Commissioner of Taxation v Tully Co-Operative Sugar Milling Association Ltd [1983] FCA 163

Federal Court of Australia|1983-07-25|Before: Fitzgerald JJ, Thomas J

1 January 1976 or what part thereof was so incurred be remitted for determination to the Supreme Court; the Supreme Court may make such modifications to the orders already made by 1t including the order for costs as may be necessary in the light of such

TULLY CO-OPERA'EI VE SUGAR MILLING ASSOC lLATLON TIMIVED

This 15 an appeal trom a decisison ot the Supreme Court of Queensland (Vhomas ud.) respectana an objection ta an assessment of taxpaver's iuncome lax for the vear (1.6. Lhe taxpaver's income tax year) ending 30 Apris LO//. Has Honour allowed the objection in part and the Commissioner of 'laxation

The respondent conducts a tlarqe suaar m3if ain Queens Land. In 1976 and (977 it carried out extensive

alterations or additions to its plant and it claimed to have expended on them during the period | danuary 19/6 to 30 April 1977 an amount of $3,L81,5L/. By the time the appeal came on tor hearing betore Thomas J. the Commissioner had allowed a deduction

of $741,603 of this amount, leaving a bajJance ot $2,439,9)4.

The taxpayer called the oniy witnesses and their evidence was accepted by the Judqe. No evidence was called for the Commissioner . The statements of fact of the learned Judge respecting relevant matters have not been challenged. He

"Before 1976, the mi!ling train consisted of some six mitts. the end result ot the up-grading was a conversion to tive mills and the replacement or up-qradtnge of various component sections of the milling process.

reprocessing ot cane through the various mijJis. Juice is thereby extracted which finds its way into the varizous ice tanks,

Ultimatesy the clarified wusice is voumped ta two etfet sets, which operate in paraljJel with

one another. Ihe effet station increases the suqar content ot the juice by evaporating water trom the solution. 'be product from the etiet station, now called liquor or syrup, is pumped to storage tanks. There is then a process of crystallization ot sugars and the production of other products at the pan station. 'The overat! scheme of things is much more complex than the primary course which 1

have described. [t includes a re-processing of by-products which are collected along the way. 'hese include recovery of the eventual

fibres which are used to tuel Che milj itself: and the collection of 'mud' which is) then reprocessed so as to extract sugar bearing liquids which 1t striil contains.

The relevant expenditure related to eauipment at various stages of the orocessind, as can be seen from the following summary.

station - s 59,226.50 Bb. karst crushing m7 LJ - BH6 649. 30 C. Third crushing mill

"82AA. Subject ta ihe followtina vorovisions ot this Subdivision. this Subdivision applies in relation to aumit of eliaible property acauired or constructed by the taxpaver ihat. is -

(a) an the case of anv taxpaver. tor the use bv the taxpayer whollv and exclusively -

(ii) for the purpose of producssiq assessable income otherwise than bv

(8) the Letting of the eliaqible property on hire under a bire-purchase aaqreement; or

(a) on or after L danuary 1976, a taxpaver has incurred expenditure of a capital

neture (in this section reterred ioas 'eliqibje expenditure') in respect ot the

acquisition or construction by him oat a new wit af eliqtbJe property in relation to which this Subdivision applies;

(b) the elagible expenditure exceeded $500; (c) the ejaaible expenditure was incurred -

(i) in respect of a unit of property acquired by the taxpaver under a contract entered into on or after | January 19/6 and before L July L984: or

(ij) an respect ot a untt of property that was constructed by the taxrpaver and the construction ot which commenced on or after t January 19/6 and hetore | duly 1985; and

(ad) the unit ot property was tirst used or installed ready for use before L duly L986,

there shall be allowed as a deduction from the taxpayer 's assessable income of the first vear ot income during which that unit was either used for the purpose of producina assessable income, oar installed ready tor use for that purpose, an amount (in this section referred to as the 'relevant amount') ascertained in accordance with the folJowing provisions of this section."

Some definitions in s.B2AQ(L) of the Act are relevant:

"' construction' iuneludes manufacture and 'constructed' has a corresponding meararie;

'eligible property' means plant or articles within the meaning of section 54° and includes earth tanks constructed tor the purpose of conserving water for use in carrying on al business at primary production:

'new' means not havina previously been either used by any person or acquired or held bv any person for use by that person, but does not include reconditioned or wholly or mainty reconstructed, "

Paragraphs (a) and (b) of 5,82A0(3) are also applicable

(a) a reference to the acquisition of property by a person 1s a reference to -

(i) the person becoming the owner of the property or taking the voroperty on hire under a hire-purchase aqreement;: or

(fi) the construction of the property for the person by another person or other persons on premises ot 1 be» first-ment i9oned person:

(b) a reference to property being installed ready tor use is a raterence Lo property being installed readv tor use and hejd in reserve;

The claim. in relation to each of the particulars "A" ta "kr" set out above in the quotation from his Honour's Judgment was made in relrance upon s.82AB(l) (er) (it). that is to sav. on the basis that the capital expenditure was ain relation to the "construction" ot the units of property. The atternative, of "acquisition", was not relied upon. 'he learned Judge disallowed the objection in respect of the used filter station, and there is

no need to consider the position in resation ta it. 'This appeal

The grounds of appeal are that the tour items | have mentioned were not "units of property", that they were not "constructed" by the taxpayer, and that the relevant expenditure was not "eligible expenditure" in that 1t was not incurred on or after t danuary 19/6. as required by the section. No question arises as to whether particular expenditure was incurred in the income tax year (i Mav 1976 to 30 April L9//). because the

"... the first year ot income durina which that unit was either used tor the purpose of producing assessable sncome, or installed

ready for use for that purpose. an amount (in this section xreferred to as the 'relevant

amount!) ascertained in accordance with the following provisions of this section."

$l6, 190, which comprised S488 spent on foundations and

"The evidence establishes that all the costs respecting the foundations were indeed incurred atler dst January 1976. 'The foundations were necessary tor che functioning of two Kelly and Lewis pumps acquired and anstalled at the mixed sjvice pumping station. Uhe relevant eauipment incJuded two starters and two electric motors to start and drive the Kelly and Lewis pumps. These items were ordered from Crompton Parkinson (Australia) Proprietary Limsted on 19th November 19/5.

It is first necessary to identify what 4s the 'new unit of eliaihle property' with respect to which the taxpayer incurred expend iture. Vhe appeltant submits that the Mixed jurce pumping station itselt comprises the relevant unit. Whilst It is plain that an electric motor, or a starter may in appropriate circumstances itself be a unit, the evidence here shows that each ot these components has become an integra! part ot the pumping station. 1t may be noted that the Kelly and Lewis pumps (in respect of which expenditure has apparently been allowed) were delivered to the site with the reJevant motors (in respect ot which expenditure has not been allowed) attached to them, The station obviousiy would not. function without the pumps, and the pumps obviously could not function without the motors or the starters. Two pumps are necessary because during the crushina season the milling must coniinue on a 24 hour basis "

"unit of property", more tully described in the section as the "new unit of eligtble property". Having in mind the detination of "eligible property" in s.82AQ(!) the starting point jis with s.54,. which deais with depreciation on plant and articles, and cqives "plant" a very wide meaning. {t is nol disputed that the items in question here, including, tor exemple. the concrete

Plainly, difficujties can arise in partsucular cases in determining what. is a unit of property. An examination ot other sections of the Act. is helpful. Section 453F provides for a deduction tor the cost af converting oilt-fired plant. Reterence is made in that context to the conversion or adaptation of a "unit of property". The term is defined tor the purposes of the section as meaning plant or an article within the meaning of s.54, not being trading stock. Plainly the units there in mind are, or tunclude, large and complex ones. Section 55 deals with depreciation in respect of "a unit of property". Section b6é relates to the calculation of depreciation and sub-section (3) provides a connection between s.8ZAK and other provistons qivinda deductions, by way of depreciation or otherwise, in respect of units of property - Section 5/AA deals with special depreciation allowances on units of property in respect of which ceprecration is allowable under s.h4. The un its anclude structural improvements, and structural amprovements which are provided Loar

residential accommodation. Section K/AY allows spenia |

depreciation on storage facilities for petroleum tuel, and

relates to "units of property" on which depreciation ts allowahie under 5.54. It has been thouqht necessary, or desirable, to exclude (hy sub-secn, (3)), inter alia. ships, a umt of railway rolling stock and a pipejine. 'here are many other uses of the Phrase 1n the Act. 'Those which L have examined suqagest Lhat the term "unit" is not used so much to Limit, or require preciseness of definition, as to distinguish between the generality and something more specific, which is capable of being separately regarded and treated. On each occasion the phrase must ot course be construed in its context, but the repetition of :t in the variety ot contexts to which | have referred certainly suggests

that it is not to he understood tn s.82AK in a narrow or

Several items, each ot which at some staqe could for presently relevant purposes be regarded as aumil, can be combined, or linked or associated together so as ta forma tarager unit. When one looks to see whether there is aunit, one normaily tooks to see whether there jis a whole something. Whether there 1s a whole wtil normally be judged by the tntended function or purpose ot that which is being looked at. On the other hand, there can be a unit when some part 1s missing without which the iarger whole cannot function in the intended way. As used 1n the section (and other sections) the matter 1s more one of identification than of structure. 'Uhe vrovision was tnt ended Lo conter a benetit on taxpayers by wav ot aiving them a special

deduction iu respect aL new plant acauired or constructed durina

a stated period, and the benefit should not be deteated by an illiberal approach. Having in mind one submission made on beha Lt of the Commissioner, L should state that what might otherwise he regarded as a unit, does not cease to quasJify as such because it. comprises one or more, or many, inteqers, each of which could, at

some stage of the development of the whoJe, be reaarded as a

The Jearned vJudge took the view that the whole pumping station comprised a unit, and that the items in question were part of it, indeed an essential part. tle was looking at the darger whole, of which the items had become an inteqral part. This was essentially a tinding of fact, and | see no reason to

The Judge found that the construction (by the taxpaver) of the pumping station commenced after 1 January 1597/6 (s.82AB(L) (0) (31)), and this finding has not been chal lended.

The result is, in my view, that the appeal under this headina

I set out a statement ot facts by the learned Judae

"This mill 15 now called the number 2 mill, and is the second ina chain ot tive.

The appellant expended $866,649.00 on this mill, and the Commisstoner has disallowed $648,701.00. in etfect, two six [oot milts were replaced with a new seven foot mii}. 'The present five mills operate an train to Lhe end result that the luice 1s extracted from the sugar cane.

does comprise a new unit for the purposes of s.82AH.

Once again the appellant submits that it has 'constructed' a new unit. it cannot claim tor acquisition of units, hecause the relevant. orders were placed with Walkers Limited on jrd Decemher 1974.

The equipment acquired trom Walkers was substantial, and included a turhine qear box

The work undertaken by the appellant in creating this mill was aiso very substantial. It involved the removal ot two existing six

foot wi LLing units, the removing ot intermediate carriers, the removal of aearing torming part ot the crushing units, and

removal of a low speed unit, hiah speed unit. turbines, access platforms, staqing, and pipe work. Such ttems had to be removed to provide access to the site hetore demojJition of the existing foundations could commence. Once back to ground level, the area tor excavation was set out, breaking of concrete and excavator proceeded, three months bex.nda involved an forming the toundations. Vhe various components supplied by Walkers limited were slow in arriving. 'Thetr ianstallatioan wes a complicated process involving levellin«a, tensioning, adjianing and assembling. The appellant's boilermakers spent a fortnight on welding work, their emploved electricians (five or six men) spent a tortniaght with much overtime, and the installation of the steam piping to the turbine took at least two weeks."

Questions arise in relation to this item concerning the

relatLonship between the terms "construction", "acauisition" and

The allowance given by the section depends upon the new plant heing constructed or acquired. "Construction" includes manufacture, but is not contined to it. One can construct by building or assembting, and it pJainly accords with the policy ot the section, as with sections in similar terms, that this can be done by a contractor for the taxpayer, as well as by its emp loyees. it as intended, ain my view, that the term

"Acquisition" as itself a broad term; ats width jn operation is sutficiently Limited by the need tor expenditure by the taxpayer in respect. of It. lt uwneludes acquisition trom a lessee (s.82AHK(/)), the taking on hire under a hire-purchase agreement and the construction of the property by another person on the taxpayer's premises. In my view the last-mentioned example cannot reasonably give rise to the conclusion that construction by a contractor under a contract with the taxpayer must. be treated as an acquisition. Rather it shows the intended width ot the notion of acquisition, so that work done by another, if not to be regarded as construction, is included. Vhe subdivision (Subdivision B of Division 3) does not af course have

application unless there is expenditure, at. some stare, In

As 1 see it, the auntention of the tearslature 1s that

"acquisition" and "construction" are between them antended to cover all cases, although they will commonly have application at different times in the development of a proiect. Problems can then arise as to whether an "acquisition" untended as part of a "construction" isa "unit". but these problems are capable of resolution, in accordance with the purpose of the learslation. if 2t 18 conceivable that there 15 some situation which would not come within either of the terms. the legislative intention may to

It is submitted that the Leqislation draws a distinction between "construction" and "acquisition" on the one hand, and "installation" on the other. If there 1s a new un1tt in respect of which the taxpayer has incurred expenditure of a capital nature, there would not seem to be any purpose or rationale in any such distinction, and in my view there is none. The purpose of the relevant reterence in s,82AH, as in a number of other sections, (see s.5/AC(t); s. b/ABRCL): S.57AG(02)2 s.5/AH(CD): 5.58? s.624A(5) and (/); s.75B(2)) a8 to requixe thal that which has heen acquired or constructed is at the relevant time in use or

installed ready Eor use and held in reserve (s8.82A0(3)(b)).

"installation" may not amount to "construction". This is not to say that there is a strict dichotomv between the terms. What s.82AB reters to 1s the unit being "instalied". Ihe passive 1s

used, to indicate a state ot affairs. 'Jhe trial Judae would seem

to bave found that, un relation to the first and third crushina mills, construction was commenced on or atter |! January 19/6 J do not understand the finding. as to time, to have been

in my view. for the reasons | have «uiven, the Learned Judge was correct in his concluston that the amount in issue under this heading was deductible (subject to the relevant expenditure having been incurred on or atter ] January 19/h: see

"This ais now called the number 5 miJl- The evidence with respéct to this issue is parallel! to that concerning the tirst crushing mill and £ do not think that there 1s any feature ot sufficient importance to produce a different result. Consequentiy, ( consider that the Commissioner was in error in disallowing $/93,121.00 of this claim for deduction.

1t bas not been submitted that the considerations in this case are ditferent from those respecting the First Crushing MilJ, or Chat, given the conctustons respectung that. miJil, the

His Honour was of the view that. the juice heaters and

efitet vessels could be regarded separately as units.

"The installation of the inice heaters involved work by Walkers and alse by the mili. Walkers <Jnitrally performed the majority of pipe work associated with the beaters. hater additional pipe work was performed with the mil! supplying materials and Walkers supplvina the labour, The mall''s work involved the design installation and toundation to support the staguig on which the heaters were

eventua Lly mounted : Lhe pur chase are installation of instrumentation to controls the systen, particularly with respect to

temperature control; and the purchase and instajJlation ot valve work associated with the steam pipe work. The work carried out by the mMiLlL cost approximately $187,000,00. The foundations prepared by the mill did not serve any function in relation to the structure of the mill building, and were for the sole purpose of the construction of the new juice heaters.

In my view the overas1 work was organised and eftected by the appellant. [t matters not that relatively substantial sub-contract work was obtained from third parties.

I also tind that the appe! lant commenced rts construction work after Lst January 19/6.

Iam prepared to decjJare that to the extent to which the assessment disallows deductions in respect ot expenditure incurred in the construction of the Juice heaters, the assessment was in error."

There was a problem in apportionment of cost which was

There has been no chaljenge to the findinas of tact ot the Jearned Judge, and what L have atready said supports the

In relation to the effet vessels. his Honour said that. he was not satisfied that their construction had been commenced on or atter | January 1976, and that the objection in respect of them should- he disallowed. 'There has not been any challenge to

Section 87AK(1)(a) requires the expenditure, that is to say, the expenditure in respect of construction, to have been incurred on or after L January 1976. Lt 1s submitted that, with some exceptions, the taxpayer did not satistv the onus of proot in this regard. 'the exceptions are expenditures of the tollowing

(a) $488.00 in relation to the mixed juice pumping station;

(db) $35,085.00 in respect of the first crushing mill:

Although the onus did /ie on the taxypaver., 11 appears

that there was some justitication tor its counsel to believe, at the hearing, that. expenditure on or after | January 19/6 was not in issue. It is signiticant that the Learned Judge did not deal with the matter in his reasons for judaqment. Counsel tor the Commissioner has sa1d, however, that un the circumstances, if 1t remains relevant, the taxpayer should have an opportunily ot proving the matter Fully. 'his will sunvolve reterring the issue to the trial Court tor turther hearing, and determination. 'this

is the course which 3t seems to me should be fol Jowed.,

The meaning of "incurred" in s.82AHK was discussed betore us. It is a term which is very tamiliar from its place in s.bl of the Act, and in my opinion it. should have the meaning in 8.82AB that it has in s.51. This meaning has been

authoritatively dealt with in New Zealand Flax Investments

Limited v. 'the federal Commissioner of Naxation (1939) 61 C.0.R

179, Federal Commissioner of Taxation v. James Flood, Ply. Limited

(19543) 88 C.L.R. 497, and Nilsen_Develonment | laboratories Ply.

Limited v. tederal _ Commissioner__ot_'l'axation (1980-1981) L44

1 am ot the view theretore that the appeal farls on the matters raised by the Commissioner on all points except this Jast matter, and that in relation to that. the matter should he remitted to the Court at tirst instance tor determination, 'he

Commissioner should pay the taxpaver's costs of this appeal.

I certify that this and the sixteen (16) preceding pages are a true copy of the Reasons for Judgment herein of his Honour

CORAM: FOX, LOCKHART & FITZGERALD JJ. 25 JULY, 1983

LOCKHART J. I have read the reasons for judgment of

The expression "a unit of property" is cent It appears in Subdivision B of Division 3 of Part

B2AA to 82AQ and was inserted by Act No. 50 of 1976.

sections of the Assessment Act are generally to the

III of the Income ch comprises ss. My references to

took during the relevant year of income namely, the year ended 30 April 1977. The subdivision provides a deduction in the form of a special investment allowance in respect of capital expenditure incurred by a taxpayer on "a new unit of eligible property" on or after 1 January 1976. Section 82AA provides that, subject to the other provisions of Subdivision B, the subdivision applies in relation to "a unit of eligible property" (an expression defined ins. 82AQ) acquired or constructed by the taxpayer that is for use by the taxpayer wholly and exclusively in Australia for the purpose of producing assessable income otherwise than by leasing, letting on hire

The operative provision of the subdivision 1s s. 82AB. It allows a deduction in respect of capital expenditure exceeding $500.00 incurred by a taxpayer on or after 1 January 1976 in respect of the acquisition or construction by him of "a new unit of eligible property" provided the requirements of s. 82AA are satisfied. if acquired, the property must be acquired under a contract entered into en or after 1 January 1976 and before 1 July 1985. If constructed, the construction of the property must have commenced on or after 1 January 1976 and before 1 July 1985. Whether acquired or constructed, the property must be first used or installed ready for use before 1 July 1986. These references to dates are, for convenience, to the

Section 82AE excludes structural improvements from the operation of subdivision B other than certain specified exceptions which are, in the main, structural improvements on land used for the purpose of carrying on a business of primary production, for example, certain fences, dams, underground water pipes, and buildings or other

structural improvements for the storage of grain, hay or fodder.

Section 82AF specifies property that does not qualify for the investment allowance including certain appliances of a kind ordinarily

used for household purposes, motor vehicles, paintings, books, films,

musical instruments, wharves, jetties or wearing apparel.

The expression "a unit of eligible property" is used in other provisions of subdivision B, for example, s. 82AA. The words "eligible property" are defined by sub-s. 82AQ (1) as meaning:-

",..plant or articles within the meaning of section 54 and includes earth tanks constructed for the

This definition thus provides a bridge between the depreciation provisions and Subdivision B relating to anvestment allowances. The expression "unit of property" appears ain the depreciation provisions, for example, ss. 55 and 56 relating to the basis and calculation of depreciation of a "unit of property". Section 57AA provides for a special depreciation allowance to primary

producers for "units of property" to which that section applies, for

example, structural improvements for agricultural pursuits and

structural improvements provided for residential accommodation. The expression "unit of property" appears in s. 62AA in respect of the manufacturers' investment allowance and in s. 62AB which provides a special deduction for primary producers who invest in certain units of property. The Legislature thought it necessary or desirable to exclude from s. 62AB items as diverse as buildings, wharves, fences,

dams, wireless receivers and transmitters, cooking appliances,

The large number of eclectic and diverse items capable of being "units of property" or "units of eligible property" which vary so considerably as to type, size and function and the fact that it is the intention of the Legislature to confer benefits on taxpayers by giving them a special deduction in respect of new plant, all point to the conclusion that in construing the undefined expression "unit of

eligible property" a wide not a narrow approach is called for.

The Dictionaries provide some help in determining the meaning of the word "unit", but the variety of meanings given by them to it

show the impossibility of assigning it an inflexible or precise meaning and likewise the larger expression "a unit of eligible

property". Coilins Dictionary of the Enqlish Lanquage, Australian

edition edited by G.A. Wilkes, Sydney, 1979, contains the most

system, apparatus, or establishment that performs a

Helpful though the dictionaries are thev do not provide much practical guidance in determining the meaning of the expression "unit of eligible property" for present purposes. It is true that ultimately the question what constitutes "a unit of eligible property" depends on the facts of the particular case, but some guidance to the Commissioner and taxpayers is called for. In my view, the nearest one can get to enunciating a test of fairly general application is that it 1s the function or purpose of the particular item to which one looks to see if it answers the description on the facts of the case of "a unit of eligible property". It is not necessary that it be functionally operative though in many circumstances this may be called for. For example, if five parts are installed in an assembly line and all that is needed to render the line operative is a sixth part, but until that part is installed no part may function or operate, the functional incompleteness does not necessarily deprive each of the five units of its character as "a unit of eligible property" for the purposes of the Assessment Act. It depends on the facts of the case. Yet, at other times a "unit" may not come into being until all the components have been assembled. For example, a farm fence 1s made up of a number of posts and rails or wires. It is difficult to conceive

of any "unit" coming into being until the fence 1s erected. A

concrete mixer installed on the back of a truck was held by Kitto J.

un Readymixed Concrete (Vic.) Pty. Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1969) 118 C.~L.R. 177 to be

a "unit of property". His Honour said (at p. 184):-

"Notwithstanding the mode and degree of annexation, the truck and the mixer are functionally separate and independent units of property. The function of delivery belongs to the truck. The use of the mixer 1s for mixing, as a step in the production of concrete in the condition required for pouring, and its nature is understated to the point of

misdescription by saying that the machine - for that is what it is - is ordinarily used for delivery."

See also Wangaratta Woollen Mills Limited v. The Commissioner

of Taxation of the Commonwealth of Australia (1969) 119 C.L.R. 1.

The difficulty of identifying a "unit of property" for the purposes of the Assessment Act 1s that sometimes an item may be correctly described as a "unit" when it is one of a number of parts which upon assembly perform a subsidiary function. Sometimes each part may be correctly described as a unit before assembly and at other times after assembly. On other occasions there may not be a unit until a number of parts have been integrated into a complete system. Then the whole may answer the description of a unit. The possibilities and combinations are numerous. But purpose or function must generally be a useful guide to the identification of an item as

answering the description of a unit of property in particular cases.

The learned primary Judge held that the whole mixed juice

pumping station, including foundations, pumps and motors, was a unit of eligible property and that the components in question were part of it. His finding was one of fact and no grounds have been established

QUEENSLAND DISTRICT REGISTRY ) NO. Gl01l of 1982 GENERAL DIVISION )

ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF QUEENSLAND

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

TULLY CO-OPERATIVE SUGAR MILLING ASSOCIATION LIMITED

Fitzgerald J.: This is an appeal by the Commissioner of Taxation from a decision of a single judge of the Supreme Court of Queensland. The respondent-taxpayer owns and operates a sugar mill at Tully in North Queensland. The Supreme Court held that certain capital expenditures by the taxpayer were allowable

deductions under sub-s. 82AB(1) of the Income Tax Assessment Act 1936 ("the Act").

Subject to other requirements, a deduction is allowable under sub-s. 82AB(1) if a new unit of eligible property in relation to which Subdivision B of Division 3 of the Act applies is either acquired or constructed by a taxpayer. By sub-s. 82AQ(1) "construction" includes manufacture. By sub-s. 82AQ(3)

the construction of property for a taxpayer by another person or

persons on the taxpayer's land is an "acquisition" by the

As part of the modernisation of its sugar mill the taxpayer dismantled and removed entire stages of its milling process, even to the extent of removing the relevant foundations. In respect of each section, it purchased new plant and equipment, excavated and laid new foundations, installed and connected up the new plant and equipment, and carried out associated work. The work was performed under the taxpayer's supervision and direction by its own employees, tradesmen whom it engaged, and suppliers of the plant and equipment. The primary judge upheld the taxpayer's contention that the expenditures in respect of which deductions were claimed were incurred by it in the construction by it of new

The first ground argued by the Commissioner was that the plant and equipment purchased by the taxpayer consisted of new units of eligible property which were acquired by the taxpayer and that, therefore, the deductibility of the expenditure incurred by the taxpayer in respect of the plant and equipment fell to be determined on the basis of acquisition, not construction. In my opinion, given the correctness of the first limb of the Commissioner's proposition, the second limb does not follow. Neither the concepts involved in, nor the terminology adopted by, the relevant statutory provisions justify the conclusion that, in any given situation, it will be possible to identify but a single unit of eligible property which has been either constructed or

acquired in one particular way or another. On the contrary, it

seems to me plain that the task imposed by the subsection will often, perhaps more often than not, be to determine what is, ina particular fact situation, the appropriate characterization of what has occurred. Further, although the subsection speaks of construction or acquisition, there may be cases in which the proper conclusion is that the unit of eligible property, by reference to which a claim to a deduction is to be considered, was in part constructed and in part acquired. It is sometimes said that legislation intended to confer a benefit should be construed

beneficially: see, e.g. PAP Printers and Publishers Pty Ltd v. Minister for Business and Consumer Affairs (1982) 40 A.L.R. 377,

It is well recognized that, where appropriate, "or" may mean "and". It is increasingly accepted, quite apart from statutory intervention, that undue literalism is to be avoided in the search for the legislative intent: see, e.g.Tickle Industries Pty Ltd v. Hann (1973) 130 C.L.R. 321. I see no reason to doubt that, in

such a case as I have described, the Act often could and should be applied separately in relation to the' acquisition expenditure and the construction expenditure. However, that does not mean that there will not be cases in which it is proper to consider that there is but a single unit of property constructed by the taxpayer although there have been purchases by the taxpayer of plant equipment or materials which have been incorporated into that unit. It may be that a similar result in such cases would arise from a liberal application of the phrase "in respect of" to which further reference is made below. Expenditure "in respect of" construction may in appropriate cases include costs of purchases, and expenditures "in respect of" acquisition might conceivably

include costs other than the purchase price, including perhaps

In the present case, the judge recognized that questions of fact and degree were involved. He concluded, with the assistance of uncontroverted expert evidence, that the relevant units of eligible property were the discrete sections of the milling system and that each had been constructed by the taxpayer. He was clearly entitled, in my opinion, to conclude that the sections of the milling process constituted units of property. Without seeking to provide an exhaustive definition, I see no reason to doubt that there is, for present purposes, a unit of property if it is capable of independent existence, not necessarily self-contained, e.g. it may require power from an external source, not necessarily separately used, e.g. it may be incorporated into an operating system such as a machine or complex of machinery in a manufacturing process, but capable either of separate function, or of function in conjunction with different parts, or in a different context, from its current user. See the definition of "unit" in the Oxford Dictionary; cf Ready-mix Concrete Pty Ltd v. Federal Commissioner of Taxation (1968) 118 C.L.R. 177 and Wangaratta Woollen Mills v. Federal Commissioner of Taxation (1969) 119 C.L.R. 1. It should, perhaps, be recorded that it was not submitted that any of the property in respect of

which expenditure was incurred was not eligible property.

Insofar as the case for the Commissioner questioned the primary judge's conclusion that the units were constructed by the

taxpayer I desire to say no more than that there was evidence upon

which that view was open. Such limited analyses of the evidence

ag were undertaken before us did not persuade me that this Court should substitute its own different factual conclusion. Certainly, Ido not accept that a conclusion that a unit of property was constructed by the taxpayer within the meaning of the legislation is excluded because parts of what were incorporated into a unit of property were manufactured by and purchased from other persons, or because part of the work of installation and erection etc. was performed by persons other than employees of the

The Commissioner's other argument was that the expenditures were not incurred on or after 1 January 1976. The debate in respect of this argument centred upon when, for relevant purposes, expenditure is incurred. The parties agreed that, perhaps due to a misunderstanding, the matter of whether the expenditures were incurred on or after January 1976 may not have been adequately litigated at first instance. Indeed, in my opinion, there are other aspects of the taxpayer's claims which do not seem to have been fully ventilated in the Supreme Court or

indeed before us, as I understood the rival submissions.

In order to be deductible on the hypothesis advanced by the taxpayer and accepted below, expenditure must have been incurred in respect of the construction of the relevant new unit of eligible property. The phrase "in respect of" is capable of describing relationships over a wide range of degrees of proximity; the meaning to be attributed to it on a particular

occasion depends on the context: State Government Insurance

Office (Qld) v. Rees (1979) 144 C.UL.R. 549, 553-554, 560-561.

Further, the expenditure must have been incurred on or after 1 January 1976 and the construction must have been commenced on or after that date. The primary judge held, without elaboration, that the purchase prices of the plant and equipment were

expenditures incurred in respect of the construction of the units of eligible property, and that such expenditures were incurred on or after 1 January 1976, although contracts to acquire the plant and equipment were entered into and perhaps other steps were taken prior to 1 January 1976. He also, however, held that the construction did not commence until after 1 January 1976 solely because he found that the foundations were not started until after that date. That finding assumed, without deciding, that the construction of each unit was confined to the work after that date; i.e. the foundations, the installation, erection, connection of the plant and equipment, and the associated work. Whilst the two conclusions in question may not be necessarily incompatible, they serve to emphasise the inter-related temporal

It is by no means clear to me that the questions of when construction was commenced, what expenses were incurred in respect of construction, and when those expenses were incurred do not bear upon each other or can generally be considered in isolation from one another. Questions of when construction has been commenced have been elsewhere considered, often, but not always, in connection with whether or not there has been a _ substantial commencement of construction: see, @.g. OQOwendale Pty Ltd v.

Anthony (1967) 117 C.L.R. 539; North Sydney Municipal Council v. Middle Harbour Investments Pty Ltd (1963) 81W.N. (N.S.W.) 35;

Parramatta City Council v. Industrial Acceptance Corp Ltd (1978) 1

N.S.W.L.R. 698; and Day v. Pinglen Pty Ltd (1981) 55 A.L.d.R. 416. Of course, the different context in which the question of commencement of construction presently falls for consideration would have to be brought into account in any attempt to derive

assistance from such cases. I desire to say no more here than

that, in the context of conclusions that the taxpayer constructed units of prperty consisting of separate entire sections of the milling system, it seems to me that the questions of when the construction was commenced, of what expenditures were incurred in respect of construction, and of when those expenditures were

incurred may have become inappropriately disassociated.

The taxpayer submitted that expenditure is incurred only when paid, relating this submission to the fact that sub-s.

82AB(1) is concerned with capital and not with revenue expenditure

and seeking to place emphasis upon the dictionary definition of an expenditure. Whatever difference it may make that capital expenditure is presently material, it does not lead me to accept that submission for the taxpayer. I am unable to distinguish in any significant way between the reference to "outgoings incurred" in s.51 of the Act and the reference in sub-s.82AB(1) to "expenditure incurred", whether literally, conceptually, or by contrast, and I consider that the cases in relation to s.51 afford a useful guide as to when expenditure is incurred for present

purposes: see, e.g. Nilsen Development Laboratories Pty Ltd v.

Federal Commissioner of Taxation (1981) 144 C.L.R. 616 and cases

As is acknowledged by the parties, the factual issues

relative to when the expenditures were incurred on this approach were not litigated. Further, I doubt whether, in the circumstances, the associated questions of when the construction

was commenced and whether the expenditures were incurred in

Iam in agreement that the matter must be remitted to the Supreme Court. I would prefer to see the order of this Court formulated differently from what is proposed but no purpose would

sans ~ nw ae wasn con - 4 eT TD r tt. ls ro. 2oe CD for

At a glance

Court

Decision date

Before

Source

Judgment (197 paragraphs)