Federal Commissioner of Taxation v. William James Cook.

Judges:
Wallace J

Court:
Supreme Court of Western Australia

Judgment date: Judgment handed down 27 February 1980.

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Wallace J.

This is an appeal by the Commissioner of Taxation under sec. 196(1) of the Income Tax Assessment Act 1936 and amendments, from a decision of Taxation Board of Review No. 2. The taxpayer, William James Cook, in his return of income derived by him in the year ended 30 June 1976, claimed as an allowable deduction the

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sum of $37,488 as depreciation upon two heavy haulage transport units purchased on the last day of that financial year. The amount claimed represented the percentage of the cost of the aforesaid plant fixed by the appellant under sec. 55 of the Act. That is, 20% per annum. However, the Commissioner reduced this claim allowing only 1/365th thereof, namely $103, that being the proportion of the amount claimed applicable to the relevant one day of the year concerned.

A statement of agreed facts tendered by consent before the Board is set out hereunder:

``(a) On the 30th June, 1976, the taxpayer became the owner of a four axle low loader and Mercedes Benz prime mover.

(b) The said low loader and prime mover were used by the taxpayer on the 30th June, 1976, for the purpose of producing assessable income.

(c) The cost of the said low loader was $24,743 and the cost of the said prime mover was $68,980.

(d) The said low loader and prime mover were each first used for the purpose of producing assessable income by the taxpayer on the 30th June, 1976, and before being used for that purpose by the taxpayer had not been used or held for use for any other purpose by the taxpayer or for any purpose by any other person.

(e) The taxpayer elected in accordance with sec. 56 of the said Act to claim depreciation in respect of the said low loader and prime mover on the basis of the percentage fixed by or under sec. 55 of the said Act of the cost of each unit.

(f) The annual depreciation per centum in respect of the said low loader and prime mover pursuant to the provisions of sec. 55 of the said Act was 20%.''

The respondent objected to the appellant's depreciation allowance the ground therefor being ``that the whole of the said sum of $37,385 is an allowable deduction under the provisions contained in sec. 54, 55, 56, 56A, and 57AD of the Income Tax Assessment Act 1936 as amended, relating to the depreciation of plant''. The Commissioner disallowed the taxpayer's objection. The Board, for reasons which will become apparent in the grounds of appeal, allowed the taxpayer's objection. The appellant's grounds of appeal are as follows:

``1. The decision of the said Board involves a question of law.

2. The Board erred in law insofar as it placed an interpretation upon the depreciation provisions of the Income Tax Assessment Act 1936 and in particular sections 54, 55 and 56 of the said Act which had the effect in the instant case of allowing the respondent a deduction of $37,488 for depreciation on a prime mover and low loader AND THE BOARD should have found that a proper interpretation of the said sections required the allowance to the respondent of a deduction of $103 only as assessed by the appellant, that figure being 40% of the agreed cost price of the subject property calculated for one day only.

3. Further and without prejudice to the above grounds of appeal the Board erred in law in construing section 54 of the said Act insofar as it should have held that the words `Depreciation during the year of income' therein occurring require the allowance of a deduction for only the amount by which the subject property has depreciated during that income year.

4. The Board erred in law in not finding that the right to a deduction for depreciation derives from section 54 of the said Act and that sections 55 and 56 then prescribe the basis upon which or the rate by reference to which depreciation is to be calculated.

5. The Board erred in law insofar as it found that where the `prime cost' method of calculating depreciation is used there is no warrant in the depreciation provisions of the Act authorising the appellant to calculate depreciation on the basis of the period during the year of income in which the subject property was either used or installed ready for use.''

Without the provision relating to depreciation in sec. 54 of the Act, the taxpayer would have no entitlement to a depreciation allowance. Thus the importance of the interpretation of sec. 54, the relevant portion of which reads:

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``Depreciation during the year of income of any property,... owned by a taxpayer and used by him during that year for the purpose of producing assessable income,... shall, subject to this Act, be an allowable deduction.''

Mr. Seaman has drawn some comfort from the Oxford Dictionary (shorter version) definition of the word ``depreciation''. He has used the meaning loss in value or, what I would prefer, an allowance for wear and tear. Starting with those definitions he argues that the use of the word ``depreciation'' within the context of the section referring to ``during the year of income of any property owned by a taxpayer and used by him'' to support the appellant's contention that the respondent is only entitled to a pro rata deduction, that is, that depreciation applicable to the period of ownership and use during or within the year of income. The section must be read as a whole and when so read it will be seen that the depreciation to which a taxpayer is entitled is that loss of value occasioned by the period of ownership and use during a year of income - and all for the purpose of producing assessable income. That, it would appear, is the construction placed upon the section by the Commissioner and everyone else, save the respondent and his advisers, since 1936. Thus construed, sec. 55 and 56 are machinery in operation.

Mr. Kennedy has argued succinctly that sec. 54 merely establishes the right to depreciation and that the language therein contained provides neither power to apportion nor the applicable rate. It is to sec. 55 that one must go to ascertain the basis of depreciation and to sec. 56 for the calculation thereof. Those two sections wherever relevant provide:

``55(1) In the first calculation of the depreciation to be allowed in respect of any unit of property, an estimate shall be made by the Commissioner of the effective life of the unit... and the annual depreciation per centum shall be fixed accordingly.

...

56(1) Subject to this section the depreciation allowable under this Act in respect of a unit of property in relation to a year of income is -

• ...
• (b)... the percentage fixed by or under the last preceding section... of the cost of that unit.''

It will thus be seen that sec. 55 and 56 do not establish a rate, merely an entitlement to an annual depreciation per centum which the appellant has fixed at 20%.

One may seek comfort elsewhere within the statute one way or the other to support either argument and the Board has referred at length to counsel's submissions thereon. In the conclusion which I have reached I find it unnecessary to advert thereto. In my opinion the language of the statute is clear. The mere fact that a practice applied by the appellant in the past has been accepted provides no authority. There is no specific power entitling the Commissioner to apportion a relevant depreciation allowance as in, for example, sec. 61. One has to strain the language of sec. 54 to obtain that result. I am not prepared to do that and the conclusion which I have reached is confirmed by the amendment brought down by Parliament in Act No. 149 of 1979, the relevant portion of which reads as follows:

``56(1A) Where the unit of property is dealt with by the taxpayer in the prescribed manner during part only of the year of income, the depreciation allowable to the taxpayer in accordance with sub-section (1) in respect of the property in relation to the year of income shall be reduced by so much of the amount of the depreciation applicable in accordance with sub-section (1) as bears to that amount the same proportion as the number of days during the year of income during which the property was not dealt with by the taxpayer in the prescribed manner bears to the number of days in the year of income.''

I refer to what Dixon J., as he then was, had to say in
Grain Elevators' Board (Victoria) v. Dunmunkle Corporation (1946) 73 C.L.R. 70, at p. 86. It is quite apparent that the legislature appreciated the need to make clear authority for the appellant's prior appreciation of the relevant statutory provision for which, in my opinion, no authority existed.

For these reasons, in my opinion this appeal fails.