Case U132
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The question upon this reference is whether a Commander S416 telephone system, as installed by Telecom in a small warehouse complex, is a "unit of property" within the meaning of sec. 82AB of the Income Tax Assessment Act ("the Act") so as to qualify for investment allowance at the rate of 18%.
2. During the year of income ended 30 June 1983 the applicant company installed a new Commander S416 system pursuant to a contract with Telecom. The system incorporated four exchange lines providing for access to and by other telephone users in the total telephone system. Those exchange lines could be accessed at each of seven handsets provided at "stations" within the warehouse complex. Within the totality of the warehouse, portions were divided off to provide an office in one corner and a tearoom in another. Two stations were located in the office - one in the tearoom and four in a small area within the body of the warehouse.
3. The making of a connection to the system from outside was indicated aurally and visually. The aural signal emanated at a particular handset within the warehouse and could be heard at all stations. Incoming calls would first ring on a particular handset, if it was not already engaged by connection to another exchange line or to another station within the system. If that handset was not available, incoming calls would ring on other handsets programmed sequentially. The visual signal was constituted by a flashing light which appeared on all handsets not in use. The aural signal was ordinarily audible throughout the complex, but if it should ring in either the office or the tearoom (which was not suggested) it would not be audible in the other of those places. The visual signal could be observed from within each area on all handsets within that area, but not otherwise.
4. When an exchange-line connection was made, either by accepting an incoming call or upon making an outgoing call, a steady light indicated which of the four exchange lines was engaged. An incoming call could be received at any station, but initially only by the first station to respond. Subject to the availability of lines, outgoing calls could be made from any stations. Upon the evidence, "party calls" could be made with multiple connections from stations within the system in connection with a telephone outside the system. Further, outside calls, whether originating from within or outside the system, could be transferred from one station to another within the system, and, accordingly, from person to person.
5. The second dimension of the system was that it provided an intercommunication facility enabling two or more stations within the system to be connected. This feature of the system was not dependent upon the existence or use of any exchange lines. It could be activated to provide a conference facility in which three or more stations were connected.
6. A senior Telecom technician explained the system in non-technical language. Exchange lines (to a maximum to four in number) are connected to a "frame" which is in turn connected to the "main equipment" ("the central processing unit") which regulates and controls the operation of the system. Within the "main equipment" up to eight "station boards" (or modules) can be connected, each capable of servicing two stations. That gave the particular system a maximum capacity of four exchange lines and 16 stations - hence the reference to "four-sixteen". It was common ground that the
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particular system was installed with four station boards and was therefore capable of operating eight stations, although only seven had been established. An eighth station could be added by connecting a further handset to the main equipment without adding any further station boards. However, to increase the stations to nine or more would require additional station boards. If a system providing more than four exchange lines or more than 16 stations was required, a larger system would have to be installed.7. The characteristics of the system are controlled through the main equipment and capable of many adaptations and variations. They were not detailed. Although the intercommunication system could function without the availability of any exchange lines (provided only that at least two stations remained), and although exchanges lines could be operated so long as one station remained within the system, no part of the system could operate without the integrity of the physical connection between the main equipment and the stations being preserved. Despite the existence of an intercommunication facility, the evidence presented to me does not persuade me that the dimensions and layout of the complex are such that the system would be resorted to with any significant frequency as an "intercom" facility. Nor does anything in the evidence suggest that "intercom" capacity was a matter of any significance in the decision to acquire the system.
8. The evidence also establishes that the relationship between the stations and the main equipment, and the nature of the handsets is such that handsets can be disconnected or replaced by any suitably qualified person without damage to the system or any need to modify the main equipment. On the other hand, to add an eighth station would require the connection of that handset to the main equipment; and to increase the number of stations in the range from nine through to 16 would require the addition of further station boards to the main equipment.
9. Evidence produced on behalf of the Commissioner in the form of Telecom business records showed that, in addition to annual rental ($1,696) and annual service fee ($223), the capital cost to the company was $5,142: the figure upon which it based its claim to investment allowance.
That figure was made up as follows:
Item Number Sale price Installation
At Total At Total
$ $ $ $
Basic unit 1 2,120 2,120 198 198
Station modules 3 170 510 6 18
Power fail telephone 1 63 63
Key station (handsets) 7 240 1,680 79 553
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$4,310 $832
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10. In its return of income the applicant claimed a deduction for investment allowance amounting to $925, being 18% of the capital cost of $5,142. The Commissioner assessed the return, but in doing so reduced investment allowance from $926 to $460. The company objected. The Commissioner reviewed the objection and increased investment allowance from $460 to $475. At the hearing the Commissioner volunteered a further concession increasing investment allowance to $524, calculated by allowing 18% of the sum of sale price and installation charges in relation to the basic unit, the three station modules, and the power-fail telephone. The result which flows from that view of the concept of a "unit of property" is that it extends to a dissection of the components of an integrated, functional and useful system, denying the character of a "unit" to the system: only recognising as a "unit" that which cannot be applied to any useful purpose. On the other hand, at the hearing the representative of the applicant proposed that only three station sets should be excluded from account because he contended (in argument only) that at the relevant time Telecom would not market any lesser package. No evidence was advanced in support of that
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proposition and, as the Commissioner concedes that such considerations of cost could not determine the identity of the "unit of property" and that the admission should not be a basis for denying the taxpayer an entitlement he might otherwise establish, I will not give that matter any further consideration.11. I am quite satisfied that without the "main equipment" neither the intercommunication nor external communication system is operable as a means of telephonic communication, and that the handsets have no functional purpose as a means of communication when disconnected from the main equipment, even though they might be made functional on being connected to other equipment. For practical purposes, the frame, the main equipment and handsets constitute a "whole"; a "whole" which might have been otherwise constructed but none the less was an integrated "whole" for all that. In short, the relationship between the handsets and the telephone system was at least akin to the relationship between wheels and the vehicle to which they are attached, be it a bicycle or a semi-trailer.
12. The contention that a "unit of property" is to be identified with some components of a telephonic communication system inoperable as a means of telephonic communication can hardly commend itself to the reasonable man as a common sense view. As I take the view that the law ought to be perceived as "common sense" when viewed dispassionately by the common man, I would reject any submission leading me to such a conclusion unless compelled to do otherwise by authority.
13. For the Commissioner it is suggested that such authority exists. The first decision cited is that in
Ready Mixed Concrete (Vic.) Pty. Ltd. v. F.C. of T. 69 ATC 4038; (1969) 118 C.L.R. 177. Kitto J. in the High Court of Australia held that a concrete mixer and the truck upon which it was installed were separate units of property. His Honour said (at ATC p. 4042; C.L.R. p. 184):
"Notwithstanding the mode and degree of annexation, the truck and the mixer are functionally separate and independent units of property. The function of delivery belongs to the truck. The use of the mixer is for mixing, as a step in the production of concrete in the condition required for pouring, and its nature is understated to the point of misdescription by saying that the machine - for that is what it is - is ordinarily used for delivery."
14. The next decision is that of McTiernan J. in the High Court of Australia in
Wangaratta Woolien Mills v. F.C. of T. 69 ATC 4095; (1969) 119 C.L.R. 1. A side issue considered by His Honour in that decision was whether sliver cans which were used in the course of or as adjuncts to the manufacturing process, and which were sometimes used with spring and piston and sometimes not, constituted "units of property". His Honour held that in the circumstances of the case the springs and pistons which were acquired in excess of the number of sliver cans purchased were separate units of property and that the sliver cans themselves were separate units of property. Having regard to the diversity of uses of sliver cans, I find the analogy to the relationship between telephone handsets and a telephone system quite unsound. However, I do find in his Honour's decision on the principal issue support for the "common sense" view in remarks made by his Honour in considering the nature of the dyehouse. Having detailed the design and functional characteristics of the dyehouse as an integrated system used in the manufacture of worsted yarn, his Honour said (at ATC p. 4101; C.L.R. p. 10):
"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."
15. Then in
F.C. of T. v. Tully Co-operative Sugar Milling Assoc. Ltd. (83 ATC 4495) a Full Bench of the Federal Court of Australia was concerned with the identification of distinct "units of property" within the totality of the operation of a sugar mill in which it was possible to identify a series of distinct stages in the production process.
Fox J. said (at p. 4500):
"... that the term `unit' is not used so much to limit, or require preciseness of definition, as to distinguish between the generality and something more specific, which is capable of being separately regarded and treated...
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When one looks to see whether there is a unit, one normally looks to see whether there is a whole something. Whether there is a whole will normally be judged by the intended function or purpose of that which is being looked at... As used in the section (and other sections) the matter is more one of identification than of structure."
Lockhart J. said (at pp. 4504-4505):
"Helpful though the dictionaries are they do not provide much practical guidance in determining the meaning of the expression `unit of eligible property' for present purposes. It is true that ultimately the question what constitutes a `unit of eligible property' depends on the facts of the particular case, but some guidance to the Commissioner and taxpayers is called for. In my view, the nearest one can get to enunciating a test of fairly general application is that it is the function or purpose of the particular item to which one looks to see if it answers the description on the facts of the case of `a unit of eligible property'. It is not necessary that it be functionally operative though in many circumstances this may be called for. For example, if five parts are installed in an assembly line and all that is needed to render the line operative is a sixth part, but until that part is installed no part may function or operate, the functional incompleteness does not necessarily deprive each of the five units of its character as `a unit of eligible property' for the purposes of the Assessment Act. It depends on the facts of the case. Yet, at other times a `unit' may not come into being until all the components have been assembled. For example, a farm fence is made up of a number of posts and rails or wires. It is difficult to conceive of any `unit' coming into being until the fence is erected.
...
The difficulty of identifying a `unit of property' for the purposes of the Assessment Act is that sometimes an item may be correctly described as a `unit' when it is one of a number of parts which upon assembly perform a subsidiary function. Sometimes each part may be correctly described as a unit before assembly and at other times after assembly. On other occasions there may not be a unit until a number of parts have been integrated into a complete system. Then the whole may answer the description of a unit. The possibilities and combinations are numerous. But purpose or function must generally be a useful guide to the identification of an item as answering the description of a unit of property in particular cases."
Fitzgerald J. agreed. He said (at p. 4506):
"In the present case, the Judge recognized that questions of fact and degree were involved. He concluded,... that the relevant units of eligible property were the discrete sections of the milling system... He was clearly entitled, in my opinion, to conclude that the sections of the milling process constituted units of property. Without seeking to provide an exhaustive definition, I see no reason to doubt that there is, for present purposes, a unit of property if it is capable of independent existence, not necessarily self-contained, e.g. it may require power from an external source, not necessarily separately used, e.g. it may be incorporated into an operating system such as a machine or complex of machinery in a manufacturing process, but capable either of separate function, or of function in conjunction with different parts, or in a different context, from its current user."
16. As a result, their Honours confirmed that the primary Judge's finding "that the whole mixed juice pumping station, including foundations, pumps and motors, was a unit of eligible property and that the components in question were part of it" was a finding open to his Honour and one which should not be disturbed.
17. The final authority referred to on behalf of the Commissioner is the decision of Lee J. in the Supreme Court of New South Wales in
Monier Colourtile Pty. Ltd. v. F.C. of T. (83 ATC 4399), affirmed on appeal in a joint judgment of the Full Federal Court (84 ATC 4846). In that case there were two claims. The first of them involved the question whether each of 5,150 pallets constituted a "unit of property". His Honour answered that in the affirmative. The taxpayer was a manufacturer of tiles and (to quote his Honour) (at p. 4402) the "... pallets are an integral part of the process of manufacture of tiles. The function of each pallet, stated simply, is to carry concrete
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in it through the various stages of the production line to the point where a complete tile is produced and separated from the pallets... At all stages of the process the pallets remain separate independent units separate from each and capable of being replaced by other single pallets". The pallets were used throughout the manufacturing process and efficient operation of the closed system circuit of production in which they were used required that 470 pallets be used. Unless those numbers were maintained, the process would not perform efficiently and ultimately would stop. Only one style of tile could be produced at any one time, but differently shaped pallets produced differently shaped tiles.18. For the Commissioner it was suggested that the handsets have a similar function in relation to the telephone system as the pallets in relation to the tile production process. The evidence is that the handsets can be disconnected and installed in other telephone systems and can be replaced by other handsets within the system in question, but that much can be said of the wheels on most vehicles and, indeed, most components of motor vehicles. If anything, the pallets in relation to the tile production system had a similar function to that of the concrete mixer on the truck as considered in Ready Mixed Concrete (ante). In the former case the pallet moulded the wet concrete into the particular case of the pallet and held it in that form until the manufacturing process was complete with the tile cured and ready for stacking and use. In the latter case, the function of the concrete mixer was to hold the concrete in a pliable mass ready for pouring into a place or mould to be there shaped and cured. That function was independent of the function of the truck in providing transport.
19. The second claim considered by Lee J. related to a contention that a two-way radio system comprising base station and 14 mobile stations (each equipped with a handset) as a single "unit of property". The base station was maintained by the company at its operational centre and mobile stations were held by its representatives in the field. It was contended, and his Honour accepted it, that "in a commercial sense" from the company's point of view the base station was useless without one or more of the mobile stations (and vice versa) in that without both there could be no communication between the operational base of the company and its field representatives by use of that radio system. However, relying on the Supreme Court of Queensland decision in Tully (82 ATC 4454) (later to be confirmed on appeal by a Full Bench of the Federal Court), his Honour said that the test (83 ATC 4399 at pp. 4406-4407):
"results in the conclusion that the base station, each mobile station and the handset were separate units of property, within the meaning of the section. Each had a distinct function and each could be acquired at a particular price. The base station was capable of being put into operation, i.e., performing its function as a base station, without any mechanical dependence at all on the mobile stations. Likewise the mobile stations and handsets were capable of exercising their function without any mechanical dependence upon the base station. The base station and each of the mobiles were physically separate from each other and intended to remain so. The fact that the base station would not receive any communications unless a mobile or some mobiles were brought into play, or that any transmission by it would be fruitless unless there were mobiles, does not prevent this conclusion. The test has regard to the unit and its purpose or function without regard to the fact that that function may only be commercially useful or valuable to the holder of the property if some other equipment is also put to use according to its particular function. Such a state of affairs has always been commonplace, and modern technology increases the instances of interaction of the functions of diverse pieces of property. A television set is still a television set although the television station goes off the air. A transmitter remains a transmitter though there be no receiver. Each can be separately replaced as required and separately paid for. Each can be separately located, remote from each other."
20. In my view his Honour was not propounding a test that because an item is made up of several components each of which can be purchased separately that therefore there are as many "units of property" as there are components.
21. In my view all of the foregoing authorities cited on behalf of the Commissioner
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compel the conclusion that "the unit" in this instance is the entirety of the telephone system as installed. Just as the handsets were not considered by the courts to be separate units of property to the mobile stations (cf. Monier (ante)), so too, in this case the handsets are an integral part of the telephone system. Although the system of radio communication in Monier (ante) did not involve any mechanical interdependence between base station and mobile stations (as distinct from telephonic communication) so that they could be physically separate, that was not so in relation to the operation of the mobile stations by handsets. They were mechanically interdependent and could not be physically separate. to that extent they are not to be distinguished from the relationship between the telephone handsets and the other equipment of the system which enabled the system to be used as a means of telephonic communication.22. I uphold the objection of the applicant.
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