INTERNATIONAL CELLARS PTY LIMITED v FC of T

Judges:
Wilcox J

Court:
Federal Court

Judgment date: Judgment handed down 7 August 1992

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Wilcox J

This case requires determination of a point left open by the High Court of Australia in
Tourapark Pty Ltd v FC of T 82 ATC 4105; (1982) 149 CLR 176: whether the investment allowance provided by Subdivision B of Division 3 of the Income Tax Assessment Act 1936 is available in respect of ``a unit of eligible property'' which is physically used by customers of the relevant taxpayer. The question arises in the present case in connection with five assessments to income tax made by the Commissioner against International Cellars Pty Limited, the present applicant. The assessments relate to the financial years which ended on 30 June in each of the years 1982 to 1986 inclusive.

International Cellars is a subsidiary of Rothmans of Pall Mall (Australia) Pty Limited, a cigarette manufacturer. In each of the relevant financial years International Cellars held under lease from Commercial and General Acceptance Corporation (``CAGA'') a quantity of cigarette vending machines. These machines were apparently manufactured in Japan by Sanyo Corporation. International Cellars was the Australian distributor of the machines and, in that capacity, made sales of machines to other cigarette vendors. It also retained some machines for its own use, installing them in premises, such as hotels, clubs and restaurants, occupied by others but thought to be places where there would be a demand for cigarettes. It appears that each machine appropriated for that purpose was sold to CAGA and leased back to International Cellars. If nothing more had occurred, there would be no question of International Cellars being entitled to an investment allowance; the reason being that it was not the owner of the machine. However, s. 82AD of the Income Tax Assessment Act prescribes a procedure whereby the lessor of property which would attract an investment allowance may cause the allowance to be deductible from the income of the lessee, rather than itself as owner/lessor. For the purposes of these appeals, the parties agree that this procedure has been followed. Accordingly, I can disregard the complication of the leases. The applicant's claim to a deduction in each year of the investment allowance falls to be considered in the same way as if it was the owner of each of the machines at relevant times.

The evidence describes in some detail the procedure followed by International Cellars in connection with the installation and use of the machines. Apparently, that procedure did not change during the relevant years. No challenge was made to any aspect of the evidence. As counsel's submissions do not depend upon the fine detail of the evidence, a broad summary will suffice for present purposes.

International Cellars employed a sales team. One of its functions was to locate suitable vending machine sites. When a site was identified, negotiations were opened with the

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ATC 4626

occupier of the relevant premises. If the occupier was prepared to accept a machine, terms were discussed. On some occasions a flat fee was paid to the occupier for the privilege of installing the machine, and the use of the electricity necessary for its operation. This fee would ordinarily be in addition to a variable fee, calculated by reference to the volume of sales effected through the machine. Sometimes there was no site fee, simply a variable fee. An instalment of the variable fee was sometimes paid in advance. I gather that the payments made to some occupiers were larger than to others, much depending upon the attractiveness of the site from the applicant's point of view. In most cases the occupier had previously made over the counter cigarette sales. Where that was the situation, the practice of the applicant's representatives was to point out the advantage to the occupier of eliminating the need to carry stocks of cigarettes, with consequent expense, labour and losses through pilfering. It appears that this advantage induced most occupiers to accept a lower gross return, through the machines, than they would have received over the counter. From the applicant's point of view, apart from the financial advantage of selling on the retail, rather than the wholesale, market, the applicant selected the particular cigarette lines to be offered in the premises, thereby no doubt assisting the implementation of Rothmans' overall marketing strategies.

Whatever the particular financial terms surrounding the installation of a machine, its filling and servicing were totally controlled by International Cellars. With one exception, the occupiers of the premises did not have a key to the machine. If the machine failed to function satisfactorily, the person in charge of the premises notified the applicant. One of the applicant's service personnel would then call to attend to the problem. Fillers employed by the applicant regularly attended each machine, noting the volume of each product sold since the previous visit, refilling the machine and removing money. Site fees were paid by cheque each month to the occupier of the premises.

The exception to which I referred was the Hornsby RSL Club. When the installation of a cigarette vending machine was negotiated between the applicant and that club, the club insisted upon having in its possession a key to the machine. This insistence apparently stemmed from its past practice in connection with vending machines. However, the club agreed that the key would be placed in a sealed envelope held in its safe and used only to obtain cigarettes for customers when the machine malfunctioned and pending the arrival of a serviceman. It is not suggested by counsel that this exception affects the present appeals.

The outcome of the present appeals is governed by s. 82AA of the Income Tax Assessment Act. Only the first subsection of that section is material; the remaining subsections deal with ships. Subsection (l) provides:

``82AA(1) Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is-

• (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively-
  • (i) in Australia; and
  • (ii) for the purpose of producing assessable income otherwise than by-
    • (A) the leasing of the eligible property;
    • (B) the letting of the eligible property on hire under a hire- purchase agreement; or
    • (C) the granting to other persons of rights to use the eligible property; or
• (b) in the case of a taxpayer being a leasing company, for use wholly and exclusively-
  • (i) in Australia; and
  • (ii) for the purpose of producing assessable income,
• by another person to whom the taxpayer has, on or after 1 January 1976, leased the eligible property under a long-term lease agreement that was entered into by the taxpayer in the course of carrying on business in Australia and was so entered into by the taxpayer and the other person at arm's length.''

Counsel agree that, if subs. (1) applies to the case, the applicant is entitled to deduct from its assessable income the investment allowances which it claimed and which the Commissioner disallowed in the notices of assessment: see s. 82AB. They also agree that para. (b) is not relevant to this case. The applicant's claim

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ATC 4627

depends entirely on para. (a). In that connection, counsel agree that each of the machines is a ``unit of eligible property'' - as to which see s. 82AQ(1) and s. 54. The relevant machines were, of course, acquired by the taxpayer, the applicant, for use by it in Australia for the purposes of producing assessable income. Accordingly, the machines satisfy the general description contained in para. (a). The question is whether they fall within any of the exceptions in sub-para. (ii) which commence with the words ``otherwise than by''. Counsel for the Commissioner does not suggest that either sub-sub-para. (A) or sub-sub-para. (B) applies. However, he says that sub-sub-para. (C) applies because the applicant gains assessable income by granting to other persons the right to use the machines. According to the argument, rights of user are granted to two categories of people: the occupiers of the premises who receive a fee calculated by reference to the value of sales affected through the machines and the members of the public who use the machines in order to purchase cigarettes.

The contention that the investment allowance is unavailable because the occupiers of the premises within which the machines are situated ``use'' the machines was not developed. As it seems to me, the argument is scarcely tenable. It is true, as Gibbs ACJ said of the word ``used'' in
Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 at 637, that ``use'' is a word of wide import. This fact is graphically illustrated by
Council of the City of Newcastle v Royal Newcastle Hospital (1956-1957) 96 CLR 493 (High Court);
Council of the City of Newcastle v Royal Newcastle Hospital (1959) 100 CLR 1 (Privy Council), a case where 291 acres of timbered land surrounding a hospital was held to be ``used'' for hospital purposes. The evidence did not indicate any physical use of the land by hospital staff or patients. But the land was held to be used by the hospital as a barrier to air and noise pollution and in providing serene surroundings to patients.

In the Macquarie University case Gibbs ACJ pointed out, at 638, that a landowner ``may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease. That is almost beyond argument when the owner's purpose is to acquire income''. So, in a sense, the occupiers of premises in which the applicant's machines were housed ``used'' them to produce income. But the focus of sub-sub-para. (C) of s. 82AA(1)(a)(ii) is not upon the question whether some other person used the relevant unit of property; but rather whether the taxpayer used it for ``the purpose of producing assessable income otherwise than by... the granting to other persons of rights to use'' it. As I see the case, the applicant used the subject machines for the purpose of producing assessable income from the sale of cigarettes. It is true that, in order to make sales, it had to negotiate an arrangement with premises occupiers; but it did not earn assessable income from the occupiers or from the grant of any right to them. In contrast to the example given by Gibbs ACJ in Macquarie University, where the relevant party received money from the other party to the arrangement, the present applicant paid money to the other party. It seems to me that, even if it can be said that the premises occupiers ``used'' the machines to receive income, the applicant did not derive assessable income from the grant of the right to receive that income but from the sale of cigarettes.

Were it not for Tourapark, I would have thought the position in relation to counsel's second argument equally clear. Although customers used machines to purchase cigarettes, the applicant did not earn income by granting rights to people in relation to machines but by selling cigarettes to that proportion of those people who elected to exercise the right and purchase cigarettes. The relevant right, an implied permission to operate the machine for the purpose of obtaining cigarettes, was granted to everyone who visited the premises. The right was granted gratuitously. The grant returned no revenue. If nobody had wanted cigarettes, no income would have been earned, notwithstanding the grant of the right. Income was earned from the exercise of the right, not its grant.

Tourapark concerned a claim for an investment allowance by a caravan park operator. The taxpayer had acquired caravans, which were ``eligible property''. They were set on concrete blocks and connected to electricity and water supplies. Customers paid a fee for a licence to occupy a caravan for an agreed period, the licence also including the right to use the park's communal facilities. The High Court unanimously held that the taxpayer used

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ATC 4628

the caravans for the purpose of deriving assessable income from the granting to other persons of rights to use the caravans. The Court rejected arguments for the taxpayer that read into sub-para. (ii) a requirement that the taxpayer be totally excluded from any active use of the property. The result might be thought unsurprising. After all, the only possible way of deriving income from the vans was by granting to customers exclusive rights to use them for specified periods. The case differed from those referred to in sub-sub-paras. (A) and (B) of s. 82AA(1)(a)(ii) only in the terms of the right of occupation conferred upon the customer.

In the present case, no right of occupation or possession was conferred on customers. Indeed no formal arrangement was entered into with them. The machines, stocked with cigarettes, were simply made available to such persons as might wish to use them to obtain cigarettes in return for money. Of course, the applicant permitted - indeed, encouraged - the use of the machines by customers. It did so in order to earn income. In that sense, the applicant ``used'' the machine to derive assessable income. But it seems to me a misuse of language to describe the position as a use of the machines to earn assessable income from the granting to customers of rights to use the machines. Unlike Tourapark, where income was earned in return for the grant of permission to use a caravan, and whether or not the customer actually did so, in this case no income was earned by the granting of general permission to use the machines. Income was derived only from those who chose to avail themselves of that permission. The purpose of the machines was to obtain income by selling cigarettes, not by granting rights of user.

However, in Tourapark Gibbs CJ (with whom Mason, Murphy and Wilson JJ agreed) said at ATC 4108; CLR 183:

``Counsel for the taxpayer in the course of argument gave a list of examples of property in respect of which it was said that if the Commissioner's construction of the Act is correct, a taxpayer would not be entitled to the investment allowance. The list included self-service petrol bowsers at service stations, automatic lockers at transport terminals, lifts and escalators and aircraft and buses. It is unnecessary to consider whether it would be correct to say that a taxpayer grants to another person a right to use property of the kind mentioned in the examples, and undesirable to do so since the question may fall for decision in other cases. However, if the conclusion is that the allowance is not payable in respect of property of that kind, the result is neither absurd nor unjust. It is apparent that the investment allowance is made available for the purpose of encouraging particular behaviour which the Parliament regarded as desirable, namely, the expenditure of money on certain plant which (except in the case of leasing companies) is intended to be used and is in fact used by the taxpayer himself wholly and exclusively for the production of assessable income and which others have no right to use. The Parliament attached conditions to the right to the allowance, no doubt with a view to preventing the right being used simply as a means of tax avoidance, and no reason appears why the words imposing the conditions should be given any other than their ordinary and natural meaning.''

The examples noted by the Chief Justice include cases to which the distinction I have made is equally applicable. Perhaps aircraft and buses stand to one side. The owner of a bus or aircraft derives income from the grant of the right to use the bus or aircraft. The income is derived when the ticket is sold, whether or not the customer uses it. Depending perhaps upon the precise facts, automatic lockers at transport terminals may fall into the same category. But self-service petrol bowsers and lifts and escalators in commercial buildings are indistinguishable from the present case. No income is derived from the grant to members of the public of the right to use such facilities. Owners seek to earn income - directly in the case of self-service petrol bowsers, indirectly in the case of lifts and escalators - from their actual use. If these are cases where the exclusion in sub-sub-para. (C) applies, the same must be said of cigarette vending machines.

Counsel for the Commissioner contends that Gibbs CJ was saying that the examples are all cases where the exclusion applies. The basis of that contention is the sentence in which his Honour said that, if it was concluded that the allowance is not payable in respect of such property, ``the result is neither absurd nor unjust''.

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ATC 4629

I do not think that Gibbs CJ intended to offer any considered view upon the examples which he mentioned. The sentence relied upon by counsel followed one in which his Honour stated that it was unnecessary and undesirable to pronounce upon the examples. Moreover, the sentence itself commenced with a conditional clause ``if the conclusion is'' etc. I think that all that Gibbs CJ meant to say was that Parliament had imposed conditions on the right to the allowance - which is an absolute deduction from taxable income, not merely a provision for accelerated depreciation - and that it was not absurd or unjust to confine taxpayers to the limits set by Parliament.

To my mind, the distinction sought to be made in the present case does lead to an absurd result. Presumably, the purpose of granting investment allowances was to encourage taxpayers to invest in income-earning equipment; and thereby stimulate the Australian economy. Some people might question the degree of economic stimulation derivable from the installation of imported retail vending machines; but that question goes to the desirable width of the concession rather than to any question of anomalous operation. However, if the section created a distinction between self- service petrol bowsers and petrol bowsers operated by service station staff - and so not ``used'' by customers - or between retail store passenger lifts and retail store goods lifts, it might reasonably be contended that, in terms of the provision's underlying rationale, the result was absurd.

I should mention two other authorities cited in argument. In the first case,
FC of T v Mount Isa Mines Ltd, Mount Isa Mines Ltd v FC of T 91 ATC 4154; (1991) 28 FCR 269, one of the issues was the deductibility of an investment allowance in respect of accommodation units at two mine sites. Accommodation was made available to employees at a small charge. Although the purpose of providing the accommodation was to enable the taxpayer to work the mines rather than to earn income, the Court held that Tourapark determined this issue adversely to the taxpayer: see Pincus and Ryan JJ at ATC 4169-4171; FCR 289-290, noting that Sheppard J agreed with their Honours on this point.

I do not think that Mount Isa Mines assists the resolution of the present case. Although there, unlike in Tourapark, the provision of accommodation was not in itself a commercial end, the taxpayer obtained income from the grant of the right to use the accommodation; not from a transaction entered into by some only of those granted a right of use.

The other decision to which reference was made is
FC of T v Brambles Holdings Ltd 91 ATC 4285; (1991) 28 FCR 451: see also its companion case
Otto Australia Pty Ltd v FC of T 91 ATC 4305; (1991) 28 FCR 477. These cases arose under sales tax legislation, the question in each case being whether garbage bins were used by a local government authority. The various reasons for decision contain analyses of the concept ``use by''. They illustrate, once again, the width of the word ``use''. But they do not bear upon the present problem.

In my opinion it is not accurate to say that the applicant's cigarette vending machines were used for the purpose of earning assessable income by the granting of rights to other persons to use them. The exclusionary words of sub-sub-para. (C) do not apply. The appeal should be allowed with costs. The decisions of the Commissioner disallowing the objections should be set aside. The Commissioner should amend the assessments by allowing the claims for investment allowances.

THE COURT ORDERS THAT:

1. The appeals be allowed.

2. The decision of the respondent, the Commissioner of Taxation, disallowing the objection of the applicant, International Cellars Pty Limited, to the assessment of income tax to be set aside.

3. The respondent amend the said assessment so as to allow the deduction for investment allowance claimed by the applicant.

4. The respondent pay to the applicant its costs of this proceeding.