Case T102

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 31 October 1986.

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P.M. Roach (Senior Member)

These references relate to the affairs of a partnership formed by a husband and wife and relate to the years of income ended 30 June 1981 to 1984 inclusive. All references were heard together by consent. The objections which were lodged raised several distinct issues, but at the hearing all contentions other than claims to depreciation and an investment allowance in relation to a special purpose swimming pool of distinct design were abandoned. It was also agreed that if the investment allowance claim were to succeed the partnership would be entitled to a deduction in the sum of $3,555 in the year of income ended 30 June 1982; that if the claim to depreciation were to succeed the partnership would be entitled to a deduction for depreciation in the sums of $749, $1,426 and $1,318 in the years of income ended 30 June 1982, 1983 and 1984 respectively; and that the former claim could only be upheld if entitlement to the latter was established.

2. The applicants carried on business in partnership and operated from a site on which their residence was constructed and from which they conducted a retail store. The husband was a master instructor of scuba-diving accredited by the Professional Association of Diving Instructors. As such he was authorised by that association to issue certificates attesting the proficiency of divers. The partnership provided tuition to divers ranging from basic introductory courses for non-divers to specialist advanced courses for more experienced divers.

3. With a view to providing more effective and efficient training facilities, a special pool was constructed on the site of the home and the shop. It was designed by an architect. It became one of three similar pools in Australia, the others existing in other States. The pool was partly in-ground and partly above ground. It was rectangular in shape at surface level with dimensions of approximately 16 x 7 m extending to a depth below surface varying between 1 and 2 m. Below that level the pool was of unusual design. There were two circular wells, each approximately 5 m in diameter. They were interconnected by a pipe which provided a means of underwater passage from one well to the other. In that way it provided a means of training pupils in the art of scuba-diving through a confined space.

4. The husband, who alone gave evidence, attested that the partnership only used the pool for scuba training; that the pool was not constructed with the view to any other use; that it could be used in the same way as a conventional pool; and that at the day of hearing it was being used by a lessee as a training pool for conventional swimmers. The lease had commenced during 1985.

5. The legal issue arising from those facts is whether the pool constituted ``plant or articles'' within the meaning of sec. 54 of the Income Tax Assessment Act (``the Act'') so as to be depreciable pursuant to that section and also qualify for investment allowance pursuant to Subdiv. B of Div. 3 - sec. 82AA ff. - of the Act.

6. The first of the authorities particularly relied on by the Commissioner is the decision of Kitto J. in
Moreton Central Sugar Mill Co. Ltd. v. F.C. of T. (1967) 116 C.L.R. 151. That decision involved claims by a sugar mill proprietor who had invested in a new diesel locomotive; new trucks; and a pit for servicing the locomotive, being a hole in the ground lined with reinforced concrete and having steel girders supporting rails upon which the locomotive was to stand while being serviced from beneath. The taxpayer's claim was for a deduction for investment in manufacturing plant pursuant to sec. 62AA of the Act. In the course of his judgment his Honour said (at p. 157):

``As regards the service pit the appellant's claim to a deduction under the section must fail, in my opinion, for want of support in any of the paragraphs of sub-s. (2), and for the additional reason that the pit, obviously not an article, is not `plant' within even the widest meaning allowed to that word in the decided cases. I have been referred to
J. Lyons & Co. Ltd. v. Attorney-General (1944) Ch. 281 at pp. 286, 287 and
Jarrold v. John

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ATC 1180

Good & Sons Ltd. (1963) 1 W.L.R. 214 at p. 219 where judicial statements as to the meaning of `plant' are reviewed. All I need say is that the word has never, I think, been held, and should not now be held, to include a structure built into the ground so as to form a static and permanent feature of the place in which a business may be carried on and having no other function than to provide a convenient stand for the performing of work in the business.''

7. In turn, the applicant places great reliance on the decision of the House of Lords in
I.R. Commrs v. Barclay Curle & Co. Ltd. (1969) 1 All E.R. 732 in which their Lordships (by majority) upheld a taxpayer's claim to initial allowances for capital expenditure on the construction of a dry dock. The magnitude of that undertaking is reflected in the fact that it was found that some 200,000 tons of earth had to be removed to make room for it and some 100,000 tons of concrete used to construct the walls and bottom of the dock in order to make them strong and impervious to water. The ultimate result of the work undertaken was that the dock acted like a hydraulic chamber in which a volume of water, variable at will, could be used to lower and raise a ship. The valves and pumps could not be used to lower or raise ships without the remainder of the dock, and the dock could not be used to repair ships without the valves and pumps. Further, the dock could not have fulfilled its purpose unless there had been excavated a depth sufficient to enable ships to enter and leave it. The valves, the machinery for the provision of electricity and the pumps were an integral part of the dock as a functioning entity. The remainder of the dock would have been useless to the taxpayer without them and, similarly, they would have been useless without the remainder of the dock. Lord Reid said at p. 741:

``Here it is apparent that there are two stages in the taxpayer company's operations. First the ship must be isolated from the water and then the inspection and necessary repairs must be carried out. If one looks only at the second stage it would not be difficult to say that the dry dock is merely the setting in which it takes place. But I think that the first stage is equally important, and it is obvious that it requires massive and complicated equipment. No doubt a small vessel could be got out of the water by the use of comparatively simple plant and machinery but clearly that is impossible with a very large vessel. It seems to me that every part of this dry dock plays an essential part in getting large vessels into a position where work on the outside of the hull can begin, and that it is wrong to regard either the concrete or any other part of the dock as a mere setting or part of the premises in which this operation takes place. The whole dock is, I think, the means by which, or plant with which, the operation is performed.''

His Honour went on to distinguish the dry dock in question from a dam which merely impounds water, acknowledging

``that it is impossible to draw a hard and fast line....''

8. Both those decisions were quoted with approval by McTiernan J. in
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095; (1969) 119 C.L.R. 1. That decision also involved a claim for investment in manufacturing plant pursuant to sec. 62AA of the Act. The plant in question was a dyehouse. His Honour allowed the claim to the deduction and in doing so said (at ATC p. 4101; C.L.R. p. 10):

``I am of opinion that the appellant's dyehouse is `in the nature of a tool' in the trade and does `play a part' itself in the manufacturing process. It is much more than a convenient setting for the appellant's operations. It is an essential part in the efficient and economic operation of the appellant's business. The complex ventilation system including the cavity wall does more than merely clear the atmosphere. Its structure is an active tool in preventing spoiling of material, and in enabling the operatives to carry out their tasks. It would be completely unnecessary in almost every other industry and quite useless to any buyer except a dyer. The protective coatings and tiling are essential in preserving the whole `tool'. It is as unreal to dissect the paint or tile from its foundation as it is to separate the paint from a workman's tool of trade. The drains do not just remove waste liquids, they remove volatile liquids which would disrupt the process as much as vapours escaping from the vats. If boiling liquids were left

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ATC 1181

uncovered in the building, in vats or drains the whole process would quickly become unworkable. I think therefore that the dyehouse should be regarded as a single unit of plant and not a collection of bricks, mortar, paint, timber etc., each of which is to be separately examined. It is not merely a special factory; it is a complex whole in which every piece is essential for the efficient operation of the whole.''

9. If there had been no other authority, I would have had little difficulty in holding that the swimming pool was merely a receptacle and had become an integral part of the ground into which and onto which it had been set by processes of excavation and construction. It did not have the dual function considered essential by Lord Reid and was not ``an active tool'' as described by McTiernan J.

10. However, the applicants also relied on the decision of Megarry J. (as he then was) in
Cooke v. Beach Station Caravans Limited (1974) 3 All E.R. 159. In that case the taxpayer claimed benefits under the Capital Allowances Act 1968. The initial allowance was available to a person carrying on trade who ``incurs capital expenditure on the provision of machinery or plant for the purposes of the trade''. The claim was made by a caravan park proprietor in relation to swimming pools which had been excavated, concreted and lined and which were constructed with a system for heating, filtering and chlorinating the water. The dispute was as to so much of the claim as related to the costs of excavation, pool construction and terracing. Megarry J. sought to apply the principles laid down in the Jarrold case (ante) and in Barclay Curle (ante) but in doing so said:

``Nobody, I think, would find the subject free from difficulty, or assert that he could draw a clear line with a steady hand. To some extent the matter must be one of impression, though it is important that the impression should not be untutored.''

His Honour took the view that the pools, together with all attendant apparatus, should be considered as a unit; that they should be considered not on their own but in relation to the business carried on by the company; and that they should not be thought of as being merely passive (at p. 166). He concluded (at p. 167):

``The pools are part of the means whereby the trade is carried on, and not merely the place at which it is carried on.''

His Lordship allowed the claim.

11. I treat with great respect the views expressed by Vice-Chancellor Megarry but I am not persuaded that the conclusion he then reached is one which I am bound to follow; or which should be recognised as persuasive authority as to the construction of the Income Tax Assessment Act; or as a decision consonant with the interpretation of ``plant'' which has found favour in the High Court of Australia.

12. I am of the opinion that the establishment of the pool by a process of excavation and construction did not bring into existence any structure which should be considered as anything other than an integral part of the real property of the applicants. In the words of Kitto J. quoted earlier, it was ``a static and permanent feature of the place...''. I am further of the opinion that it should not be considered as ``plant or articles'' within the meaning of sec. 54 meaning either something physically distinct from the realty in which it is set or something performing a function which so contributed to a course of activity as to be reasonably and appropriately described as a ``tool''. It follows that the claim to ``Investment Allowance'' is not established either.

13. I will affirm the decision of the Commissioner on all the objections before me.

Claim disallowed