on findings that the arrangements would not have been entered into if there had been no increase in the taxpayer's current liabilities during 1987, that it would have entered into a medium term financial arrangement of one kind or another if the arrangements had not been available, and that the funds realised by the sale to the Bank were substantially used to discharge existing short term debt.
CHATTELS OR FIXTURES 47 The taxpayer filed a notice of contention in which it was claimed that the primary judge erred in holding that the items of plant were fixtures. It was submitted that his Honour attached undue weight to the degree to which the items were attached to the land and too little weight to his finding that the object of the annexation was for the better enjoyment of the items as plant rather than for the better enjoyment of the land. Reliance was placed on recent decisions attaching primary importance to the object of annexation. Thus in Palumberi v Palumberi (1986) Aust NZ Conv R 593 at 596 Kearney J in the Supreme Court of New South Wales said:
"It would seem from perusal of these and other authorities in the field that there has been a perceptible decline in the comparative importance of the degree or mode of annexation, with a tendency to greater emphasis being placed upon the purpose or object of annexation, or, putting it another way, the intention with which the item is placed upon land. This shift has involved a greater reliance upon the individual surrounding circumstances of the case in question as distinct from any attempt to seek to apply some simple rule or some automatic solution."
See also EON Metals NL v Commissioner of State Taxation (WA) (1991) 91 ATC 4841 at 4845. It was then submitted that the proper approach in a case such as the present, where the object of annexation is the better enjoyment of the items annexed, is that so long as the degree of annexation goes no further than what is required to achieve that object (in the present case to steady the machinery so as to maintain quality control of the ultimate product and minimise safety risks), there is no need for the court to have particular regard to the degree of annexation.
48 The first thing to observe about this submission is that it overstates the finding of the primary judge as to the object of the annexation of the items. The finding was a qualified one, as appears from the following passage from his Honour's reasons:
"Certainly, it was necessary that the Plant and Equipment be attached to the land in a manner that would steady it, ensuring quality of the ultimate product, and for safety reasons. In that sense, the items were affixed for the better enjoyment of the items themselves, rather than for the better enjoyment of the land. However, there can be circumstances in which chattels may become affixed for the better enjoyment of land used for a particular use. Thus, a milk processing plant might constitute a fixture because it was annexed to the land for the better enjoyment or use of the land as a dairy processing plant ‑ see National Dairies WA Ltd v Commissioner of State Revenue (WA) (1999) 99 ATC 5155. Similarly, items of machinery in a factory plant may be fixtures because they were annexed for the better use and enjoyment of the land as a furniture factory ‑ see Re Starline Furniture Pty Ltd (1982) 6 ACLR 312."
49 There is a long line of authority that supports the primary judge's approach. Holland v Hodgson (1872) LR 7 CP 328 concerned looms on the premises of a worsted spinner and stuff manufacturer. The looms were attached to the stone floor of the mill premises by means of nails driven through holes in the feet of the loom, in some cases into beams which had been built into the stone, and in other cases into plugs of wood driven into holes drilled in the stone for that purpose. It was necessary so to attach them in order to steady them and keep them in position so that steam power could be applied to them. They could be detached without serious damage to the flooring. After referring to earlier cases, Blackburn J, speaking for all six members of the Court of Exchequer Chamber, said (at 339) that they were authority
"that where an article is fixed by the owner of the fee, though only affixed by bolts and screws, it is to be considered a part of the land, in all events where the object of setting up the articles is to enhance the value of the premises to which it is annexed for the purposes to which those premises are applied. The threshing machine in Wiltshear v Cottrell was affixed by the owner of the fee to the barn as an adjunct to the barn, in much the same way as the hay cutter in Walmsley v Milne was affixed to the stable as an adjunct to it, and to improve its usefulness as a stable. And it seems difficult to say that the machine in Mather v Fraser was not as much affixed to the wall as an adjunct to it and to improve the usefulness of the mill as such, as either the threshing machine or hay cutter."
50 The two cases cited by the primary judge are modern illustrations of the same principle. In Re Starline Furniture Pty Ltd Neasey J held that joinery machines bolted to the cement floor of the factory and wired into the electrical system, and other related equipment, all of which were detachable without damage, were nonetheless fixtures because they were primarily installed and affixed for the better use and enjoyment of the land and premises as a furniture factory. Neasey J applied the observation of Lord Lindley in Reynolds v Ashby & Son [1904] AC 466 at 472:
"The purpose for which the machines were obtained and fixed seems to me unmistakable; it was to complete and use the building as a factory. It is true that the machines could be removed if necessary, but the concrete beds and bolts prepared for them negative any idea of treating the machines when fixed as moveable chattels."
The machines in question were heavy carpenter's tools worked by steampower transmitted from a steam engine by shafts and wheels. Each machine was fastened to its concrete bed by bolts and nuts, the bolts being embedded in the concrete and projecting through holes in the machine, thus enabling them to be bolted down. The machines could easily be detached.
51 The National Dairies case involved pasteurising and homogenising equipment, tanks and vats, blow moulders used to make plastic bottles, various filling machines, boilers, butter printers, an evaporator, a separator, an evaporative condenser, a hot water softener, water cooling towers, a refrigeration component and a gram wrap machine for ice cream packing. The items were attached to the power supply and connected in the processing line by pipes fixed to ceilings of rooms in the processing plants or under floors and running through walls. Generally the items were not otherwise fixed than by their own weight. Notwithstanding this they were held to be fixtures. Murray J said at 5161:
"So this is not a case where the degree of annexation of specific items of equipment will by itself be of much assistance in answering the question whether or not they are fixtures. The Court is much more concerned with the objective intention behind annexation in the form of the incorporation of the item into the processing plant, bearing in mind that I am looking to the character of particular pieces of plant and equipment which, whilst they continue to be incorporated into the processing plant, all play a part in an integrated system of milk processing, no matter how economically effective may be the capacity to remove them and replace them so as to change the nature of the processing plant. While they play their role they must do so as parts of a system which is an integrated whole."
"As at the time the above items of equipment were respectively placed upon the land and incorporated into the dairy processing factory they were undoubtedly readily removable and might have been removed and transferred to another place, or sold, or otherwise disposed of as required, but in my opinion, they were items which were placed on the land for the purpose of their integration into the factory system into which they were firmly incorporated. They were not placed there for a temporary purpose, but for an indefinite period of time. They were interconnected and incorporated into the factory, although the degree of annexation was variable and generally not otherwise than by the weight of the units. Nonetheless, as photographs reveal, their operative use was in various quite complex ways a part of the way in which the factory was structured. I have no doubt that the items of equipment described above were annexed to the land for the purpose of its better enjoyment or use as a dairy processing plant."
52 Although the bulk of the primary judge's reasoning was directed to the degree to which the plant was affixed to the land rather than to the purpose for which it was affixed, it is clear from his Honour's reference to Starline and National Dairies that he did not ignore or fail to give sufficient weight to the latter aspect. 53 Thus, there was no unqualified finding that the items were affixed for the better enjoyment of items themselves, and the primary judge looked beyond the immediate purpose of annexation, namely the steadying of the items, to the more general purpose of facilitating the use of the land as a factory in which energy cables, tubes and pipes were manufactured. It is clear, in my view, that on this latter issue his Honour applied the long‑standing principle illustrated by the two cases to which he referred. No error in his approach has been identified. The present case is a clearer case than Reynolds, Starline and National Dairies because of the much more substantial degree of annexation than in those cases. 54 For the appellant reliance was placed on the decision of Fullagar J in Attorney‑General (Cth) v R T Co Pty Ltd [No 2] (1957) 97 CLR 146. The case involved two printing presses, each weighing about 45 tons, which were attached by nuts and bolts to a concrete foundation. His Honour thought the proper inference was that the affixing of the presses was for the purpose of holding them steady when in operation and for the more efficient use of them as presses. However, his Honour recorded that no one had at any stage suggested that the presses were fixtures. In the absence of a contest on the point, the force of Fullagar J's conclusion is diminished. I agree with the observation of Neasey J in Starline at 319 to this effect. 55 For the foregoing reasons the attack on the primary judge's conclusion that the items of plant were fixtures fails.
THE EFFECT OF THE ARRANGEMENTS 56 The primary judge concluded that because the items of plant were fixtures, the Bank could not have a legal interest in them since they formed part of the land to which they were attached. That indeed is the orthodox view. See however Professor Butt's note on Selling land separately from fixtures in (2000) 74 ALJ 130. The primary judge, however, held that the Credit Purchase Agreement was effective to vest in the Bank "an interest in the nature of property which should be characterised as equitable". His Honour referred to cases such as In re Samuel Allen & Sons Ltd [1907] 1 Ch 575 and Kay's Leasing Corporation Pty Ltd v CSR Provident Fund Nominees Pty Ltd [1962] VR 429 in support of the view that a party in the position of the Bank acquires an equitable interest in the plant and equipment. But for the lease, the Bank's proprietary interest would give it the right to enter upon and sever the plant and equipment from the land. That interest was sufficient to support the lease. 57 Before the primary judge the Commissioner argued that because the plant and equipment were fixtures the instruments were ineffective to achieve their stated objects. The contention was not repeated on the appeal, and it was not suggested that his Honour's conclusion that while the Bank acquired no legal interest, it did obtain an equitable interest, was erroneous. In his written submissions the Commissioner asserted that legal title was never transferred, though he accepted the primary's judge's view that the Bank obtained some form of equitable interest. Rather the argument was that, accepting the Bank acquired an equitable interest, the advantage actually obtained by the taxpayer was the same as that which it had sought, namely a capital component being the difference between $50 million paid by the Bank and the residual value of $18.75 million. It was said that this was so whether the Bank's equitable interest in the plant resembled that of a chargee or, as the primary judge thought, was an equitable interest sufficient to support a lease of the plant. It is thus unnecessary to consider the nature of any interest acquired by the Bank under the Credit Purchase Agreement. And since the Commissioner did not advance argument on the point, it is inappropriate that I express any concluded view on the matter. See in addition to the cases cited by the primary judge, Melluish v BMI [No 3] Ltd [1996] AC 454 at 475‑476.
COLLATERAL ADVANTAGE 58 This appeal was heard together with the appeal in Eastern Nitrogen Ltd v Commissioner of Taxation [2001] FCA 366. For the reasons given by Carr J in that case and those given by Lee J in the present case, I agree that no part of the rental payments made by the taxpayer should have been disallowed as being outgoings of capital or of a capital nature.
PART IVA 59 For the reasons given by Carr J in Eastern Nitrogen, Part IVA does not apply to the scheme identified in this appeal.
CONCLUSION 60 The appeal should be dismissed with costs. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.
Counsel for the Appellant: DF Jackson QC and JW Durack SC
Solicitor for the Appellant: Australian Government Solicitor
Counsel for the Respondent: RF Edmonds SC and JRJ Lockhart
Commissioner of Taxation
Metal Manufactures Ltd
LEE J: 1 I have had the advantage of reading the reasons prepared by Sundberg J, which set out the relevant facts and issues. 2 With regard to the issue relating to fixtures I agree with his Honour, for the reasons he gives, that the learned trial judge (Emmett J) did not err in finding that the items of plant, the subject of the arrangement for sale and lease-back, were fixtures, and that an equitable interest in that property vested in the State Bank of New South Wales ("the Bank") upon purchase. 3 In respect of the deductibility of the outgoings of rent, s 51 of the Income Tax Assessment Act 1936 (Cth) ("the Act") excepts an outgoing from deductibility to the extent to which it is an outgoing of capital, or of a capital nature. Division of the characterisation of an outgoing does not, however, require separation of the facts relevant to each component. All relevant facts must be considered, giving due weight to any transaction relevant to the outgoing that may govern the rights and obligations of the taxpayer in respect thereof. That is not to say that those rights or obligations are considered to the exclusion of other facts (Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 per Brennan J at 190). However care must be taken not to introduce an hypothetical construct that is considered to the exclusion of the effect of rights or obligations established by a relevant transaction. 4 As was stated by Stephen and Aickin JJ in The Commissioner of Taxation of the Commonwealth of Australia v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 662: "We do not read Dixon J's judgment in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 as intended to convey that practical business considerations are to be used to the exclusion of an analysis of legal rights." 5 Indeed, there will be cases in which the legal rights and obligations which generate the outgoing are sufficient to characterise the nature of it and it will be unnecessary to go beyond them. (Federal Commissioner of Taxation v Broken Hill Proprietary Company Limited (2000) ATC 4659 per Hill J at 4667). 6 In the present case the outgoings made were payments of rent made by the taxpayer to obtain the use of property used in the conduct of its business. The only advantage obtained by the taxpayer was that which it obtained as lessee. Counsel for the Commissioner submitted, however, that a "collateral advantage" was sought by the taxpayer by making payments of rent, namely, the reacquisition of the property upon termination of the lease, and that the taxpayer made payment of the rent with the intention of obtaining the advantage of being able to negotiate with the Bank to repurchase the property at a price equal to the residual value stipulated in the lease. It was submitted that the difference between the residual value, which, it was said, may be expected to be the price of the property on the sale thereof by the Bank on the termination of the lease, and "market value" would be in the order of $31 million and that the outgoings by way of rent should be taken to have sought the advantage of a reduction in the cost of the asset to that extent. 7 If the Bank were to deal with the taxpayer at the termination of the lease, the Bank would do so after deciding that it was in its interests to deal with the taxpayer after considering various factors, including whether the taxpayer had duly performed its obligations under the lease and whether the taxpayer had the means to purchase the property. The contention that the payment of rent was calculated by the taxpayer to maintain good standing with the Bank in order that the Bank would deal with the taxpayer at a later date in respect of the sale of the leased property, fails to describe a circumstance sufficient to ground a conclusion that some part of the payments made by the taxpayer by way of rent were of a capital nature. 8 If it could be said that the taxpayer anticipated that at the termination of the lease it could discuss with the Bank re-acquisition of the property sold to the Bank and leased back to the taxpayer, neither the realisation of that anticipation, nor, for that matter, entry into an arrangement to reacquire the property, could be an advantage secured or effected by a part of each payment of rent. 9 With regard to the contention that the advantage sought was purchase of the property at less than "market value", the learned trial judge noted that in Commissioner of Taxation v Battery Makers, the arrangement under consideration in that case provided expressly that payments made by way of rent by the taxpayer were to be applied by the lessor/vendor in amortisation of the price to be paid for the leased property under an option to purchase granted to a party related to the taxpayer. In that case it was held that no part of the rent was paid by the taxpayer to secure an advantage for the taxpayer. 10 Emmett J noted that in the case before him, even if it could be said that the Bank would deal with, or sell the property to, the taxpayer at less than market value, the taxpayer had no right to call on the Bank to sell the property to it at that price. Furthermore, if in due course, the property were to be purchased from the Bank by an entity other than the taxpayer, albeit an entity related to the taxpayer, any advantage represented by the difference between the purchase price and the market value would fall to the purchaser and not the taxpayer and could not be said to be an advantage in the nature of capital sought by the taxpayer. (see Commissioner of Taxation v Battery Makers per Gibbs J p 660; per Stephen and Aickin JJ p 662) In other words, the learned trial Judge was satisfied that the instant case was even a stage removed from the facts in Commissioner of Taxation v Battery Makers and that it could not be found that any part of the rent paid by the taxpayer sought to effect an advantage of a capital nature. In my opinion, his Honour's analysis was correct and involved no error of law. 11 It is unnecessary, therefore, to consider what principles should have been applied to ascertain what the value of the property would have been upon termination of the lease to determine whether that value exceeded the residual value. 12 When regard is given to the "whole picture" (BP Australia Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1965) 112 CLR 386 per Lord Pearce at 399) the cardinal facts are that the taxpayer made genuine payments of rent pursuant to a Lease under which the taxpayer obtained no interest in the property the subject of the Lease. If the taxpayer defaulted under the Lease it could make no claim for relief against forfeiture in respect of the payments the Commissioner contends were payments in the nature of capital. No part of any outgoing paid by the taxpayer by way of rent is able to be isolated to be shown not to be rent but an outgoing to obtain an interest of a capital nature. It is plain that the whole of the payments were incurred and discharged to obtain the right to use the property for the conduct of the taxpayer's business. 13 I agree with Emmett J that no part of the outgoings made by way of rent were shown to be an outgoing of a capital nature. 14 The final issue is whether Part IVA of the Act applied to the circumstances described. The appeal in this matter was heard in conjunction with the appeal in Eastern Nitrogen Ltd v Commissioner of Taxation [2000] FCA 366. Both matters involved proposals for the borrowing of funds put to the respective taxpayers by Macquarie Bank Ltd. In the instant matter the funds obtained by the taxpayer on sale of the property to the Bank were applied in reduction of short-term debt and to put the finances of the taxpayer on a more stable foundation in the conduct of its business but there is no difference in substance in the respective arrangements under consideration in this case and in Eastern Nitrogen, and the further reasons provided by me, and by Carr J, in Eastern Nitrogen as to why Part IVA of the Act did not apply to the arrangements in that case, apply equally to this matter. 15 For the reasons provided by Emmett J, I agree with his Honour that an objective consideration of relevant facts did not show that the taxpayer, or any other relevant party, entered into the finance arrangements for the dominant purpose of obtaining a tax benefit for the taxpayer. Therefore, Part IVA of the Act did not apply to permit the Commissioner to exercise a discretion under s 177F to determine that any part of the payments made by way of rent were not an allowable deduction from the assessable income of the taxpayer. His Honour considered each of the components of s 177D(b) and applied those provisions to the facts before him. It has not been shown that his Honour erred in any respect in the construction of the provisions of s 177D or in his application of those provisions to the relevant facts. 16 The submissions put by the Commissioner relied on degrees of emphasis and on the weight his Honour may have given some facts if he had been persuaded so to do, and upon a contention that had his Honour so acted, he may have formed another view of the application of Part IVA to the facts of this case. As stated above, no error of law in his Honour's approach to the construction and application of the relevant provisions has been demonstrated. 17 The appeal must be dismissed. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.
CARR J: 18 I have had the advantage of reading Sundberg J's draft reasons for judgment in this appeal. I am grateful to his Honour for saving me the task of setting out the factual and procedural background to the matter. 19 I agree, respectfully, with Sundberg J's conclusion (and with the reasons given for that conclusion) that the primary judge did not err in holding that the items of plant were fixtures. 20 I agree with the learned primary judge's conclusion that the Credit Purchase Agreement was effective to vest in the Bank an interest in the nature of property which should be characterised as equitable. I also agree with his Honour's reasons for that conclusion. 21 I agree with the primary judge's characterisation of the rental payments as having been made entirely on revenue account. His Honour's views coincide with the opinion expressed by Drummond J in Eastern Nitrogen Ltd v Commissioner of Taxation [1999] FCA 1536, on the assumption that he (Drummond J) was wrong in his conclusion that the sale and lease-back transaction in that case were legally ineffectual to create the relationship of lessor and lessee with respect to the plant in that matter. 22 I cannot see any relevant factual distinction between the circumstances of this matter and the circumstances in Eastern Nitrogen. I am thus in agreement with both Emmett J in this matter and Drummond J in relation to characterisation of the rent payments. But I disagree, respectfully, with Sundberg J's conclusion that Emmett J was in error in this matter. 23 In my reasons for judgment in the appeal in Eastern Nitrogen I identified further relevant advantages which the appellant in that case obtained by making the rental payments. 24 One of those further advantages was the continuing use of a very substantial amount of money. The same advantage can be seen as obtained by the respondent in this appeal i.e. the continuing use of some $50 million (the comparable figure in Eastern Nitrogen was $71.4 million). 25 For the reasons set out in paras 29 to 47 (both inclusive) of my reasons for judgment in Eastern Nitrogen, I do not think that any portion of the rental payments made by the respondent in this matter should have been disallowed as being outgoings of capital or of a capital nature. 26 In this matter, as in Eastern Nitrogen, the Commissioner relied upon Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the Act"). 27 Again for the reasons which I gave in the Eastern Nitrogen appeal (see paras 48 to 96 both inclusive) I do not consider that Part IVA applies to the scheme identified in this matter. 28 Accordingly I would dismiss this appeal with costs. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr.
(1978) 140 CLR 645
(1980) 49 FLR 183
(1965) 112 CLR 386
(1957) 97 CLR 146
(1946) 72 CLR 634