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AIR LIQUIDE AUSTRALIA LTD v FC of T

Judges:
Heerey J

Court:
Federal Court

Judgment date: 17 April 1996

Heerey J

The taxpayer Air Liquide Australia Ltd (formerly named Liquid Air Australia Limited) appeals against the rejection of deductions claimed by way of an investment allowance in respect of vacuum insulated vessels (VIVs) installed on the premises of its customers. The Commissioner took the view that Air Liquide had granted to other persons rights to use the VIVs within the meaning of s 82AA(1)(a)(ii)(C) of the Income Tax Assessment Act 1936 (Cth) (the Act). An identical issue arises under s 82AG(1)(b). The relevant period is 1 January 1980 to 31 December 1985.

VIVs

During the relevant period Air Liquide manufactured, sold and supplied gases such as oxygen, nitrogen and carbon dioxide for industrial and medical purposes. In the case of a few very large customers Air Liquide supplied the gas by a dedicated pipe-line from its factory to the customer's premises. With smaller customers the gas was supplied in portable cylinders. Between those two extremes were the customers with which this case is concerned. Air Liquide installed a VIV on the customer's premises for the storage of gas in liquid form and replenished the VIV from time to time by road tanker delivery.

A VIV consisted of a stainless steel inner vessel and a carbon steel outer vessel separated by an annulus which was both insulated and evacuated, a vaporiser (where the customer required gas in a gaseous state), a pressure building coil, a regulator, gauges (pressure and content) and ancillary pipe-work and valves. The regulator maintained the pressure within the vessel. The VIVs varied in size. The evidence included a photograph of one which showed a cylindrical structure that looked about five to six metres high. It bore Air Liquide's name and company logo. The customer met the cost of installation, including foundations and an enclosing fence.

A VIV enabled liquefied gas to be stored at cryogenic temperatures, sometimes as low as minus 100° celsius. If the customer required the gas in gaseous form it could be converted to that state by an attached vaporiser. The pressure of the gas, whether in liquefied or gaseous form, was regulated by Air Liquide within the VIV for the customer's requirements by means of the regulator valve. Should a customer's gas pressure needs change, the regulator would be adjusted to meet those needs. The gas in liquefied or gaseous form passed into pipes which connected with pipelines and valves owned and operated by the customer.

The VIV included a valve called the ``main isolation valve'' or sometimes the ``customer draw-off valve''. The valve was located on or near the beginning of the customer's pipeline. The customer could and did shut down the vessel by shutting down the main isolation valve, for example if the customer's operations were to cease for any time.

ATC 4470

The gauges on the VIV indicated pressure and contents. Customers could inspect those gauges to ascertain whether there was sufficient gas in storage. However the more usual practice was for Air Liquide to monitor the customer's usage and provide regular deliveries to keep up a sufficient supply.

Liquefied gas is a dangerous substance and the VIVs required expert specialised maintenance. This was provided by Air Liquide. Its customers adopted a hands-off policy.

Supply contracts

Most of the contracts under which Air Liquide sold and supplied gas were pro forma agreements. Up until the end of calendar 1981 the pro forma agreement (``the old agreement'') included the following terms which are relevant for present purposes. (The numbering has been added for ease of reference.)

``[i] The seller agrees to sell to the buyer and the buyer agrees to buy from the seller upon the terms and conditions herein the gases herein specified...

[ii] The seller agrees to keep the buyer adequately supplied with gases...

[iii] The seller will supply, install and maintain on the buyer's premises at a site mutually agreed upon, a storage and regulating installation (herein with accessories referred to as the `storage equipment') of an adequate type and size to facilitate continuous delivery of one or more gases as contracted for under this agreement for delivery in bulk form.

[iv] Supply by bulk of any one or more of the gases is contingent on monthly minimum purchases of the gas concerned of... m3 and it is agreed that the seller shall have the option and privilege at any time or from time to time during the continuance of this agreement to discontinue bulk delivery and remove the storage equipment from the buyer's premises whenever the buyer's monthly purchases fall below the said minimum for a period of six months and there is a reasonable indication that the reduced level of purchases will continue; in which event the buyer will accept the gas concerned in cylinders at the cylinder price and rental specified in the seller's then current published price list.

[v] The seller shall have access at all reasonable times to the buyer's premises for the purpose of installing the storage equipment and of refilling, inspecting, maintaining, repairing or removing the same in accordance herewith. It is agreed that the buyer will supply at its expense whatever utilities, including but not limited to electricity and steam, which may be required for the operation of the said equipment.

[vi] The storage equipment will remain the sole and exclusive property of the seller to be left in the custody of the buyer on a loan basis for so long as the seller supplies the buyer with gases.

[vii] All storage equipment supplied by the company on loan is for the use of the customer solely who will not sell nor offer for sale, loan, let, pledge, mortgage or otherwise dispose of such equipment nor will allow any lien to be placed thereon and will pay all rents, charges, rates, taxes and other impositions where such equipment is located and will protect the equipment against distress, execution or seizure and will indemnify the company against all losses, damages and expenses incurred by the company by reason or in respect thereof.

[viii] For reasons of safety the customer shall not

  • (a) have the storage equipment, the property of the seller, filled with gas, liquid or any other product by any person, firm or corporation other than the seller;
  • (b) use the storage equipment for any purpose other than the service originally intended and the supplies in bulk delivered to it for its own use.

[ix] The buyer shall provide the seller free access with its transport to and from the equipment for the purpose of making deliveries and for the delivery and collection of equipment beyond the main entrance of the buyer's premises.''

Further terms provided for a price per cubic metre, a delivery charge per cubic metre and a ``monthly facility charge'' for the VIV.

From the beginning of 1982 a new pro forma agreement (``the new agreement'') was introduced. It commenced with a clause

ATC 4471

described as ``Objectives of the Agreement'' as follows:

``1. The buyer agrees to purchase from LAA and LAA agrees to supply the buyer... (hereinafter called `gas') and LAA agrees to install equipment for its own use in the storage and dispensing of gas (hereinafter called `the equipment') on and subject to the terms and conditions contained herein and in LAA's standard terms and conditions (a copy of which is attached hereto and forms part of this Agreement.)''

``LAA'' were the initials of Air Liquide's former name. The prices were to be an amount per m3/tonne/kilogram/litre for the supply of gas, an amount per m3/tonne/kilogram/litre for delivery and ``an amount of $ payable each and every month during the term of this agreement''. The latter would appear to be the successor of the ``monthly facility charge'' payable under the old agreement.

Other relevant clauses of the new agreement were:

``6. Storage & Dispensing Equipment

  • (A) LAA will install at the buyer's premises equipment which is in the opinion of LAA necessary for the supply of gas to the buyer. This equipment which remains the equipment of LAA at all times will be installed at the location detailed in the schedule overleaf.
  • (B) The buyer will provide at no cost to LAA a suitable site for the equipment in accordance with LAA's requirements and relevant SAA standards. LAA undertakes to advise the buyer of the details of such requirements.
  • (C) LAA reserves the right to change the equipment if in its opinion such a change enables LAA to more efficiently service the buyer's needs.''

The new agreement had annexed to it Standard Terms and Conditions which included:

``Section IV Terms and Conditions of Supply - Gas Dispensing Equipment Installation

General

2. The cost of providing a suitable site as described in the Agreement together with foundations electric power supplies and any necessary pipework will be to the buyer's account.... [I]f the buyer requests replacement of equipment of a different size type or capacity then all costs incurred by or on behalf of Liquid Air directly or indirectly in connection therewith will be borne by the buyer.

4. Property in any liquefied gas stored in the equipment shall remain vested in Liquid Air until gas is drawn off for use by the buyer whereupon such property shall pass to the buyer. Notwithstanding that property in the liquefied gas shall remain vested in Liquid Air as aforesaid the buyer shall pay for all quantities of liquefied gas delivered with the equipment prior to such gas being drawn off.

Ownership

5. The equipment remains the sole property of Liquid Air and would [sic] be for the sole use of Liquid Air and regardless of how or in what manner the equipment may be located upon fixed or attached or placed in the buyer's premises.

Maintenance

9. The buyer shall:

  • (a)...
  • (b) not without the previous written consent of Liquid Air move or alter or interfere in any way with the equipment other than to adjust same (in any case where adjustment is necessary) by the means provided and in accordance with the instructions provided for such purpose by Liquid Air.

10. Liquid Air shall:

  • (a) maintain the equipment in good working order and condition;

Removal for Repairs

11. Liquid Air shall be entitled on giving reasonable notice to the buyer to discontinue the use of the equipment temporarily for the purpose of making any tests or repairs or for any other purpose which Liquid Air considers necessary and Liquid Air may remove the equipment or any component or components thereof for such purpose.

Losses from Equipment

12. The buyer shall inform Liquid Air immediately when there are abnormal conditions or obvious leaks or defects in the equipment. Liquid Air shall not be

ATC 4472

responsible for any loss of gas from any equipment due to incorrect operation or power failure....

13. The equipment shall not be used for the storage and dispensing of gas other than that supplied to the buyer by Liquid Air without Liquid Air's previous written consent provided that Liquid Air will not unreasonably withhold or refuse consent in any case where it is unable to meet the buyer's requirements for the supply of gas into the equipment.''

From the sample agreements which were in evidence it may be inferred that the usual term of an agreement was two years.

There was evidence of other agreements with customers which contained minor variations to the wordings of the pro forma agreements. In some instances the monthly charge was referred to as ``rental''. A special agreement was negotiated between Liquide Air and Nestle Australia which contained the following relevant clauses:

``1. Liquid Air agrees to install free of charge on your prepared sites suitable gas storage and dispensing equipment solely for LAA's use in meeting Nestle's gas usage needs.

2. Liquid Air reserves the right to change the equipment at no cost to Nestle Australia if in its opinion such a change enables LAA to better meet the supply requirements.''

Finally there was a ``snow shooting'' agreement made between Air Liquide and a small number of companies. Relevantly these provided for Air Liquide to install a VIV on the premises of the company which would then spray carbon dioxide on food consignments brought in by customers of Air Liquide. Air Liquide paid the company an amount per tonne for providing this service and invoiced its customers directly for the price of the gas.

Statutory provisions

Under s 82AB of the Act a deduction is allowable for capital expenditure in respect of the acquisition or construction by the taxpayer of a new unit of ``eligible property''. The term ``eligible property'' is defined in s 82AQ(1) to mean plant or articles within the meaning of s 54. Section 82AA(1) provides relevantly as follows:

``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; and
      • (C) the granting to other persons of rights to use the eligible property; or
  • ...''

Section 82AG provides:

``This Subdivision does not apply, and shall be deemed never to have applied, in relation to property acquired or constructed by a taxpayer... if, before the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer-

  • (a)...
  • (b) the taxpayer:
    • (i) leased the property; or
    • (ii) let the property on hire under a hire-purchase agreement; or
    • (iii) otherwise granted a right to another person to use the property; or
  • (c)...''

It is common ground in the present case that the VIVs were ``eligible property''. The issue is whether they are caught by the exclusionary provisions of s 82AA(1)(a)(ii)(C) and s 82AG(1)(b).

Conclusion

There can be a ``granting'' of rights within the meaning of the Act even if the transaction is of a most casual and transitory kind. In
Tourapark Pty Ltd v FC of T 82 ATC 4105 at 4111-4112; (1982) 149 CLR 176 at 189 Aickin J said:

``... I do not think that the fact that the section [82AA] would involve the loss of the investment allowance in many cases of the ordinary but occasional use of articles

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and machinery falling within the definition of `eligible' property is a consideration which would warrant ignoring the plain meaning of the words used. It is true that the lending of eligible plant without any charge to a friend or business acquaintance for one day, or permitting such person to use such plant on the owner's premises for a day without charge, would appear to destroy the investment allowance. There would in such cases be a `right' to use, though the licence would be revocable. The making of a nominal charge on such an occasion would undoubtedly destroy the deduction. Likewise the use of eligible plant by the owner on some isolated occasion for a purpose which is not the derivation of assessable income would destroy the deduction. However the fact that these provisions pose risks for hobbyists and farmers, and may well induce an attitude of apparent selfishness is not a sound basis for departing from the plain meaning of the words; they are clear and unambiguous.''

The present case is stronger because Air Liquide granted rights to its customers in relation to the VIVs by means of formal contractual documents. Two aspects are of particular significance. First, Air Liquide restricted its rights to retake possession of the VIV or control what the customer did with it; see clauses [iv] and [vi] of the old agreement and section IV clauses 11 and 13 of the new agreement. Had Air Liquide attempted to retake possession in breach of those contractual stipulations it is likely that the customer could have obtained injunctive protection from a court. Secondly, Air Liquide charged the customer a monthly fee referable to the continued retention of the VIV on the customer's premises. Whether this charge was called ``rental'' or not seems to me unimportant. The facts that Air Liquide placed its VIV on the customer's premises and charged the customer a periodical amount so long as it remained there, point to a conclusion that the ```genesis' and objectively the `aim''' of the transaction (
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429) was to confer on the customer some practical commercial benefit from the presence on the customer's premises of the VIV. That benefit can in my opinion be properly characterised as ``use'' by the customer of the VIV pursuant to the rights granted by Air Liquide. Reference in the new agreement to the installation being for Air Liquide's ``own use'' and ``sole use'' - phrases drafted, one might suspect, with s 82AA at the elbow - cannot destroy or diminish that underlying reality.

Two of the meanings given by the Macquarie Dictionary for the verb ``use'' are applicable:

``1. To employ for some purpose; put into service; turn to account; use a knife to cut, use a new method.

2. To avail oneself of; apply to one's own purposes; use the front room for a conference.''

The presence of the VIV on the customer's premises played an essential part in the customer's operations on those premises. The customer drew off gas from the VIV which then flowed through the customer's pipelines. The customer could and did turn the supply on and off by means of the isolation valve. If a bystander were to ask the customer ``How do you arrange for the supply and storage of gas for your operations?'', the natural response of the customer would be ``We use VIVs which Air Liquide installs on our premises and refills regularly with road tankers''. It is of course true that Air Liquide, in response to an enquiry about its supply arrangements, could say with equal truth ``We use our VIVs which we install on the customer's premises''. But to destroy the deduction it is not necessary for the ``other person'' to use the eligible property to the exclusion of the taxpayer: Tourapark.

The snow shooting agreements do not lead to any different result. The companies carrying out the snow shooting were not agents of Air Liquide so as to make their use of the VIVs not the use of ``other persons''. They were independent contractors.

The appeal will be dismissed with costs including reserved costs. Like orders will be made in the linked cases VG 171, 172, 173, 174 and 175 of 1992.

THE COURT ORDERS THAT:

1. Appeal is dismissed.

2. Applicant pay the respondent's costs, including reserved costs.


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