W Thomas & Co Pty Ltd v Commissioner of Taxation

W Thomas & Co Pty Ltd v Commissioner of Taxation - [1965] HCA 54 - HCA 1965 case summary — Zoe

[6]

The Berry Building has been so called because before the time when it was acquired by the taxpayer it belonged to a company, Henry Berry & Company Limited (which I shall call "Henry Berry"). One part of it is an old stone building erected more than a hundred years ago. To this, considerable additions in brick were made thirty or more years ago. Henry Berry used the building as a warehouse in connexion with its grocery business. It also carried on there some factory processes - blending spices, pepper-grinding, mixing curry powders. The building adjoins a part of the taxpayer's premises. The taxpayer, being in need of further storage space for its business, sought at first to lease part of the Berry Building from its then owner, Henry Berry. But that company did not wish to lease it, saying that it was intending to vacate it and put it up for sale. Thereafter it was sold to the taxpayer by a contract dated 1st November 1960 for £14,000. On signing the contract the taxpayer was let into possession of part of the building and began at once to store there bales of corn sacks, phosphate from Christmas Island (which the taxpayer imports and sells as agricultural fertilizer) and bran and pollard. It progressively increased the area of its occupation by moving in concurrently with Henry Berry's moving out. The transaction was completed by settlement and conveyance on 14th February 1961 and the taxpayer thereafter occupied the whole building. Some parts of the building were somewhat dilapidated when the taxpayer got it. It proceeded to renovate or repair or do it up progressively as need appeared and convenience dictated. This work was done by its own workmen, its ordinary maintenance staff, except for the laying of an asphalt floor on top of the existing brick and concrete floor in the basement. This was done by a contractor. The building is on three levels. The lowest, called the basement, was in fact the ground floor level of the oldest part of the building when it was first built; but a general raising of the levels of streets in Port Adelaide has put it now below the present street level. The land at Port Adelaide is low-lying and water sometimes seeps up through aged or damaged concrete flooring in what are now basements. According to the contractor E. S. Wells who did the work, who was an eagerly informative and I thought reliable witness, the cost of laying the asphalt was very much less than the cost of putting down a new concrete floor would have been.

[22]

Turning now to the facts. First as to the roof. When the building came into the possession of the taxpayer the greater part of the roof, looked at as a whole, was of galvanized iron. The roof of the stone building was originally slate. It had fallen into disrepair and been patched in part with malthoid. In other parts the slates had been removed and galvanized iron had been fairly recently substituted by Henry Berry. Of the rest, that is the galvanized iron section, much of the iron was old although there too some parts had been fairly recently renewed by Henry Berry. That company had it seems been progressively renewing the roof but the work was far from complete. Mr. Leppinus said that when the building was taken over some parts were in need of immediate repair and that it was obvious that the whole of the old iron sections would need renewal sooner or later. It was not, however, realized by the taxpayer until winter was approaching that, if the building was to be used to its full capacity for the storage of goods that might be damaged by water, the task of repairing the roof as a whole must be put in hand at once. On 9th June 1961 the work started. New galvanized iron was put wherever Henry Berry had not already replaced the old iron, and the slates and malthoid were replaced with iron. The old iron removed was sold by the taxpayer, as is shown by the statement. Much of the guttering was in bad repair. It too was removed and replaced by new guttering at the same time. Work on the roof and guttering went on for about nine weeks, but not continuously. It was done intermittently, depending upon what other work had to be done by the maintenance staff and as the need to make various sections of the roof completely watertight became apparent or urgent. In the course of carrying out the work certain existing skylights were replaced by new ones of a larger size made of fibreglass perspex. This was done, as the statement shows, at a cost of £84 17s. 6d. The purpose was to improve the lighting in part of the upper floor where in connexion with the McAulay undertaking bag sewing and branding was to be carried on.

[25]

The next subject is described in the statement as " Painting ". The expenditure on this is the largest single item of those in question. The internal surfaces of the walls and those parts of the woodwork that had previously been painted were repainted, also some of the roofing timbers that had not been painted were painted. Quite soon after the purchase of the building was completed, in February 1961, Mr. Leppinus decided that the whole interior must be freshly painted. The work began apparently in April. It went on intermittently and was still in progress on 31st October, the end of the income tax year. Painting in one part or another of the taxpayer's premises seems to go on continuously, there being two painters regularly employed as part of the maintenance staff. The expenditure compendiously described in the statement as for painting includes the cost of cleaning the building in preparation for painting. This proved to be a considerable operation because, the building having been for a long time used for blending spices and grinding pepper, the walls, rafters and other surfaces were found to be heavily overlaid and in places impregnated with dust containing pepper and spices. A thorough cleaning of the interior surfaces of the building, followed by extensive painting, was necessary to get rid of the smell and dust of the previous occupation and ensure that foodstuffs could be stored without risk of contamination and people could work in comfort. The cleaning proved a troublesome and expensive business. Pepper had got into corners and crevices everywhere. Steel brushes, vacuum cleaners and blowers were used to get rid of it, and those engaged on the work had to be paid dirt money. The original intention had been to paint the walls with boncote, which is a white cement wash, to repaint woodwork and where the tie beams and rafters had not been painted to paint them after filling any weather warps and cracks. This work was done but because of the discolouration caused by the spices two coats of boncote instead of one had to be applied in places.

[59]

When this general principle is applied to the present case the issue becomes one of deciding whether the expenditure upon the vessel is part of the company's organization of capital in order to earn profits with her, or whether it arises from causes associated with the course of operations embarked upon for that purpose. In this regard nobody would doubt that to maintain such an asset which otherwise would deteriorate by its use in operations directed to produce income is a revenue charge. Work of this sort is done to preserve the asset, and following the work the character of the asset is left unchanged. But equally clearly the initial purchase of the asset involves an outlay of capital - it is a part of the organization of capital by the taxpayer to enable income-producing activity to be carried out. How then must one label an expenditure which remedies some flaw in the asset existing at the time of purchase? To me there can be only one answer. To the extent that such initial defects are restored, the result is an improvement in the quality of the asset purchased, and, in my opinion, there has been an outlay of capital. To treat this outlay as a revenue loss is no more justified, in my opinion, than to treat the value of the improvement as an income gain. Defects may arise gradually over an extended period or develop from unexpected or sudden causes, but in so far as they have matured by the time of purchase by the new owner, they affect the quality of the asset he has acquired. Any subsequent need to remove them must be regarded as a legacy inherited by him as part of his bargain. It follows, therefore, that I take the view that the restoration of defects in an asset cannot be classed as a revenue charge unless the defects have arisen out of the taxpayer's application of that asset in his search for income and unless the work is limited to those defects and does not become enlarged into such a reconstruction that a permanent improvement in quality has been effected. 1. [1924] S.C. 74; 12 Tax. Cas. 621. 2. (1965) 9 A.I.T.R. 501, at p. 506.

[60]

Applying the principle to the present case it seems to me that the expenditure of £5,082 upon repairs upon the Berry Building in the year ended 31st October 1961 was of a capital nature. It seems to me immaterial that when the taxpayer acquired the building it did not know of some of its defects, those in the basement floor for example. That means only that the cost of obtaining an asset suitable for its purpose was greater than had been expected. It is equally immaterial that some parts of the work of repair were done progressively as parts of the building were taken into actual use. Expenditure of a capital nature does not cease to be so because made for work the doing of which was spread over a period of weeks or months and paid for as it was done. It is perhaps possible that some part of the expenditure might perhaps on a more close analysis than the evidence permits be shown to contain elements that would, if they could be separated, be a justifiable charge to revenue account. There are always some difficulties in applying in a strict way the concept of repairs, as limited to those resulting from a taxpayer's own operations, to work such as painting that is periodically done not merely to make good defects but also to prevent defects developing. A stitch in time is as much a repair as would be the nine it saves. And the cost of it may be in the same category as would the cost of nine. It may be too that the need for some of the work done on the building in the second half of 1961 was contributed to by the use that the taxpayer had made of it during the first half of that year. But I can see no basis for apportioning between capital and revenue the actual expenditure that was incurred on any of the items listed in the statement. Looked at as a whole, each was I consider expenditure of a capital nature. As Kitto J. said in Federal Commissioner of Taxation v. Western Suburbs Cinemas Ltd. [1] , "if a total expenditure is of a capital nature, so is every part of it".

[66]

Finally it is said for the Commissioner that there was not a true and full disclosure because the taxpayer impliedly stated that the work done was not of a capital character. It is said that this was an accompanying misrepresentation which neutralized the description of the work done. This contention requires consideration. What the taxpayer actually said was that it had met the cost out of revenue, regarding it as a proper outgoing in ascertaining its trading profit. That of itself is of course inconclusive. If the taxpayer chose to finance capital works out of income that would diminish its distributable profit; but it would not mean that in assessing its taxable income the cost of the works must be treated as an allowable deduction. On the other hand however what must be disclosed are the material facts concerning a particular expenditure. It does not seem to me to be correct to say that if these be truly and sufficiently stated the effect of doing so is neutralized by a claim based upon an erroneous view of their legal complexion and consequence. As Kitto J. said in the case referred to above, "the capital or income character of expenditure actually incurred depends upon the nature of the purpose for which it was incurred". If that purpose sufficiently appears, there is I consider no failure of full disclosure because the taxpayer treats the expenditure as of a revenue and not of a capital nature in its own accounts and claims to do so for taxation purposes. The distinction between expenditures on capital account and revenue account has in many cases proved to be debatable and difficult and to cause differences of opinion. For several reasons the taxpayer could honestly, although mistakenly, think that its claim was justifiable. The work was a repair: most of it was not begun until some time after the taxpayer had entered into possession and begun to use the building, it not being absolutely necessary that it be done before the building be put to some use: it was (with the exception of the basement) done by regular servants of the taxpayer who, if not doing this, would have been paid, just the same, for doing ordinary maintenance work: the expenditure was not for making suitable for the purposes of trade a separate profit-earning asset, as in the ship cases; it was upon a building that had been added to the taxpayer's adjoining premises to be used therewith and which the taxpayer had done up as part of the larger undertaking of keeping all its premises in good order. These considerations explain, I think, an honest view that the expenditure was a proper outgoing on trading account. Making the claim that that was so did not, I think, negative full disclosure. I have come to the conclusion that, except in respect of the item "Painting", there was a true and full disclosure of material facts. As to the cost of the "painting" the taxpayer has failed to satisfy me that all that the Commissioner needed to know was told him. As I have said, painting does not always have to wait upon insistent necessity. It would not necessarily follow that because the building was painted shortly after its acquisition the cost was part of the cost of gaining a capital asset. But here I think it was. It was done as part of an unusual and costly operation necessary to dispel the relics of spice-making and pepper-grinding and to make the premises suitable for use by the taxpayer.

At a glance

Court

Decision date

Before

Source

Judgment (68 paragraphs)

Parties

Cited By (1)