NEGATIVE INSTRUMENTS PTY LTD v FC of T (No 2)

Judges:
Heerey J

Court:
Federal Court

Judgment date: Judgment handed down 31 October 1994

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Heerey J

This appeal from the Administrative Appeals Tribunal constituted by Dr P Gerber, Deputy President, is concerned with s. 59 of the Income Tax Assessment Act 1936 (Cth) (the Act). That section relevantly provides:

``(1) Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction.

...

(3) Subject to subsections (4) and (6), the consideration receivable in respect of the disposal, loss or destruction means-

• (a) in the case of a sale of the property - the sale price less the expenses of the sale of the property;

  ...

• (c) in the case where the property is sold with other assets and no separate value is allocated to the property - the amount determined by the Commissioner;''

On 6 December 1984 the applicant entered into a contract to sell to Andrew Stanislaw Krawiec and Meir Saltoun a service station at 36 Lane Cove Road, Ryde. The contract included in the description of the property sold:

``... as ancillary to the land above described the following furnishings and chattels as inspected by the purchaser -

All fixtures, fittings, pumps, underground tanks and any associated items required for the operation of the business of a petrol station.''

The price was $700,000. The contract provided for completion on 22 February 1985. Time was stipulated to be of the essence. On the date of the completion the parties executed the following handwritten document (the note):

21-2-1985

"Note on contract for sale of 36 Lane Cove Road, Ryde to Messrs Krawiec and Saltoun dated 10/1/85, who agreed to pay to the Council¹ and Water Board² rates thereon for 1985.

The agreed value of pumps less XL bezzles and paiels [?] and air compressor and red gauge, old ice blocks and screw and any other plant excluding all signs with XL PAYLESS or and less than on them is nil.

                                Signed

                       for XL Petroleum Pty Limited

   Ian G Sykes
   22/2/85                    Signed
                              Signed

   1 Paid   22/2/85         Ian G Sykes        $1,119.00
   2 Paid   22/2/85         Ian G Sykes          $718.00"
          

In its return for the 1985 tax year the applicant claimed a loss on the sale of the plant and equipment. The respondent disallowed this claim but allowed depreciation for the short period of use.

The Tribunal's decision

The Tribunal dismissed the appeal on the ground that the plant ``formed an inseparable part of the land'' and that no attempt was made to treat any of the items as other than fixtures. In the light of the decision of the Full Court in
Pearce v FC of T 89 ATC 4064; (1988) 85 ALR 359 counsel for the Commissioner did not seek to uphold this reasoning.

However counsel argued that there was no evidence that the items in question were plant or articles or that they had been ``properly depreciated''. But the depreciation schedule which was in evidence showed that depreciation had in fact been allowed on the items; thus s. 59(1) was satisfied since it applies to property where depreciation ``has been allowed or is allowable''. I might add that this argument was never put to the Tribunal.

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ATC 4815

There was a further argument, also not raised before the Tribunal, that the note (i) referred to a contract of sale dated l0 January 1985 and (ii) could not be relied on because it was not part of the contract. Reference was made to
FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 at 350 to support the proposition that the subsequent conduct of parties cannot be used as an aid to construction of a contract.

As to (i), there is no explanation for the misdescription of the date. There is no suggestion however that there was any other contract. The most likely explanation consistent with the evidence is that there was a mistake in description. As to (ii), the note is a variation of the contract itself, not conduct of the parties in its performance.

It was further said that s. 59 had no application because the relevant time was the time the contract was executed and the note was made subsequently. However s. 59 speaks of the time the property is ``disposed of''. This will usually, in the case of real property, be some time after the contract. I think ``disposed of'' here is used in the sense of ``part company with'' or ``get rid of''. The Commissioner's contention would lead to strange results. If a contract was entered into but not completed because of default of one of the parties and subsequent recision, or by mutual cancellation, there would nevertheless have been a ``disposal''.

I make the following orders.

1. Appeal allowed.

2. Order that the decision of the Administrative Appeals Tribunal given on 2 April 1993 insofar as it affirms the decision of the respondent to disallow the applicant's objection dated ll November 1986 under s. 185 of the Income Tax Assessment Act 1936 (the Act) against the assessment of incone tax dated 22 October 1986 in respect of the year of income ended 30 June 1985 be set aside and in lieu thereof the applicant's said objection be allowed.

3. Order that the matter be remitted to the respondent to amend the applicant's assessment of income tax for the said year of income in accordance with law.

4. Order that the respondent pay the applicant's costs of the appeal, including reserved costs.