The Submissions discussed
31 It is now clear, if it ever was in dispute, that the task of construction is not one simply of taking each word used in a statute and applying the dictionary meaning of that word to arrive at a conclusion. The task is not as mechanical as that. While it is clear that the construction of a statute will commence with the words used and that it is a good start to assume that the words mean what they say, that is only a start to the process. As Gibbs CJ said in Cooper Brookes at 305:
"if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust."
32 However, the English language is seldom so clear and unambiguous that only one construction is open. It is for that reason that in judicial decisions in recent times which have discussed the process of construction great importance has been attached to "context". Perhaps the most famous and often cited passage to this effect is to be found in the judgment of the High Court in CIC Insurance Ltd v Bankstown Football Club Limited (1997) 187 CLR 384 at 408 where Brennan CJ, Dawson, Toohey and Gummow JJ in a joint judgment wrote:
"It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent."
33 The mischief which s 82(2) was designed to overcome is clear enough. The subsection, as I have already illustrated, complements s 82(1). The first subsection ensures that a taxpayer does not get more than one deduction where the same amount is allowable under different sections. The second subsection is designed to achieve the same result in a case where instead of a deduction being available under two sections there is a deduction available under one section and a need arises to compute a profit or loss by virtue of another section. Thus subsection (2) was enacted to ensure that a taxpayer, entitled to a deduction for expenditure which he or she incurred, should not in essence obtain a second deduction for that expenditure by taking that expenditure into account on the cost side of the equation in computing a profit (or loss) where that profit would be brought into assessable income.
34 The legislative purpose of the building allowance is also obvious. It is to give a deduction for what in essence is amortisation on a fixed percentage basis for expenditure on the construction of or in certain cases extensions to buildings used to produce assessable income and thereby encourage the construction (or extension) of new commercial buildings. The amortisation, while calculated by reference to the expenditure incurred, is not given only to the person who expended the money. The criterion relevant to the deduction is not that the taxpayer has expended the money, although clearly someone must have. The criterion for the allowance is use of the building as non-residential premises for the purpose of gaining assessable income.
35 The incentive which the building allowance is intended to provide would obviously be cut down if the deduction is clawed back when the building is sold, for while the allowance would still be given there would be only a timing advantage. Express provisions permit a clawback (generally referred to as a balancing charge) in other circumstances, for example, in the 1936 Act there will be a clawback for the allowance for depreciation (s 59), research buildings (s 73A(4), mining and quarrying expenditure, including exploration, development and transport (ss 122K, 123C, 124AM ), timber operations (ss 123G, 124JB ), and dealings with industrial and intellectual property (s 124T). Other provisions requiring a clawback and found in the 1997 Act include s 42-190, and in the now repealed provisions of s 40-285, Division 44, Division 46 and Subdivision 380D. No such provision is to be found in Division 43, the successor to Division 10D (sec 40-45 and Subdivision 43-H)
36 When the interaction of s 124ZH and s 82(2) is examined it seems to me that the proper interpretation of s 82(2) is that the effective double deduction that is prevented by the subsection is one where the criterion for the deduction is expenditure by the taxpayer in respect of property that is subsequently turned by the taxpayer to account. The sub-section is not concerned with the case where the criterion of deductibility is not expenditure incurred by a taxpayer at all, but rather the criterion of deductibility is use by the taxpayer of non-residential property to produce assessable income, irrespective of who the person was who initially incurred the expenditure. In other words the question of who incurred the expenditure is an adventitious circumstance in the scheme of the building allowance. And this is so, notwithstanding that some person must have incurred the expenditure in circumstances such that it becomes "qualifying expenditure". Once the interaction of the sections is interpreted in this way the obviously anomalous consequences implicit in the interpretation put forward by the Commissioner disappear. Different results will not then follow depending upon whether the taxpayer who realises the property was the person who built the building or extended it and who incurred expenditure which was qualifying expenditure or was a subsequent purchaser of the building who did not himself or herself incur the qualifying expenditure but used the building to gain assessable income. And, with respect to the submission of senior counsel for the Commissioner, it can not be said that the language of s 82(2) is so clear, so intractable, that this interpretation, which gives effect to the legislative policy of both s 124ZH and s 82(2) is simply not open.
37 In the course of argument I was referred to a comment I made by way of dicta in the course of my judgment in Australia & New Zealand Banking Group Ltd v Federal Commissioner of Taxation (1994) 48 FCR 268 at 291 - 292. In that case in a judgment which was agreed with by the other members of the Court I said:
"Counsel for the Bank referred us to the notes to s 82(2) contained in the explanatory handbook, showing the differences between the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1922 (Cth), issued by authority of the Commonwealth Treasurer on 31 August 1936. That handbook does not stand in the same position as Explanatory Memoranda to legislation to which regard may be had in interpreting that legislation, at least in the case of ambiguity under s 15AB(2)(e) of the Acts Interpretation Act 1901 (Cth). Publication of the handbook postdated the date of assent to the Income Tax Assessment Act 1936 on 2 June 1936. Nevertheless, regard might be had to that publication as indicating the mischief to which s 82(2) was directed, that subsection having no counterpart in the prior legislation. The explanatory handbook has the following comment:
'Sub-section (2) of section 82 applies to cases where profit loss results from the realisation of property acquired for purposes of profit making. For instance a person may acquire real property for purposes of re-sale at a profit. It may be two or three years after purchase before a satisfactory offer is received from the property. In the meantime, the taxpayer may be receiving rent from the property and paying interest on money borrowed to purchase the property, and also paying rates and taxes, and expending money on repairs.
The interest, rates and taxes, and repairs would be allowable deductions from the rental income, and when the property was sold, section 82(2) would apply to prevent the interest, rates and taxes, and repairs, being again deducted, when arriving at the profit arising from the re-sale of the property.'
While there is no reason to read s 82(2) as limited to that class of profits which would have fallen within s 26(a) as arising from the sale by a taxpayer of property acquired, inter alia, for the purpose of profit-making by sale, the difficulty with applying s 82(2) in the present case is that the deduction granted for depreciation is arguably not a deduction for expenditure incurred by a taxpayer in connection with property sold, but rather allowance is made for depreciation by a calculation which takes into account as the starting point to which the rates of depreciation are to be applied, the depreciated value of the unit of property. The starting point of the calculation 'depreciated value' is the purchase price of that property. In these circumstances I doubt the correctness of applying s 82(2). It is, however, in my opinion, unnecessary to reach a final conclusion on that matter."
38 It is not necessary in the present case to consider the interaction between s 82(2) and the depreciation provisions and I refrain from doing so. But it is perhaps important to point out that if s 82(2) does not apply to the deduction for depreciation it is not so much, as was suggested in argument, because what is deductible is merely a percentage of expenditure incurred over a period but rather that the starting point for the calculation of depreciation is not expenditure which the taxpayer incurs, but rather "depreciated value" which in some circumstances is the amount which the taxpayer himself or herself incurs as expenditure on the capital asset to be depreciated, but which in other circumstances may represent amounts incurred by another person in the case where the taxpayer has purchased the depreciating asset from that other person.
39 Accordingly I am of the view that the objection decision in each case should be allowed and that the taxable income of the applicants should be reduced in accordance with these reasons.