WOODWARD v FC of T

Members:
D Muller DP

Tribunal:
Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal)

MEDIA NEUTRAL CITATION: [2003] AATA 4

Decision date: 3 January 2003

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D Muller (Deputy President)

This is an application to review an Objection Decision of the Commissioner of Taxation (``the Respondent'') dated 1 February 2001 to disallow in part certain tax deductions claimed by the Applicant.

Background

2. The Applicant owned a rental property at Lot 4 Bridgewater Quays Kangaroo Point QLD (``the Property'').

3. The Property was rented for the whole of the 1998 financial year with a gross rental income of $13,452.00.

4. The Applicant claimed in his tax return for the year ending on 30 June 1998, deductions for the Property of $9,361.00. This included claims for:

• (a) Special Building Write Off of $1845.00; and
• (b) Other Deductions in the amount of $7,516.00 (``the Plant Depreciation'').

5. On 3 February 1999 the Respondent requested the Applicant to complete a Rental Property Questionnaire for the Plant Depreciation of $7,516.00.

6. The Applicant supplied the Questionnaire on 18 February 1999 and included a Depreciation Schedule completed by quantity suveryors Napier & Blakeley Pty Ltd dated August 1996.

7. On 3 October 2000 the Respondent provided a schedule of Items Reviewed:

• (a) Special Building write-off was increased by $577.00 to allow for claim on capital expenses;
• (b) The Plant Depreciation claimed by the Applicant of $7,516.00 was decreased by $3036.00 because the following items were determined to be not plant or article and therefore not depreciable:
  • (i) Electrical Distribution Gear $809.00;
  • (ii) Furniture, Counter Fittings, Shelving $1612.00;
  • (iii) Gardening Watering System $113.00;
  • (iv) Gas Installation $5.00;
  • (v) Security Systems $6.00;
  • (vi) Swimming Pool, Spa, and Equipment $407.00;
  • (vii) Telephone Installation $81.00; and
  • (viii) Vehicle Control Equipment or Bollards $3.00

8. The Respondent provided a Notice of Amended Assessment dated 25 October 2000 which:

• (a) allowed a further deduction of $577.00 for Special Building write offs; and
• (b) refused a further deduction of $3036.00 for The Plant Depreciation.

9. The Applicant on 18 December 2000 lodged a Notice of Objection against the Amended Assessment. The Applicant claimed the depreciation of the Disputed Items should be allowed as plant for the purposes of s 42-18 of the Income Assessment Act 1997 (``the Act'').

10. On 1 February 2001 in response to the Objection the Respondent changed the Amended Assessment to the following extent:

• (a) the deduction for Special Building Write- Off be reduced by $150.00; and
• (b) allowed a further deduction for the Depreciation of Plant for the following items be:
  • (i) the PVC pool equipment and BBQ $753.00; and
  • (ii) the Gardening Watering System $113.00.

11. The Respondent provided a second Amended Assessment dated 13 February 2001 incorporating the changes outlined in paragraph 10:

• (a) the Special Building Write Off deduction be reduced by $150.00; and
• (b) the Depreciation of Plant be increased by $866.00.

12. The Applicant was dissatisfied with the Objection Decision of the Respondent dated 1 February 2001 and lodged an application to the

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Tribunal for review of that decision on the basis that the Disputed Items are plant for the purposes of section 42-15 of the Act.

The law

13. The applicable law for the 1998 income year is s 42-15 of the Act which states:

``42-15 Deduction for depreciation

You deduct an amount for depreciation of a unit of plant for an income year if, in that year:

• (a) you are its owner or quasi-owner; and
• (b) you use it, or have it installed ready for use, for the purpose of producing assessable income.''

14. The Applicant submits that all of the Disputed Items were plant used by him for the purposes of producing assessable income.

15. It is clear from the evidence presented that the Applicant owns the Property and that he uses it for the purpose of producing assessable income.

16. The only question for the Tribunal to determine is whether the Disputed Items are ``plant'' for the purposes of s 42-18 of the Act:

``(1) Plant includes:

• (a) articles, machinery, tools and rolling stock; and
• (b) animals used as beasts of burden or working beasts in a business,, other than a primary production business; and
• (c) fences, dams and other structural improvements, other than those used for domestic or residential purposes, on land that is used for agricultural or pastoral operations; and
• (d) structural improvements, other than a forestry road or structural improvements used for domestic or residential purposes, on land used in a business involving:
  • (i) planting or tending trees in a plantation or forest that are intended to be felled; or
  • (ii) felling trees in a plantation or forest; or
  • (iii) transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed, or from which they are to be transported to the place where they are first to be milled or processed; and
• (e) structural improvements, other than those used for domestic or residential purposes, that are used wholly for operations (carried out in the course of a business) relating directly to:
  • (i) taking or culturing pearls or pearl shell; or
  • (ii) taking or catching trochus, bêche- de-mer or green snails;

  and that are situated at or near a port or harbour from which the business is conducted; and

• (f) structural improvements that are excluded from paragraph (c), (d) or (e) because they are used for domestic or residential purposes if they are provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities referred to in that paragraph.

(2) Plant also includes plumbing fixtures and fittings (including wall and floor tiles) provided by an entity mainly for:

• (a) either or both:
  • (i) employees in a business carried on by the entity for the purpose of producing assessable income; or
  • (ii) employees in a business carried on for that purpose by a company that is a member of the same wholly- owned group of which the entity is a member; or
• (b) children of any of those employees.''

17. The Act does not provide a definition of plant. It has been described in
Yarmouth v France (1887) 19 QBD 647 as:

``... whatever apparatus is used by the business man for carrying out his business;''

18. The decision of whether an item is plant or article for the purposes of s 42-18 of the Act is primarily one of fact and degree for the Tribunal to make (
Carpentaria Transport Pty Ltd v FC of T 90 ATC 4590; (1990) 21 ATR 513).

19. The Courts have applied several tests defining whether or not an item meets the definition of plant:

• (a) what is the function of the item in relation to the income earning activities;
• (b) what is the setting or circumstances of the income earning activities and does the

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  item form an integral part or a part of the fabric of the setting (
  Wangaratta Woollen Mills Ltd v FC of T 69 ATC 4095; (1969) 119 CLR 1); and
• (c) is the purpose of the item to make the building or the structure complete? (
  Imperial Chemical Industries of Australia and New Zealand Ltd v FC of T 70 ATC 4024; (1970) 120 CLR 396)

20. Generally, residential income producing properties have come with the definition of setting and have not been classified as plant. Senior Member Block, in Case 11/97,
97 ATC 173 dated 3 March 1997 concluded [at 184]:

``(a) A rental property itself is not `plant'... It is the `setting' for the income earning activities.

(b) That which forms a `part of the fabric' of the property, in a metaphorical sense, or in other words, that which is an `integral part of the structure of the premises' is therefore also not plant... It is to be regarded as a part of the `setting' of the income earning activity.

(c) A conclusion that some item forms `part of the fabric' of a rental property is an issue of fact, arrived at by considering whether the rental property may still be regarded as a complete entity for the purposes which it serves (in an income earning sense) even if the item were absent. If the property would be regarded as incomplete,... without the item, the item is a part of the fabric....

(d) If the item is properly regarded as NOT forming part of the `setting'... there is a need to consider (positively) it's function in the context of the income-earning activities. If it can be said to be related to those activities in a sufficiently significant sense, it will be `plant'...''

Electrical distribution gear, gas and telephone installation

21. The Applicant claims a deduction of $809.00 for the switchboards, mains and sub- mains cables along with gas and telephone installations.

22. In
Imperial Chemical Industries of Australia and New Zealand Ltd v FC of T 70 ATC 4024; (1970) 120 CLR 396 Kitto J stated that electrical wiring cannot be considered ``plant'' or ``articles'' as they form an integral part of the setting of the building.

23. These items claimed by the Applicant are clearly absorbed by the structure of the building and are a part of the fabric of the rental apartment. The purpose of these items is to make the building a complete building by providing the necessary infrastructure that a potential tenant would expect from a rental property.

24. The Applicant would not be able have an income producing property without those items and therefore the Tribunal considers they are not plant for the purposes of s 42-18 of the Act.

Furniture, counter fittings, shelving

25. The Applicant submits that the kitchen counter fittings, the bathroom's mirror and glass shower screen and the wardrobe shelving and mirrored doors do not form an integral part to the setting of the building and are plant for the purpose of s 42-18 of the Act.

26. In considering Case 109 (1966) TBR NS at 630 Mr. McCaffery determined that baths and clothes hoists in a rental property were not plant because ``Both physically and functionally, the baths and hoists are integral with the comprehensive income-producing entirety, i.e. the dwelling house.''

27. In examining the photographs provided by the Applicant, the kitchen counters, and the bathroom items form the basis of the setting of an income producing residential unit. Their purpose is to provide a complete kitchen and bathroom and without them the Property would be incomplete and unable to be rented.

28. In conclusion, the kitchen taps and bathroom items are not plant for the purposes of s 42-18 of the Act as they are integral to the fabric of the building and the Property would not be complete without them.

29. The removable shelving is fixed to the walls of the Property and covered by the mirrored doors. They complete the built-in wardrobes and cupboards.

30. These wardrobes are unlike the custom- made wardrobe which Senior Member Block determined in Case 11/97 as plant for two reasons:

• (1) the wardrobe is part of the walls of the Property; and
• (2) dismounting the wardrobe would create a space for built-in wardrobe cupboards without doors or shelves.

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31. The Tribunal views the doors the shelving and the mirrored doors to the wardrobes, both in their physical presence and function, are a part of the fabric of the residential unit. These are items that a tenant would expect from a rental property. Consequently, these items are not plant for the purposes of section 42-18 of the Act.

PVC furniture and gardening water system

32. The Respondent accepted depreciation for the PVC pool furniture at rate of $753.00 and the Gardening water system at a rate of $113.00 and no dispute exists between the parties with that evaluation.

Security system

33. The Applicant claims a depreciation of $6.00 for the security system which comprises of a sliding security screen over the external door and other types of security items for the building as a whole such as floodlights, gates and steel security for car access, deadlocks and the security letter box.

34. The function of these items is to provide security to the building. These items are not detachable and are permanent. The security system also involves an intercom system that has been wired through the building and is provided for in every apartment.

35. In considering the reasoning in
Imperial Chemical Industries of Australia and New Zealand Ltd v FC of T 70 ATC 4024; (1970) 120 CLR 396, it is the Tribunal's view that these items form a part of the structure of the building. The building as a general type of residential units would be incomplete with out these items and their function does not go beyond the building setting.

36. Therefore, these items do not constitute plant for the purposes of section 42-18 and the Applicant is not entitled to a deduction under section 42-15 of the Act.

Swimming pool, spa and equipment

37. The pool and spa are static features of the apartment complex. They are shared by all of the apartments.

38. The Applicant claims that the pool and spa are plant and relies on
Cooke v Beach Station Carvans Ltd [1974] 3 All ER 159, where a swimming pool and a paddling pool constructed by a caravan park operator were accepted as plant.

39. The respondent submits that these items are not deductible and relies on Taxation Determination TD 92/190 where a farmer claimed the cost of an in-ground swimming pool for fire-fighting purposes. The pool was not considered to be plant as it was a permanent structure and it was not integral to the farming operations.

40. In examining the function of the pool and spa, the Tribunal concludes that the pool and spa play a passive role in the process of earning income from the Property. The pool and spa have no other function then in providing entertainment and leisure to the tenant.

41. Unlike the caravan situation, the pool and spa do not provide a function that so special or so related to the income from the rental of the Property of the Applicant. Therefore, the Tribunal concludes that the pool is not plant for the purposes of the Act and the Applicant is not entitled to deduction under section 42-15 of the Act.

Vechile control equipment or bollards

42. The Applicant claims $3.00 in depreciation of bollards.

43. The Respondent concluded that these items were an integral part of the garage and therefore a part of the building setting and not plant for the purposes of 42-18 the Act.

44. In examining the photographs of the bollards it is the Tribunal's view these items do not perform a function that is so special or so related to the Applicant's income producing property that warrants the item being classified as plant. They are not detachable and form a part of the structure of the building.

45. The Tribunal considers the bollards are not plant and the Applicant is not entitled to the depreciation of the bollards under section 42-15 of the Act.

46. In summary, the Tribunal is of the view that the Disputed Items do not come within the meaning of plant under section 42-18 of the Act. Therefore, the Applicant is not entitled to any further deductions for depreciation of plant under sections 42-18 of the Act.

47. Accordingly, the Tribunal affirms the decision of the respondent dated 1 February 2001.