GP International Pipecoaters Pty Ltd v Commissioner of Taxation

GP International Pipecoaters Pty Ltd v Commissioner of Taxation - [1990] HCA 25 - HCA 1983 case summary — Zoe

[33]

What was the scope of the business in which the establishment costs were received and what was the taxpayer's purpose in engaging in it? The taxpayer submits that its business consists in the coating of pipes, not in the construction of the plant. At the time when the tender was submitted, that was the intended scope of the business and the tender was submitted on the footing that the income of the business would be the fees calculated on the length of pipe which was coated. At that time, the taxpayer intended to construct the plant and sought an advance of 15 per cent of the expected total fees to cover the anticipated costs of construction. If the tender documents be treated as defining the taxpayer's business, it is clear that 15 per cent of the estimated total fee, though payable before production commenced, was intended to be received as income. If the cashflow requirement of 15 per cent of the estimated fee payable on the coating of 1500 km of pipe which was payable before production commenced had been received in the form contemplated in the tender documents, it would have been received as a payment on account of the coating fee. Such a receipt would have been income in the taxpayer's hands, at least as the coating progressed sufficiently to earn the 15 per cent. However, the agreement which came into existence between G.P.C.K.K. and C.R.I. on the one hand and S.E.C.W.A. on the other was, and was intended by them to be, superseded by a contract entered into by the taxpayer and S.E.C.W.A., the taxpayer being incorporated in order to enter into and to perform that contract. Recital F to that contract notes that G.P.C.K.K. and C.R.I. assigned their interest under the antecedent agreement to the taxpayer on the day of its incorporation but, as the contract is deemed to be effective from the date of acceptance of the tender (cl. 7), the contract superseded the accepted tender. Therefore it is that contract which is critical to the ascertainment of the true scope of the taxpayer's business.

[40]

However, the taxpayer takes its stand on two cases in which payments made under a contract to recoup capital expenditure were held to be capital in the hands of the recipient. The first is Boyce (H.M. Inspector of Taxes) v Whitwick Colliery Co. Ltd. [19] ; the second is A.P.A. Fixed Investment Trust Co. Ltd. v Federal Commissioner of Taxation [20] . In Boyce , a colliery company agreed with the Coalville Urban District Council, a water authority, that the company would instal plant and equipment to pump water out of its mine, to filter it and supply it to the Council's system. The plant and equipment were specified by the Council to meet its needs, and the Council entered into a contract with the company to pay each year one-thirtieth of the cost outlaid by the company in installing the plant and equipment together with certain other charges including one penny per thousand gallons of water supplied. In the event of the company ceasing to work their colliery during the currency of the agreement (thirty years with an option for a further twenty years), the Council was entitled to continue to pump, filter and supply water using the plant and equipment installed for the purpose. (The facts are abbreviated, but they suffice to illustrate the point of the decision.) It was held that the payments of one-thirtieth of the cost outlaid in installing the plant and equipment were of a capital nature and not subject to income tax in the company's hands. Boyce was decided under a provision of the Income Tax Act 1918 UK which brought to tax "profits or gains arising from any trade" in the computation of which no sum was deductible in respect of " any sum employed or intended to be employed as capital in such trade" (Sched. D, cl. 1(a)(ii), and r. 3(f) of the Rules applicable to Cases I and II). It was decided as one of two appeals decided consecutively: one by the company seeking to exclude the payments in respect of the cost of plant and equipment from the profits or gains arising from its trade, one by the Council seeking to deduct those payments from the profits or gains arising from its water undertaking. Thus in the company's appeal, Lord Hanworth M.R. [21] said:

[41]

I intend to look at the agreement as a whole and I find in the agreement a capital outlay made not really for the purpose of the Colliery Company but for the purpose of this supply of water and upon certain assets, the user of which, in certain events, might pass to the Council and in respect to which there was no undertaking or covenant or certainty that the Colliery Company would continue to use them for the full term of thirty years. His Lordship appears to disregard the company's extension of its business to the supplying of water in determining the character of the receipt. And Romer L.J. took the character of the expenditure by the Council as determining the character of the receipt by the company. He said [22] : The Urban District Council were desirous that water should be supplied to them by the Colliery Company and they, therefore, must have recognised that, if a contract was to be entered into by the Colliery Company for supplying water to them, the Colliery Company must put themselves into a position, by the provision of adequate machinery and buildings, to do so. If, in those circumstances, the Colliery Company had agreed with the Urban District Council that they would themselves erect the necessary buildings and machinery for the purpose and the District Council had agreed that, in consideration of their so doing, the Council would repay to the Colliery Company, by thirty yearly instalments, the cost to which the Colliery Company had been thereby put, I cannot conceive that anyone could contend successfully that the sums so paid by the District Council to the Colliery Company were liable to Income Tax, even though, at the end of the thirty years, the buildings and plant, which presumably by that time would not be worth very much, should remain the property of the Colliery Company. A taxpayer can make a capital expenditure upon the land of a third party; it is, none the less, a capital expenditure even if it is upon the land of a third party and not upon his own land.

[44]

The A.P.A. Case [25] arose out of an agreement for lease with an option of purchase. The intending lessor was to buy land and erect a building to be occupied by the intending lessee at a rental of £1475/10/- calculated at 5 per cent on the cost of the land and 10 per cent on the cost of the building. The rental approximated 8 per cent per annum return on the capital sum to be outlaid on land and building by the lessor. In addition, the lessee was to pay £250 per annum as a "sinking fund" to meet the cost of the building. The price at which the lessee was to be entitled to exercise the option was the cost of the land and building less whatever had been paid into the sinking fund. For each payment of £250 made into the sinking fund, the rent was reduced by £20 per annum, or 8 per cent of £250. Owen J. held that the payments into the sinking fund were not received as assessable income. He regarded those receipts as a recoupment of the capital outlaid, not as rent. The dichotomy may not be complete but the case is distinguishable from the present. There, every payment into the sinking fund reduced the value, pursuant to the option, of the recipient's capital asset; each payment was, so to speak, an instalment of the price contingently payable. Here, there is no sale or contingent sale of a capital asset by the taxpayer; the receipt of the establishment costs did not affect the taxpayer's ownership of or interest in the plant. Neither of the cases on which the taxpayer takes its stand requires this Court to hold that the establishment costs were received not as income but as capital. The establishment costs were not received as the price of a capital asset nor as a payment dissociated from the taxpayer's business; they were received as part of the remuneration earned by the carrying on of its business which consisted in the performance of the contract, that is, in constructing the plant and coating the pipe required. The establishment costs were therefore received as part of the taxpayer's assessable income.

At a glance

Court

Decision date

Before

Source

Judgment (44 paragraphs)

Parties