NIZICH & ANOR v FC of T
Judges:French J
Court:
Federal Court
French J
Vice Ivan Nizich and his wife, Ane Nizich, carry on the business of sand contractors under the name NLG Sand Supplies and have carried on that business since January 1975. They are also directors of a company called Vincent Nominees Pty Ltd which is trustee for the Nizich Family Trust. The trust has been in existence since May 1976 and the company has been trustee since that time.
The principal business of the partnership involves the preparation of building sites and the delivery and compaction of sand as fill on the sites. In addition, the partnership sells sand to some customers as a separate commodity. The system under which the business has operated for a number of years involves Vincent Nominees Pty Ltd purchasing blocks of land containing sand deposits and selling loads of sand off that land to the partnership in accordance with the requirements of its business. The partnership would claim the expenses of buying sand from the company as a tax deduction allowable for the purchase of raw materials in the income year during which expenditure was incurred.
When, on 24 March 1984, the company signed an agreement to purchase land from Owen Ashley Pty Ltd, being Lot 130 at the corner of Mason and Frazer Road, Banjup for $250,000 it was doing so in accordance with the established arrangements between itself and the partnership. The offer to purchase was accepted on 26 March 1984. A deposit of $25,000 was paid by the company. At the time that the agreement was made the land was subject to two applications for registration of mining tenements. The tenement sought in each case was a mineral claim for silica, calcium carbonate, diatomite and attapulgite. The agreement to purchase the land which was embodied in a standard offer and acceptance form contained a condition that:
``This offer and acceptance is made subject to the land being free of encumbrances and the removal of any mining claims on the said lot.''
On 28 March 1984, the mining warden recommended to the Minister for Minerals and Energy that the claims be refused. On 17 April 1984 the Minister refused the claims in accordance with the recommendation. Nevertheless, because of an alleged perception on the part of the appellants that another claim might be lodged, they decided to restructure the purchase so that the company would pay $125,000 for the land and they would pay $125,000 for the right to enter upon it and remove sand. The latter agreement was made in writing on 17 April 1984. It recited that the owner was the registered proprietor of the land and that Mr and Mrs Nizich were desirous of purchasing ``the natural sand on the land'' upon the terms and conditions set out in that agreement. Relevant provisions of the agreement were in the following terms:
Clause 1:
``The Owner HEREBY AGREES TO SELL to the Purchaser who HEREBY AGREE TO PURCHASE (sic) all the natural sand upon the land limited however to a depth of FORTY (40) metres from the natural surface of the Land IN CONSIDERATION of ONE HUNDRED AND TWENTY FIVE THOUSAND DOLLARS ($125,000) (herein called the `purchase price') upon the terms and conditions hereinafter specified.''
Clause 3(2):
``The Purchaser purchases the natural sand wholly and exclusively for the supply of raw materials for the Business by enabling the Purchaser to remove the said sand and the Purchaser HEREBY EXPRESSLY ACKNOWLEDGES AND ADMITS that all other rights granted pursuant to this Deed are merely ancillary to the main purpose of the supply of raw materials to the Business AND THAT the Purchaser acquires no other right or easement in or over the Land.''
Clause 4 contained mutual covenants and agreements between owner and purchaser which included the following:
``(1) the Purchaser shall have full and free access to and egress from the Land at all times with or without workmen, horses, carts, motor driven vehicles, portable
ATC 4749
machinery and haulage equipment all of which may be stored or otherwise kept on the Land for the Term of this Deed.(2) the Purchaser shall be at liberty to register a subject to caveat against the Land;
(3) the Purchaser shall have full liberty and power to erect, construct, occupy and repair any sheds, lines, fences and machinery as the Purchaser may from time to time consider necessary to erect, construct and occupy on the Land;
(4) the Purchaser shall fence and gate thereby making it safe such part of the Land as the Purchaser shall have removed the sand from and shall during the Term of the Deed maintain sufficient fence and protection around the said area to the satisfaction of the Owner and shall indemnify and keep the Owner indemnified against all costs, expenses, damage or loss sustained by third parties;
(5) the Owner shall be at liberty to at any time transfer its title in the Land subject to this Deed;''
The day after Mr and Mrs Nizich had entered into their agreement with the owner of the land relating to access to and removal of sand from it, their company Vincent Nominees Pty Ltd executed a fresh agreement to purchase the land. It was set out in a standard offer and acceptance and specified a purchase price of $125,000. Settlement of the purchase of the sand by the Nizichs and the land by Vincent Nominees Pty Ltd took place on 9 May 1984.
Mr and Mrs Nizich claimed the outlay of $125,000 by which they purchased the rights to remove sand from the property from Owen Ashley Pty Ltd as a deduction in their returns for the year 1983/84. In their partnership return for that year the Trading and Profit and Loss Statement disclosed expenditure on ``Materials'' of $162,731. A note to a Statement of Net Income from the business enclosed with the return said that:
``the materials item in the profit and loss statement includes a payment of $125,000. This was for the purchase of sand on a property at Canningvale in May 1984 for resale purposes. The land on which the sand was situated was purchased by the Nizich Family Trust for $125,000 at the same time. The partnership considers that as the sale of the sand is assessable, the acquisition cost should be a deduction in full, the partial disposal of the item at 30 June 1984 notwithstanding.''
The loss disclosed in the partnership return after treating that expenditure as a deductible item, was $16,203. Half that amount was taken into account in each of the individual returns of Mr and Mrs Nizich. The assessments which issued in October 1985 however, disallowed the deductions thereby adding $62,500 to the taxable incomes of each of them. Objections lodged on 20 December 1985 were disallowed. Notice of the disallowances were issued on 30 April 1986. On 2 May 1986, the Commissioner was requested to refer each of the objections to the Administrative Appeals Tribunal. The appeals were heard together on 27 and 28 February 1990 and a decision delivered on 3 July 1990 affirming the assessments. The appellants have appealed against the decision of the Tribunal.
The Tribunal's Decision
The principal issues before the Tribunal were:
- (1) Was the payment of $125,000 for the right to remove sand from the land an outgoing of capital or of a capital nature.
- (2) If yes to (1) was the expenditure incurred in the purchase of stock and therefore deemed not to be of capital or a capital nature.
- (3) If not of a capital nature should the expenditure be disallowed as a deduction under the provisions of Part IVA of the Income Tax Assessment Act 1936 relating to tax avoidance schemes.
The Tribunal found that at the time of the purchase of the right to remove sand, the major feature of the land was a large grass and scrub covered hillside with some trees. It was necessary to construct a road to the site, knock down some of the larger trees and scrape away the scrub on a portion of the hillside. Topsoil was removed from the proposed excavation site and stockpiled for the purpose of rehabilitation after the conclusion of the operations. This was a condition of the local authority approval that was necessary before the excavation could proceed. Following removal of the topsoil the appellants cut into the base of the hillside with a frontend loader and loaded the sand so
ATC 4750
excavated, together with residual grass, scrub, roots and topsoil on to trucks. As excavation into the base of the hillside continued, sand fell to the foot of the hill creating a face which became higher and steeper as the cutting-in process continued. The Tribunal inspected the operation and observed that at the time of the inspection a whole side of the hill had been cut away leaving a steep face about 20 metres high.The Tribunal found on this basis that the process of converting the natural hillside into loads of sand involved a significant degree of winning of the sand. The acquisition of 17 April 1984 had not merely involved ``buying a pile of sand''. The sum of $125,000 expended by the appellants purchased only the right to win the sand on the land. On this analysis, the Tribunal concluded, that the payment had the nature of a capital expenditure rather than expenditure on raw materials. The Tribunal came to the same conclusion applying various indicia of capital expenditure derived from the case law. Thus the ``fixed or circulating capital test'' and the questions whether the expenditure was current or ``once and for all'' and whether the asset acquired was of ``enduring benefit'' were all applied with the same result. In this connection, reliance was placed on
Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 5 ATD 87; (1938) 61 CLR 337. On the ``enduring benefit'' test the Tribunal found that the sand supply on the land would last for a period of 10 to 15 years. And applying what it described as ``the profit yielding structure test'', the Tribunal concluded that the ``$125,000 expenditure clearly was not merely a working expenditure as it related to the most important part of the whole structure; it established right of access to the source of the sand on which the whole business was based''. As well as the Sun Newspapers case, reference was made to the decision of the Court of Appeal in
Stow Bardolph Gravel Co., Ltd v. Poole (1954) 3 All ER 637.
The Tribunal then turned to consider whether it could be said that the expenditure was incurred in the purchase of trading stock and therefore deemed not to be capital or a capital nature by virtue of s. 51(2) of the Income Tax Assessment Act. The appellants having purchased an interest in the land in the form of a profit a prendre and not being in the business of buying or selling interests in land, their expenditure could not be said to be of stock in trade. Having come to that conclusion, the Tribunal found it unnecessary to consider whether Part IVA would operate in any event to deny the deduction. It affirmed the assessments.
The Grounds of Appeal
By their grounds of appeal to this Court, Mr and Mrs Nizich identify a number of points in which the Tribunal is said to have ``erred in fact and in law'', they being:
- (a) In failing to hold that the $125,000 expenditure was an allowable deduction under the provisions of s. 51(1) of the Act.
- (b) In holding that the $125,000 expenditure was of a capital nature.
- (c) In failing to hold that the $125,000 expenditure was incurred in the purchase of raw materials for use in the partnership business.
- (d) In holding that the $125,000 expenditure was incurred in purchasing a right of access to the source of the sand rather than sand itself.
- (e) In failing to hold that the $125,000 expenditure was deductible under the provisions of s. 51(2) of the Act.
- (f) In holding that the $125,000 expenditure was not incurred in the purchase of trading stock.
The Submissions
Counsel for Mr and Mrs Nizich submitted that having regard to its findings of fact, the Tribunal must have been satisfied that the $125,000 payment was an outgoing incurred in gaining or producing assessable income or that it had been necessarily incurred in carrying on the business of the appellants for the purpose of gaining or producing assessable income. The effect of the deed, it was said, was that upon payment of the sum of $125,000 the appellants became entitled to remove an identifiable quantity of sand (to a depth of 40 metres) in respect of which no further payment had to be made to the owner of the land. Accordingly, the access and removal rights acquired under the deed were ancillary to the right to take the sand.
The question of the characterisation of the expenditure as capital or revenue, it was
ATC 4751
pointed out, ``depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights if any, secured, employed or exhausted in the process'' -Hallstroms Pty Ltd v. FC of T (1946) 8 ATD 190 at 196; (1946) 72 CLR 634 at 648 (Dixon J.);
BP Australia Ltd v. FC of T [1966] AC 224 at 264. The fact that the payment of $125,000 was made by Mr and Mrs Nizich before the sand was severed from the land and therefore was no more than payment for a right to acquire raw materials at a future date, was not decisive of the question whether it was of a capital nature -
FC of T v Raymor (NSW) Pty Ltd 90 ATC 4461; (1990) 94 ALR 255 and
Golden Horse Shoe (New) Ltd v. Thurgood (Inspector of Taxes) [1934] 1 KB 548 at 557.
The Tribunal, it was said, ought to have had more regard to the fact that the process of winning the sand was essentially a means of taking delivery of a raw material. In a business sense, prior to severance from the land the sand was equivalent to a pile of sand. Because the appellants controlled the company which purchased the land, they took de facto control of the sand following settlement in accordance with the two deeds. Applying a practical business test to the payment made by the appellants the Tribunal, it was said, ought to have concluded that the purpose achieved by the payment was to make available to the appellants an immediate supply of a raw material regularly used by them in their business. On this basis it was submitted that the Tribunal erred in following the decision of the Court of Appeal in Stow Bardolph Gravel Co., Ltd v. Poole (supra). As to the trading stock question, it was submitted that the definition of trading stock is not exhaustive and is sufficiently wide to cover sand used in the preparation of building sites some of which is sold direct to the public. It was common ground that if the appellants succeeded on the question of characterisation of the payment the application of Part IVA of the Income Tax Assessment Act would depend upon further findings of fact which would have to be made by the Tribunal.
The Commissioner for his part, submitted that none of the grounds disclosed any error of law and that on that basis the appeal was not competent. The proper construction of the deed of 17 April 1984 led to the conclusion that what was purchased was an interest in the land itself, namely a profit a prendre and that the sand became a chattel and the property of the appellants only when it ceased to be physically integrated with the land. The outgoing of $125,000 was expended not on purchasing sand but on the purchase of a right to obtain it and a distinction was to be made between the purchase of a raw material itself and the purchase of a right to obtain such raw material or the purchase of a source of raw material -
Kauri Timber Co. Ltd v. Commissioner of Taxes (NZ) [1913] AC 771 at 777-778; Stow Bardolph Gravel Co. Ltd v. Poole (supra);
Raymor v. FC of T 89 ATC 5173 at 5179; (1989) 89 ALR 267 at 273. The Tribunal, it was said, had identified the correct principles of law as enunciated in Stow Bardolph and Sun Newspapers and had applied the law to the facts as found concluding in effect that the $125,000 was expended with a view to acquiring an asset or advantage for the enduring benefit of the appellants and as such was an affair of capital. On this basis, no error of law was disclosed.
As to the argument under s. 51(2), the Commissioner submitted that the right to win sand was not trading stock. The appellants' trading stock was sand. Neither s. 51(2) nor any other provision of the Act could deem the $125,000 to have been incurred in the purchase of any or all of the sand which might be extracted from the land during the term.
Whether there is a Question of Law?
The Commissioner submitted by way of preliminary point that the appeal was incompetent as no question of law is disclosed by the grounds. The right of appeal to this Court is defined by s. 44(1) of the Administrative Appeals Tribunal Act which provides:
``44(1) A party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding.''
Jurisdiction is conferred on the Federal Court in sub-section 44(3) which reads, in part:
``44(3) The Federal Court of Australia has jurisdiction to hear and determine appeals instituted in that Court in accordance with sub-sections (1) and (2)...''
ATC 4752
The balance of the sub-section provides that jurisdiction may be exercised by a Full Court and sets out the circumstances in which it shall be so exercised. The nature of the jurisdiction in its constitutional setting was discussed in
TNT Skypak International (Aust) Pty Ltd v. FC of T 88 ATC 4279; (1988) 82 ALR 175.
A substantial line of authority supports the proposition that the function of the Court on an appeal under s. 44(1) is limited to resolving the questions of law upon which the appeal is brought -
FC of T v. Swift & Ors 89 ATC 5101 at 5112-5113. The task of the Court is to leave to the Tribunal decisions as to the facts and to interfere only when the error is one of law -
Repatriation Commission v. Thompson (1988) 82 ALR 352 at 357. But the distinction between matters of fact and law is not always an easy one to make. In its marginal applications it could well be included with the capital/revenue distinction in the class of ``categories of meaningless reference'' described by Professor Stone in Legal System and Lawyer's Reasonings (1968) p. 340, see especially paras (8) and (9). There are nevertheless general approaches which, while not identifying a universal discrimen, provide bases for characterisation in certain cases.
Where facts are fully found and undisputed the question whether they fall within the terms of a statutory provision properly construed is said to be a question of law -
Australian National Railways Commission v. Collector of Customs (SA) (1985) 69 ALR 367;
Collector of Customs (Tasmania) v. Flinders Island Community Association (1985) 60 ALR 717,
Hope v. The Council of the City of Bathurst 80 ATC 4386 at 4388; (1980) 144 CLR 1 at 7. On the other hand it is also said that the question whether a particular set of facts comes within the description of ordinary English words used in a statute is one of fact -
Australian Gas Light Co. v. Valuer General (1940) 40 SR (NSW) 126 at 137 (Jordan CJ);
FC of T v. Broken Hill South Limited (1941) 6 ATD 167 at 174; (1941) 65 CLR 150 at 160;
Brutus v. Cozens [1973] AC 854 at 861 and see
Lombardo v. FC of T 79 ATC 4542 at 4544; (1979) 28 ALR 574 at 576 (Bowen CJ). That proposition is said to apply when different conclusions are reasonably open as to whether the facts found fall within the ordinary meaning of the words of a statute but not when the question is whether any conclusion other than that propounded is reasonably open -
FC of T v. Cooper 91 ATC 4396 at 4409-4410; (1991) 99 ALR 703 at 719-721 (Hill J., Lockhart and Wilcox JJ. agreeing on this point). The latter proposition is amply supported by authorities referred to in the judgment of the Full Court. It is however, not immediately apparent that a case involving the disputed application of ordinary words in a statute to undisputed facts could not be presented in such a way as to raise the question whether any conclusion other than that propounded is reasonably open. This view is consistent with the approach taken by Gummow J. in TNT Skypak International (Aust) Pty Ltd v. FC of T (supra) at ATC 4284; ALR 182. Observing that the question whether facts once found by the Tribunal fall within the terms of a particular statute will frequently be a question of law, his Honour said:
``This, in my view, will be so even though the criterion fixed by the statute for its operation is so supple (if not subtle) that its application to given facts may be described as `one of degree' or `of fact and degree'.''
Views have differed on whether the characterisation of expenditure as capital or revenue is a question of law or fact. Latham CJ called it ``a matter of some uncertainty'' - Sun Newspapers Ltd and Associated Newspapers Ltd v. FC of T (1938) 5 ATD 87 at 89; (1938) 61 CLR 337 at 354. Dixon J. thought that to describe such decisions as questions of fact was a less explicit way of indicating the difficulty of finding reasons for them than to suggest, as Lord Greene M.R. had, that a spin of the coin might have done as well - Hallstroms Pty Ltd v. FC of T (1946) 8 ATD 190 at 194; (1946) 72 CLR 634 at 645 (referring to the observations of Lord Greene M.R. in
Inland Revenue Commissioners v. British Salmson Aero Engines Ltd [1938] 2 KB 482 at 498). Dixon J. was however plainly of the view that decisions on the capital/revenue distinction should not be so described [at ATC 194; CLR 646]:
``For myself, however, I am not prepared to concede that the distinction between an expenditure on account of revenue and an outgoing of a capital nature is so indefinite and uncertain as to remove the matter from the operation of reason and place it exclusively within that of chance, or that the discrimen is so unascertainable that it must be placed in the category of an unformulated question of fact.''
ATC 4753
McTiernan J. agreed with Dixon J. in that case, although they were in the minority as to the result which did not turn upon whether the question was one of law or fact. Starke J. said unequivocally that ``... in the end as in the beginning the question is one of fact... which must be determined on the facts of each particular case'' at 644). Williams J. took the via media at 656, adopting the statement of Viscount Simon LC. in
Doncaster Amalgamated Collieries Ltd v Bean [1946] 1 All ER 642 at 645:
``The borderline between revenue and capital expenditure is sometimes difficult to draw, and there may be cases in which the conclusion is properly reached by the Commissioners as a question of fact which will not be disturbed. But where, as here, the Commissioners find facts which in law must lead to the conclusion that the item falls into one class and not into the other... the error can be corrected on appeal.''
It may be that it is sufficient, in the light of the latter observations and those of the Full Court of this Court in Lombardo and Cooper, to determine whether the appeal attacks the Tribunal's conclusion as not open on the facts which it found. The difficulty of that approach arises from the facility with which that question can be posed in any debate about the application of the capital/revenue distinction. In my opinion, in this case, the question whether the Tribunal was right in its characterisation of the expenditure as capital involves the question whether it could reasonably have come to that conclusion. So holding, I am bound to treat the appeal as raising a question of law.
Whether the Expenditure was Capital or Revenue
The characterisation of an expenditure as a capital outgoing tends to flow from the assessment of factors which have been discussed in a number of cases in England and Australia. Those factors taken singly or together may, according to the circumstances, be sufficient to support such characterisation. Generally they are not necessary conditions. In
British Insulated and Helsby Cables v. Atherton [1926] AC 205, Viscount Cave LC said at 213:
``... when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as property attributable not to revenue but to capital.''
That case concerned a payment made out of profits to establish the nucleus of a pension fund for the taxpayer company's employees. It was held to be a capital payment. The difficulty attending that characterisation was apparent from the 3-2 division of opinion among the members of the House of Lords who sat on the appeal.
The decision was invoked in a leading Australian authority, Sun Newspapers Ltd and Associated Newspapers Ltd v. FC of T (1938) 5 ATD 87; (1938) 61 CLR 337. Money paid by the proprietor of a newspaper to acquire the interest of parties contemplating production of a competitive publication and to obtain their promise not to compete for three years within 300 miles of Sydney was held to be an outgoing of capital. Latham CJ described British Insulated and Helsby Cables as ``the most authoritative decision upon the question'' (354) and quoting the passage from the judgment of Viscount Cave LC which is set out above. He took the view that the newspaper's expenditure was ``a large non-recurrent unusual expenditure made for the purpose of obtaining an advantage for the enduring benefit of the appellant's trade by conserving and increasing the value of the goodwill of the newspaper enterprise''. No one of these factors was decisive of its characterisation as capital but all were material.
Dixon J. regarded the capital/revenue distinction as corresponding to the distinction between the business structure set up to earn profit and the process by which that structure operates to obtain regular returns by means of a regular outlay (359). He referred to some of the verbal formulae propounded by courts in the attempt to establish criteria for the distinction. Whether an outlay is recurrent or once for all, whether an asset or advantage of lasting character is acquired or created by the outlay, whether in the words of Viscount Cave LC, it is an asset for ``the enduring benefit'' of the business, whether the asset procured is a fixed capital asset; these were criteria referred to in the judgment which have been invoked on many occasions since (361). At 363 he set out what was described by the Full Court of this
ATC 4754
Court in FC of T v. Raymor (supra) at ATC 4468; ALR 263 as ``the classic test for resolving the distinction between capital and income'':``There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover it use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''
The correspondence between capital and revenue on the one hand and the structural and operational aspects of a business on the other was reaffirmed in his dissenting judgment in Hallstroms Pty Ltd v. FC of T (1946) 8 ATD 190 at 194; (1946) 72 CLR 634 at 647:
``... the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.''
Where expenditure is outlaid to acquire an interest in land there is, on these criteria, a strong case for its characterisation as a capital outlay. In
Colonial Mutual Life Assurance Society Ltd v. FC of T (1953) 10 ATD 274, (1953) 89 CLR 428, the question was whether money paid as a percentage of rents collected by the purchaser of certain land in consideration of the transfer of the land to that purchaser was capital. For Williams ACJ it was sufficient that the expenditure was necessary for the acquisition of property or rights of a permanent character, the possession of which was a condition of carrying on trade at all. The purchase of the land fell into that category (ATD 280; CLR 448). Webb J. held that although the payments derived from revenue earned by the land they constituted expenditure for the acquisition of the capital asset constituted by the land (ATD 280; CLR 448). And for Fullagar J. (with whom Kitto and Taylor JJ. agreed) the fact that the outlay constituted the purchase price for the land was ``the end of the matter''. The land was an asset forming part of fixed capital and the price was therefore an outgoing of capital or of a capital nature (ATD 283; CLR 454).
A similar approach is reflected in cases dealing with the acquisition of interests in land, short of full ownership, be they rights of access or profits a prendre necessary to enable income producing activity to be carried on. In Kauri Timber Co. Ltd v. Commissioner of Taxes (NZ) [1913] AC 771, the Privy Council held there could be no question that the acquisition of the right to possess land and cut and remove timber growing on it ``was just as plainly a capital on cost as if the land, with the timber upon it, had been bought outright'' (777). When a mining company purchased mining leases in consideration, inter alia, of paying to the vendor 20% annually of the value of gold or other minerals won from the property that outgoing was treated by the Full Court of the Supreme Court of Victoria as part of the purchase price and therefore as a capital outgoing for the purposes of the Income Tax Acts 1895, 1903, 1904 and 1906 - In
re The Income Tax Acts (No. 2) [1915] VLR 530. In
Robert Addie and Sons Collieries Ltd v. The Commissioners of Inland Revenue (1924) 8 T.C. 671, the Court of Sessions held that a payment to a lessor for the rehabilitation of land leased to and used by the taxpayer company to construct access roads to a mine site was ``made for the acquisition of an asset in the form of the means of access and passage which was part of the capital establishment of the company''. Another example, not factually congruent with the present case, but logically analogous, is
Herring v. FC of T (1946) 8 ATD 130; (1946) 72 CLR 543. The taxpayer company's income consisted of royalties paid in respect of timber obtained from land belonging to it. The company incurred certain expenditure in the construction of a road which it claimed was built solely for the purpose of removing timber from the land and thus obtaining the royalties. Rich J. held that the expenditure was of a capital nature and not deductible under s. 51. At ATD 132; CLR 547 he said:
``I accept the position that the road was constructed in pursuance of the agreement
ATC 4755
and because it was necessary for the purpose of removing the timber. But even so it amounted, as I think, to an outlay of a capital nature. It is not to the point that the outlay was made in connection with the creation of an asset of which the value for the purpose of profitably working the timber or obtaining royalties therefrom would progressively diminish. That happens when capital is spent in acquiring patents, mining leases or concessions limited in point of time. Income tax law may not always be just in the provisions it makes for writing off against assessable income the cost of such wasting or terminating assets. But that does not make their acquisition or creation any the less an affair of capital. The expenditure on the road formed a necessary outlay to obtain the `enduring benefit' of the expected royalties.''
And in
Butcher v. DFC of T (1951) ALR 30, the taxpayers had purchased certain land on which there stood growing crops of bananas. Of the purchase price the sum of 1,100 pounds was allocated for ``banana plants bearing'' and another sum of 500 pounds in respect of ``banana plants new planting''. These were claimed as deductions but disallowed. Kitto J. dismissed the appeals against the disallowance of these deductions, stating at 31:
``In so far as s. 51 alone is relied upon, the answer to the claim for the deduction of the sums allocated to the purchase of banana plants is, I think, that, as these plants were growing on the land purchased and therefore formed part of a capital asset acquired, any portion of the total purchase price which may be regarded as attributable to the plants was an outgoing of capital or of a capital nature: cf
Webster v. Deputy Federal Commissioner of Taxation for Western Australia (1927) 39 CLR 130.''
In a Court of Appeal case relied upon by the Tribunal, the benefit of an agreement conferring an exclusive right to use and acquire sand and gravel from deposits on certain land was held to be a capital asset even though it was said to confer no proprietary right in the land or in the sand and gravel before it was removed. Nor did the sand and gravel become part of the stock in trade of the company which extracted it pursuant to the contract until it had been removed - Stow Bardolph Gravel Co. Ltd v. Poole [1954] 3 All ER 637.
The outlay of $125,000 in this case acquired for the appellants the right to remove sand which was, on the facts found by the Tribunal, incorporated in and part of the land. As such it was an expenditure to purchase an interest in the land, a profit a prendre -
Morgan v Russell & Sons [1909] 1 KB 357 at 365 (Lord Alverstone CJ.), 366 (Walton J.);
Stratford (HM Inspector of Taxes) v. Mole and Lea; Old Silkstone Collieries Ltd v. Marsh (HM Inspector of Taxes) (1941) 24 T.C. 20 at 32-33 (Lawrence J.). In my opinion the Tribunal correctly applied the approaches taken in the principal authorities when it concluded that the outlay was of a capital nature. What was acquired was a proprietary right to mine the land for sand. The attempt to equate that proprietary right to the purchase of a pile of sand in what was said to be the ``business sense'' of the transaction fails for the same reason that the attempt to equate the purchase of forward coal contracts with the purchase of coal under the contracts failed in
John Smith & Son v. Moore (Inspector of Taxes) [1921] 2 AC 13. And I agree with the Tribunal that as the appellants were not in the business of buying or selling interests in land, the expenditure could not be said to be of stock in trade. It could not therefore be deemed not to be of capital or of a capital nature by virtue of s. 51(2) of the Income Tax Assessment Act. For the preceding reasons this appeal will be dismissed.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.