MLC LIMITED & ANOR v DFC of T

Judges:
Hill J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2002] FCA 1491

Judgment date: 29 November 2002

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Hill J

Before the Court are three applications which, by consent, were heard together. In two of them, (N 1159 of 2001 and N 1160 of 2001) MLC Limited (herein ``MLC'') is the applicant. In the remaining application (N 1161 of 2001) MLC Lifetime Company Limited (herein ``MLC Lifetime'') is the applicant. Each is an authorised life insurer and is subject to taxation under the provisions of Division 8 of the Income Tax Assessment Act 1936 (Cth) (``the 1936 Act''). Each derived a profit from the sale of certain buildings, which profit was assessable income. Each is in dispute with the respondent Commissioner as to the calculation of that profit. That dispute has given rise to the issue of assessments, objections to them and disallowances of the objections. Hence each proceeding is an appeal by the relevant company against the objection decision of the Commissioner. The tax years in question are the years of income ending June 30, 1996 and 1997.

2. The relevant facts are not in dispute. The parties are in agreement that they are, so far as concerns the calculation of the profit, as follows.

``Each Applicant is an authorised life insurer, subject to taxation under the provisions of Division 8 of the 1936 Act. Relevantly, each carries on its business through a Statutory Fund, Statutory Fund No 1, which is for the purposes of Division 8 a `mixed fund,' comprising life insurance, superannuation, and ordinary (accident, disability, residual life assurance (AD/RLA) and non complying superannuation (NCS)) classes of businesses.

In the course of carrying on those ordinary classes of business the Applicants owned four presently relevant buildings: in the case of MLC Ltd (`MLC')

• (a) London Court, Canberra (`London Court');
• (b) 44 Martin Place, Sydney (`Martin Place'); and
• (c) the MLC Centre, Sydney, and in the case of MLC Lifetime Ltd (`MLC Lifetime')
• (d) St Georges Terrace, Perth (`St Georges Terrace').

The costs incurred by the Applicants before June 1988 in acquiring these buildings as fully constructed buildings or in the case of the MLC Centre in constructing that centre, and the subsequent expenditure by the Applicants on extensions, alterations and improvements comprising `qualifying expenditure' for the purposes of Division 10D of the 1936 Act, were respectively:

                         Acquisition   Qualifying
                         Cost          Expenditure

   Martin Place          $9,354,000    $33,477,634
   London Court          $3,711,000    $127,953
   MLC Centre            $47,062,000   $142,695,226
   St. Georges Terrace   $50,874,753   $13,916,357
          

The deductions claimed pursuant to sec 124ZH as being applicable to the Applicants' ordinary classes of business were:

   Martin Place         $794,263
   London Court         $2,553
   MLC Centre           $1,135,358
   St Georges Terrace   $2,395,576
          

The Applicants disposed of each building in the years of income in issue in these proceedings, and in doing so derived a profit on the sale, calculated as being in each case, to the extent applicable to their ordinary classes of business:

            


   Martin Place         $14,377,328
   London Court         $1,007,858
   MLC Centre           $9,426,040
   St Georges Terrace   $9,252,658
          

In calculating the profits on sale, the Applicants did not exclude, from the cost taken into account, the amount of the deductions previously claimed pursuant to sec 124ZH of the 1936 Act.

The Respondent has assessed the taxpayer on the basis that by reason of the operation of sec 82(2) upon the deductions allowable under Div 10D and claimed by the Applicants as set out above, the profits of the Applicants on sale of the buildings is increased by the following amounts:

   Martin Place         $1,332,399
   London Court         $10,333
   MLC Centre           $406,458
   St Georges Terrace   $2,248,713
          

The difference between the deductions claimed and the amount added back on assessment is due to the operation of Division 8 on the calculation of the taxable income attributable to ordinary business in the years of sale from its operation on the calculation in the years in which the deductions were claimed...''

3. It is not necessary in these reasons to set out the calculations which show these differences. They are set out in appendices to the submissions filed on behalf of the Commissioner.

4. It is common ground that, because each of the taxpayer companies is an insurance company, the profits it makes on the sale of investment properties will be an ordinary incident of that business and in consequence is to be classified as income within ordinary usages and concepts and so form part of the assessable income:
The Colonial Mutual Life Assurance Society Ltd v FC of T (1946) 8 ATD 137; (1946) 73 CLR 604. Absent a special provision, that profit would be calculated in the normal way by deducting from the proceeds of sale the costs of acquisition and, if appropriate, cost of capital extensions or repairs. The question for decision is whether s 82(2) of the 1936 Act operates in the circumstances of the present case as such a special provision.

5. Relevantly s 82(1) and (2) provide:

``82(1) Where in respect of any amount, a deduction would but for this section be allowable under more than one provision of this Act, and whether it would be so allowable from the assessable income of the same or different years, the deduction shall be allowable only under that provision which in the opinion of the Commissioner is most appropriate.

82(2) Where the profit arising from the sale of any property is included in the assessable income of any person, or where the loss arising from the sale is an allowable deduction, and any expenditure incurred by him in connexion with that property has been allowed or is allowable as a deduction under this Act or has been allowed or is allowable as a deduction in assessments under the previous Act, that expenditure shall not be deducted in ascertaining the amount of the profit or loss.''

6. The reasons why the Commissioner submits that s 82(2) is applicable in the present case arises from the fact that each taxpayer was entitled to and did in earlier years of income claim deductions under s 124ZH of the 1936 Act, being part of Division 10D. Put shortly, that section permitted the taxpayer to claim a percentage (that percentage varied from 2.5% to 4% depending on the year of income in question) of ``qualifying expenditure'', generally speaking the building cost or cost of extensions, alterations or improvements to buildings that were used to produce rental income. It is necessary here to set out in more detail the provisions of Division 10D.

The building allowance - Division 10d

7. Division 10D was introduced into the 1936 Act by Act No 14 of 1983.

8. In 1980 the provisions of Division 10C had been introduced to provide for a deduction for capital expenditure on traveller accommodation (eg hotels, residential apartments) as a means of boosting investment in tourist infrastructure. Division 10D was modelled upon Division 10C and was designed to provide a similar form of deduction for capital expenditure in respect of buildings to be used for non-residential rental purposes. The allowance was to apply to buildings where the construction of the building commenced after 10 July 1982. The measure, which was designed to provide an incentive to ensure that

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structures remain up to date, was said by the Prime Minister in his Statement on Taxation and Industry Assistance delivered on 19 July 1982 to provide eligibility for ``depreciation'' on new non-residential income producing buildings. Division 10D did not initially replace Division 10C which continued to apply.

9. Initially the deduction available under Division 10D was an annual 4% of ``qualifying expenditure''. However, the 4% figure was reduced to 2½% in 1987 and remained at that level for relevant purposes, thereafter. Upon the introduction of the Income Tax Assessment Act 1997 (Cth) (``the 1997 Act'') in its so-called simplified form Division 10D was replaced by Division 43 which continued the building allowance at the 2½% rate.

10. The operative provision of Division 10D is s 124ZH which provides relevantly:

``124ZH Deductions in respect of qualifying expenditure

(1) Subject to this section and section 124ZJ, where:

• (a) there is an amount of pre-27 February 1992 qualifying expenditure in respect of a building; and
• (b) during the whole year of income, a taxpayer
  • (i) was the owner of the prescribed part and dealt with the prescribed part in the prescribed manner; or
  • ...

the taxpayer is entitled to a deduction, in his assessment in respect of income of that year of income, of an amount equal to:

• (c) in a case to which subparagraph (b)(i) applies:
  • (i) where the building...
    • (A) commenced to be constructed after 21 August 1984 and on or before 15 September 1987; or
    • (B) commences to be constructed after 15 September 1987 under a qualifying previous commitment;

    4% of the qualifying expenditure; and

  • (ii) in any other case - 2½% of the qualifying expenditure...''

11. Qualifying expenditure is ``pre 27 February 1992 qualifying expenditure'' if the relevant construction commenced (as it did in the present cases) before 27 February 1992. Relevantly qualifying expenditure is to be found defined in s 124ZG(2A) which is in the following terms:

``124ZG Qualifying expenditure

...

(2A) Subject to this section, where:

• (a) a person has incurred expenditure of a capital nature in respect of the construction of a building...;
• (b) at the time when that expenditure was incurred:
  • (i) the building... was to be owned or leased by that person; or
  • (ii)...
• (c) the building... commenced to be constructed after 17 July 1985 and construction of the building...has been completed; and
• (d) at the time of completion of construction of the building...
  • (i) in a case to which subparagraph (b)(i) applies:
    • (A) the building... was for use by that person for the purpose of producing income, was for disposal by that person to another person for use by that other person for the purpose of producing income...
  • ...

then, for the purposes of this Division:

• (e) in a case to which sub-paragraph (d)(i)(A) applies - the amount of the capital expenditure referred to in paragraph (a) shall be taken to be an amount of qualifying expenditure in respect of the building...''

12. It is significant to note that to be qualifying expenditure it was not necessary that the taxpayer who claimed the deduction be the person who outlaid the money to construct the building or make extensions to it. The expenditure had to be by a ``person'' (not the taxpayer) and either that person intended to own or lease the building (or part) or that person intended to dispose of the building or part to another who thereafter leased the building or relevant part. In either event, however, it was necessary that the builder or person to whom the builder intended to dispose of the building or part of it was to use the

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ATC 5109

building or part for the purpose of producing income.

13. So, for example, a builder might build the building intending to dispose of it to another person to be leased out as commercial space by that person. Notwithstanding that the builder had sold to the other person, so long as the other person in fact used the building for commercial leasing that other person would be entitled to the allowance. However, the allowance in such a case was not to be calculated by reference to what that person paid by way of purchase price for the building, rather it would be the relevant percentage of the amount outlaid by the builder for the construction of it or extension of it as the case may be.

14. The scheme of the legislation is well summarised in the Explanatory Memorandum to the Income Tax Assessment Bill 1983 (Cth) which, when passed, provided for the insertion of Division 10D into the Act. That memorandum states:

``Once a building qualifies for deduction under the new scheme it will continue to be depreciable on that basis for so long as it is used for eligible non-residential income- producing purposes.

... [w]here an eligible building is demolished or destroyed within the statutory 40 year period, a balancing deduction will be allowed to the extent that the remaining entitlement to deductions exceeds any insurance or salvage recoveries...

Entitlement to deductions under the scheme in respect of an amount of qualifying capital expenditure is conferred on the owner (or owners), or an eligible lessee, of the prescribed part by section 124ZH, in respect of the period that he or she uses that part in the prescribed manner.

The owner (or eligible lessee) of the whole or part of a prescribed part will be taken to have used the part in the prescribed manner at any time when he or she used that part for the purpose of producing assessable income...

A building constructed by a tax exempt organisation for use for eligible income producing purposes will give rise to an amount of qualifying expenditure for the purposes of the scheme. If the building is subsequently acquired by a person who uses the building or part of the building for the purpose of producing assessable income, deductions would become available to that person.

Similarly, a building constructed `on spec' will be capable of giving rise to qualifying expenditure. In these circumstances deductions would become available to the person who acquires the building from the builder and uses if [sic] for eligible income- producing purposes...

By virtue of subsection 124ZG(3), in determining the amount of any qualifying expenditure, expenditure incurred on plant or articles, such as lifts and air- conditioning plant that presently qualify as depreciable property is to be disregarded. Such property will continue to be depreciable under the general depreciation provisions of section 54 of the Principal Act. Similarly, expenditure incurred on property that is eligible for deduction under section 73A (scientific research), section 75B (conserving or conveying water), section 124JA (timber milling), Division 10 (general mining), Division 10AAA (transport of certain minerals) or Division 10AA (prospecting and mining for petroleum) will continue to be deductible under the relevant provisions of the Principal Act.

Sub-section (4) ensures that once a building qualifies for deduction under new Division 10D, deductions in respect of eligible (non- residential) income- producing use will continue to be allowable under that Division to the exclusion of any deduction entitlements attributable to the qualifying expenditure that might otherwise arise in respect of the future use of the building.''

15. The provisions of s 124ZG(3) and (4) as referred to in the above extracts from the Explanatory Memorandum are in the following terms:

``124ZG(3) References in subsections (1) and (2A) to expenditure of a capital nature incurred in respect of the construction of a building or of an extension, alteration or improvement to a building shall be read as not including references to expenditure in respect of any property in respect of which depreciation is allowable, or would be allowable if the property were for use for the

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ATC 5110

purpose of producing assessable income, under section 54 or expenditure in respect of which a deduction is allowable, or would be allowable if the property were for use for the purpose of producing assessable income, under section 73A, 75B, 75D 124F or 124JA or Division 10, 10AAA or 10AA or expenditure in respect of which a deduction is allowable, or would be allowable if the property were for use for the purpose of the carrying on of research and development activities, under section 73B.

124ZG(4) Where there is an amount of qualifying expenditure in respect of a building or a part of a building (which building or part of a building is in this subsection referred to as the `relevant building' ), no part of that amount, or of any amount incurred by a person in acquiring any part of the relevant building to which that amount of qualifying expenditure is attributable, shall be an allowable deduction, or be taken into account in ascertaining the amount of an allowable deduction, from the assessable income of any person of any year of income under a provision of this Act other than this Division.''

16. It may be noted that the deduction was only to be available so long as the taxpayer in fact used the building to produce assessable income. If, for example, ownership of the building should come into the hands of an entity exempt from income tax, such as a charity, the allowance would not be available to that entity. However, if that entity then sold the building to a taxpayer who was not exempt from income tax, so that the rental income from it was assessable income, that taxpayer would thereafter become entitled to the Division 10D deduction during its ownership or use. However to the extent of the period of ownership by the charity the portion of the deduction would be lost forever.

17. Next, it should be noted that if the building was destroyed an immediate deduction for the balance of the assumed 25 years (in the case of the 4% allowance) or the assumed 40 years (in the case of the 2½ allowance) of life of the building would become available to the owner of the building at the time of destruction.

18. Finally it may be said that unlike other amortisation deductions (for example, the deduction for depreciation of plant under s 54 of the 1936 Act or the corresponding provisions of s 42-190 (now s 40-285)) of the 1997 Act no clawback or balancing charge will normally arise when the taxpayer disposes of the income producing property. The following example will illustrate this. Assume that the taxpayer, whether it built the building or acquired the building by purchase from the builder thereafter had rented the building out and in consequence became entitled for say 5 years to the building allowance of 2½% a year (in total 12½% of the qualifying expenditure). So long as the profit on sale was not assessable income to that taxpayer the taxpayer would not be required to bring into income any part of the building allowance which had been allowed during the 5 years of ownership by the taxpayer, even if the profit might be said to have recouped the taxpayer any depreciation which the allowance in effect recognised.

19. The question for decision is whether this result is altered by s 82(2) in a case where the profit on sale made by the taxpayer was assessable income to the taxpayer. For completeness it may be noted again that the provisions of the 1936 Act dealing with the building allowance were replaced by comparable provisions of the 1997 Act. It is not suggested that any different result flows as a result of the rewording of the provisions.

The policy behind section 82(2)

20. Sections 82(1) and (2) have been in the Act in virtually the same form since the enactment of the 1936 Act. Although there have been minor amendments, none affect the present case or throw light upon it, except as hereafter noted.

21. The purpose of subsection (1) is quite plain. Section 51(1) of the 1936 Act was the general deduction section for what may be referred to compendiously as working expenses. However, there were many provisions of the Act which confer upon taxpayers specific deductions. A clear purpose of the first subsection of s 82 was to ensure both that more than one deduction was not to be available for the one lot of expenditure and also that the deduction which was to be conferred was to be available only under the section that was the most appropriate section. Generally it might be said that if a deduction were available under both a general section such as s 51(1) and a specific section the more appropriate section under which the deduction should be conferred

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would be the specific section. Two deductions were not allowed.

22. The second subsection is presumably designed to achieve a somewhat similar result where expenditure of the taxpayer is on the one hand an allowable deduction but on the other hand would, but for the subsection be taken into account in the calculation of profit or loss (that is to say by being deducted from the sale proceeds in computing net profit.) The Explanatory Handbook to the 1936 Act, issued after that Act was passed and thus not extrinsic material in the sense contemplated by s 15AB of the Acts Interpretation Act 1901 (Cth), but nevertheless useful in illustrating the mischief which Parliament intended to rectify makes the following point:

``Sub-section (2) of section 82 applies to cases where profit or loss results from the realization of property acquired for purposes of profit making. For instance a person may acquire real property for purposes of re-sale at a profit. It may be two or three years after purchase before a satisfactory offer is received from the property. In the meantime, the taxpayer may be receiving rent from the property and paying interest on money borrowed to purchase the property, and also paying rates and taxes, and expending money on repairs.

The interest, rates and taxes, and repairs would be allowable deductions from the rental income, and when the property was sold, section 82(2) would apply to prevent the interest, rates and taxes, and repairs being again deducted, when arriving at the profit arising from the re-sale of the property.''

23. There is no reason to suggest (and it is not suggested here) that s 82(2) was limited in its operation to cases where a profit arising from the resale of property acquired for resale at a profit was to be included in assessable income (see s 26(a) of the 1936 Act). There is no reason why it would not apply as well to a profit of an insurance company or bank, which profit was, as a result of the operations of insurance companies or banks properly to be seen as income in accordance with the ordinary concepts or usages of mankind. Nor is there any reason to suggest that the kinds of outgoings which were allowable deductions should be restricted to interest, rent and taxes. It may be noted that it was common ground between the taxpayer and the Commissioner and accepted without comment by Gibbs J in
Loxton v FC of T 73 ATC 4001 at 4002-4004; (1973) 47 ALJR 95-96 that if the profit from the sale of mining shares was included in assessable income s 82(2) would operate to prevent at least one third of the cost of the shares being taken into account in computing the profit where the taxpayer had previously been entitled to a deduction under s 77 of the Act to one third of the amount subscribed as capital to the mining company.

24. As I have already noted amendments have been made from time to time to s 82. These amendments, as the Commissioner in his submissions points out, were to exclude a particular category of expenditure from the application of subsection (2). So, for example, in 1958 subsection (3) was inserted to remove from s 82(2) certain capital expenditure incurred by primary producers in developing rural lands. Similar amendments were made in 1959, and 1968 to exclude from subsection (2) certain expenditure subscribed for by share- dealers in shares in prospecting, mining or afforestation companies. Likewise in 1968 the section was further amended to remove from s 82(2) expenditure being calls paid on shares in companies engaged in the exploration for or prospecting for minerals or in afforestation. The significance of these amendments is, so the Commissioner submits, that no similar amendment was made to s 82 so as to remove from it expenditure which was an allowable deduction under section 124ZH. The proper inference said to follow is, so it is submitted, ``that expenditure incurred by a taxpayer which is qualifying expenditure and gives rise to a deduction under section 124ZH... is expenditure to which section 82(2)... applies.''

25. However, with respect to the submission it is hard to see why that inference follows. It may well be the case that the legislature was of the view that s 82 had no application to a deduction under s 124ZH so that no amendment to s 82 was necessary to remove that expenditure from s 82 of the Act. In other words, I think that the history of amendments to s 82 ultimately tells nothing as to the interpretation of s 82 so far as its application to the present circumstances is concerned.

26. For completeness it may be noted that an amendment to s 82(2) was made in 1969 by adding the words ``has been allowed''. That

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amendment which predated s 124ZH clearly had no relationship to that section, nor does it bear upon the present problem.

The Commissioner's submission

27. The Commissioner's submission is a simple one. It can be summarised by saying that the language of s 82(2) means what it says. So, the Commissioner submits that s 82(2) should be given a literal construction and without regard to whatever anomalies that construction might create in other circumstances. Indeed, it is the Commissioner's submission that where the language of a statute clearly applies to the facts in issue and two meanings are not open, a suggested anomaly or inconvenience in relation to different facts should not require the adoption of a different construction to the present facts. Reference is made to
Walker v Shire of Flinders [1984] VR 409 at 414-415 and
International Writing Institute Inc v Rimila Pty Ltd (1993) 27 IPR 546 at 566 per Lockhart J.

28. The critical element in this submission, however, is to be found in the words ``and two meanings are not open''. It is no doubt right that where a meaning is not open reference to anomalies will, at least ordinarily, not permit the Court to adopt an interpretation that on the premise was not open to it in the first place. Although even this principle may be called into issue where the interpretation that is open is one that is ``irrational'' or operates so that ``the plain intention of the legislation has entirely failed'' or brings about a result that is ```absurd', `extraordinary', `capricious', `irrational' or `obscure''':
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292 at 4295-4296; (1908-1981) 147 CLR 297 at 304, per Gibbs CJ, at ATC 4300; CLR 311 per Stephen J and at ATC 4306; CLR 321 in the joint judgment of Mason and Wilson JJ.

29. In any event there is a question here whether only the one interpretation is open, for it is clear that where more than one construction is open the Court will adopt that construction which conforms to the legislative intent as appearing from the provisions of the statute including the policy which can be discerned from it: Cooper Brookes supra at ATC 4306; CLR 321.

The submissions of the Applicants

30. The applicants submit that the provisions of s 82, in their possible application to s 124ZH must be read having regard to the policy inherent in the latter section and in a way that would not defeat the objectives of Parliament or cut down the benefits of the incentive that Parliament enacted to promote the building of income producing property. Reference was made to
FC of T v Top of the Cross Pty Ltd and Travel Holdings (Aust) Pty Ltd 81 ATC 4563; (1981) 37 ALR 623,
FC of T v Faywin Investments Pty Ltd 90 ATC 4361; (1990) 22 FCR 461,
Totalizator Agency Board v FC of T 96 ATC 4782; (1996) 69 FCR 311 and
FC of T v Murry 98 ATC 4585; (1998) 193 CLR 605. The applicants submit that the present is a case where more than one construction is open and that in such a case it is both appropriate and necessary in choosing between the alternative constructions to have regard to the anomaly which the construction, urged upon the Court by the Commissioner, produced.

The Submissions discussed

31. It is now clear, if it ever was in dispute, that the task of construction is not one simply of taking each word used in a statute and applying the dictionary meaning of that word to arrive at a conclusion. The task is not as mechanical as that. While it is clear that the construction of a statute will commence with the words used and that it is a good start to assume that the words mean what they say, that is only a start to the process. As Gibbs CJ said in Cooper Brookes at ATC 4296; CLR 305:

``... if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust.''

32. However, the English language is seldom so clear and unambiguous that only one construction is open. It is for that reason that in judicial decisions in recent times which have discussed the process of construction great importance has been attached to ``context''. Perhaps the most famous and often cited passage to this effect is to be found in the judgment of the High Court in
CIC Insurance Limited v Bankstown Football Club Limited (1997) 9 ANZ Insurance Cases ¶61-348 at 76,853; (1995-1997) 187 CLR 384 at 408 where Brennan CJ, Dawson, Toohey and Gummow JJ in a joint judgment wrote:

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``It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.''

33. The mischief which s 82(2) was designed to overcome is clear enough. The subsection, as I have already illustrated, complements s 82(1). The first subsection ensures that a taxpayer does not get more than one deduction where the same amount is allowable under different sections. The second subsection is designed to achieve the same result in a case where instead of a deduction being available under two sections there is a deduction available under one section and a need arises to compute a profit or loss by virtue of another section. Thus subsection (2) was enacted to ensure that a taxpayer, entitled to a deduction for expenditure which he or she incurred, should not in essence obtain a second deduction for that expenditure by taking that expenditure into account on the cost side of the equation in computing a profit (or loss) where that profit would be brought into assessable income.

34. The legislative purpose of the building allowance is also obvious. It is to give a deduction for what in essence is amortisation on a fixed percentage basis for expenditure on the construction of or in certain cases extensions to buildings used to produce assessable income and thereby encourage the construction (or extension) of new commercial buildings. The amortisation, while calculated by reference to the expenditure incurred, is not given only to the person who expended the money. The criterion relevant to the deduction is not that the taxpayer has expended the money, although clearly someone must have. The criterion for the allowance is use of the building as non- residential premises for the purpose of gaining assessable income.

35. The incentive which the building allowance is intended to provide would obviously be cut down if the deduction is clawed back when the building is sold, for while the allowance would still be given there would be only a timing advantage. Express provisions permit a clawback (generally referred to as a balancing charge) in other circumstances, for example, in the 1936 Act there will be a clawback for the allowance for depreciation (s 59), research buildings (s 73A(4), mining and quarrying expenditure, including exploration, development and transport (ss 122K, 123C, 124AM ), timber operations (ss 123G, 124JB ), and dealings with industrial and intellectual property (s 124T). Other provisions requiring a clawback and found in the 1997 Act include s 42-190, and in the now repealed provisions of s 40-285, Division 44, Division 46 and Subdivision 380D. No such provision is to be found in Division 43, the successor to Division 10D (sec 40-45 and Subdivision 43-H)

36. When the interaction of s 124ZH and s 82(2) is examined it seems to me that the proper interpretation of s 82(2) is that the effective double deduction that is prevented by the subsection is one where the criterion for the deduction is expenditure by the taxpayer in respect of property that is subsequently turned by the taxpayer to account. The sub-section is not concerned with the case where the criterion of deductibility is not expenditure incurred by a taxpayer at all, but rather the criterion of deductibility is use by the taxpayer of non- residential property to produce assessable income, irrespective of who the person was who initially incurred the expenditure. In other words the question of who incurred the expenditure is an adventitious circumstance in

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the scheme of the building allowance. And this is so, notwithstanding that some person must have incurred the expenditure in circumstances such that it becomes ``qualifying expenditure''. Once the interaction of the sections is interpreted in this way the obviously anomalous consequences implicit in the interpretation put forward by the Commissioner disappear. Different results will not then follow depending upon whether the taxpayer who realises the property was the person who built the building or extended it and who incurred expenditure which was qualifying expenditure or was a subsequent purchaser of the building who did not himself or herself incur the qualifying expenditure but used the building to gain assessable income. And, with respect to the submission of senior counsel for the Commissioner, it can not be said that the language of s 82(2) is so clear, so intractable, that this interpretation, which gives effect to the legislative policy of both s 124ZH and s 82(2) is simply not open.

37. In the course of argument I was referred to a comment I made by way of dicta in the course of my judgment in
Australia and New Zealand Banking Group Ltd v FC of T 94 ATC 4026 at 4044; (1994) 48 FCR 268 at 291-292. In that case in a judgment which was agreed with by the other members of the Court I said:

``Counsel for the Bank referred us to the notes to s 82(2) contained in the explanatory handbook, showing the differences between the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1922-1934, issued by authority of the Commonwealth Treasurer on 31 August 1936. That handbook does not stand in the same position as explanatory memoranda to legislation to which regard may be had in interpreting that legislation, at least in the case of ambiguity under s 15AB(2)(e) of the Acts Interpretation Act 1901 (Cth). Publication of the handbook postdated the date of assent to the Income Tax Assessment Act 1936 on 2 June 1936. Nevertheless, regard might be had to that publication as indicating the mischief to which s 82(2) was directed, that sub-section having no counterpart in the prior legislation. The explanatory handbook has the following comment:

`Sub-section (2) of section 82 applies to cases where profit loss results from the realization of property acquired for purposes of profit making. For instance a person may acquire real property for purposes of re-sale at a profit. It may be two or three years after purchase before a satisfactory offer is received from the property. In the meantime, the taxpayer may be receiving rent from the property and paying interest on money borrowed to purchase the property, and also paying rates and taxes, and expending money on repairs.

The interest, rates and taxes, and repairs would be allowable deductions from the rental income, and when the property was sold, section 82(2) would apply to prevent the interest, rates and taxes, and repairs, being again deducted, when arriving at the profit arising from the re- sale of the property.'

While there is no reason to read s 82(2) as limited to that class of profits which would have fallen within s 26(a) as arising from the sale by a taxpayer of property acquired, inter alia, for the purpose of profit-making by sale, the difficulty with applying s 82(2) in the present case is that the deduction granted for depreciation is arguably not a deduction for expenditure incurred by a taxpayer in connection with property sold, but rather allowance is made for depreciation by a calculation which takes into account as the starting point to which the rates of depreciation are to be applied, the depreciated value of the unit of property. The starting point of the calculation `depreciated value' is the purchase price of that property. In these circumstances I doubt the correctness of applying s 82(2). It is, however, in my opinion, unnecessary to reach a final conclusion on that matter.''

38. It is not necessary in the present case to consider the interaction between s 82(2) and the depreciation provisions and I refrain from doing so. But it is perhaps important to point out that if s 82(2) does not apply to the deduction for depreciation it is not so much, as was suggested in argument, because what is deductible is merely a percentage of expenditure incurred over a period but rather that the starting point for the calculation of depreciation is not expenditure which the taxpayer incurs, but rather ``depreciated value'' which in some circumstances is the amount which the taxpayer

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himself or herself incurs as expenditure on the capital asset to be depreciated, but which in other circumstances may represent amounts incurred by another person in the case where the taxpayer has purchased the depreciating asset from that other person.

39. Accordingly I am of the view that the objection decision in each case should be allowed and that the taxable income of the applicants should be reduced in accordance with these reasons.

Penalty

40. Because I am of the view that the assessment should be set aside on the basis that the Commissioner was not authorised to apply s 82(2) in the circumstances of the present case, it follows that the penalty included in the assessment in reliance upon s 226G of the 1936 Act was likewise not authorised. However, in case the matter should proceed further I would set out shortly my views on the penalty on the assumption that the assessment was correct in taking into account the building allowance amounts in computing the profits on sale of items where the building allowance was allowed to the relevant applicant.

41. Section 226G provides:

``Subject to this Part, if

• (a) a taxpayer has a tax shortfall for a year; and
• (b) the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.''

42. It is submitted by the Commissioner that there has been a failure on the part of the applicants or their tax agent to take reasonable care by failing to include in the returns the adjustment of cost required if s 82(2), contrary to my view, applied.

43. The relevant facts I would find to be as follows. First, it must be said that the returns of the applicant companies were prepared under the supervision of a well-known firm of chartered accountants which specialised in income tax and had wide experience in income tax matters. Secondly, the person concerned with the preparation of the returns for the income years in question, Mr Mills, then a director of Greenwood & Freehills Pty Limited, with considerable tax experience including many years working for or advising life insurance companies, had formed a view that s 82(2) did not require the adjustment which the Commissioner now submits it did. It may be inferred that others in Greenwood & Freehills took a similar view. Indeed in correspondence with the ATO it is asserted, and I have no reason to disbelieve the assertion, that the view Mr Mills took was the view in the industry generally. At the time Mr Mills formed his view, and clearly the view was a bona fide view and even if wrong was at worst, highly arguable, the decision in the Australia and New Zealand Banking Group had been handed down. However, as I have already noted, what was there said was dicta and in any event it is clear that the question of the application of s 82(2) in respect of depreciation was left undecided. I do not think that the applicants would have been entitled to rely upon the dicta in that case to any substantial extent.

44. In 1994 Mr Mills became concerned, as a result of amendments to s 160ZK(1A) (which had the result that the Building Allowance would be taken into account in computing capital gains) whether s 82(2) might in some way require the building allowance to be taken into account in the case of life companies which had claimed the building allowance and subsequently sold the relevant asset. He instructed Mr Taylor, then a senior tax manager with Greenwood Challoner and the person who at the time had the day to day responsibility for the tax affairs of the applicants, some time in early 1994 to call Mr Reich, an officer of the Australian Taxation Office, in the section of the ATO dealing with life insurance companies. Mr Taylor, as requested phoned Mr Reich and asked him whether there was a need for a clawback in calculating the gain made on disposal of buildings where Division 10D deductions had been claimed. Mr Reich replied that he did not see on what basis such an adjustment would be required.

45. I should say that generally it is unwise for taxpayers to make oral enquiries of officers of the ATO and equally unwise of officers to answer those enquiries verbally. (I put to one side the procedure now adopted for oral rulings in non-complex matters). It is highly desirable that dealings between a taxpayer and the ATO

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on matters which are complex be in writing to ensure that there is no dispute later either as to the facts represented to be relevant to the advice sought or the advice which is given. However, it is not suggested here that the conversation did not take place or that the advice given was different from that which Mr Taylor recorded in his affidavit. Indeed, Mr Taylor was not cross- examined on his affidavit and accordingly I would accept his evidence.

46. The conversation to which I have referred took place at a time when there was no published ruling or determination dealing with the question of the meaning of s 82(2) or its application to the building allowance.

47. The 1996 taxation returns were lodged on 23 December 1996 and the 1997 returns were lodged on 1 December 1997.

48. It was only on 3 June 1998 that a taxation determination (TD 98/D5) on the subject was issued for public comment. That was followed by a final determination TD1999/1 which was published on 24 March 1999. The draft and final determination set out publicly and for the first time the Commissioner's view on the interaction of s 124ZH and s 82(2). On 6 November 2000 the ATO issued a position paper in which the view asserted in the draft and final determinations was repeated.

49. It can be said, however, that perhaps the applicants and their tax agents might have been alerted to what became the Commissioner's position by a request for information about Division 10D deductions which was received on 19 July 1999 and the correspondence which thereafter followed. But that was all long after the returns in question had been lodged and the draft determinations had issued.

50. In the statement of reasons which accompanied notification of the disallowance of the applicants' objections the Commissioner said, inter alia:

``The exercise of `reasonable care' would have required the taxpayer to have made attempts to seek the ATO's view about whether subsection 82(2) applied to exclude deductions claimed under section 124ZH when calculating the assessable profits and deductible losses on the disposal of the buildings. Furthermore, it would have required that the taxpayer to have informed the ATO that it disagreed with the view in TD 1999/1.''

51. It may be said that it is hard to see how the applicants or their agent could have taken into account in preparing the returns lodged in 1996 and 1997 the views expressed in TD 1991/1 when those view did not appear publicly for some years after the returns were lodged. Further, the Commissioner's statement did not take into account the telephone advice which had been given to the applicants by Mr Reich.

52. It is not appropriate in this case to endeavour to set out what would constitute reasonable care in all circumstances. For much will depend upon the facts of a particular case. Some assistance may be obtained, however, from the decision of the full Court of this Court in
North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293. In that case the Commissioner claimed that the appellant had not exercised reasonable care in lodging a return omitting a percentage of subscriptions allocated to Clubkeno Holdings on the basis that the amounts were not assessable because they were mutual receipts and not the proceeds of trading and in circumstances where the club knew that the Commissioner took a contrary view. Notwithstanding that the Court agreed with the Commissioner that the amounts in question were assessable income it was held by Spender, Finn and Merkel JJ that it had not been shown that the Club had not exercised reasonable care. The Administrative Appeals Tribunal, which had affirmed the penalty did so both because there had been a failure to disclose an opinion on the matter which the club had sought, and the failure to do so entitled the Tribunal to infer that the opinion would not assist the club's case and because it was said to be imprudent not to have sought a ruling where the circumstances were that the club was aware there was a real conflict of views. It was held, however, on the appeal that there was no basis for a finding that the club had failed to exercise reasonable care. In particular failure to seek a binding private ruling from the Commissioner was not in the circumstances failure to exercise reasonable care.

53. In my view the present is also a case where on the facts it cannot be said that there was a failure to exercise reasonable case. Indeed, the present case is stronger than the facts in the North Ryde RSL Community Club case. Here, the taxpayer through its accountants had made an enquiry and been told that the view it took, a view taken in good faith and

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highly arguable, was correct. The view was one held generally in the insurance industry. It is true that it could have sought a binding ruling from the Commissioner, but clearly failure to seek a ruling will not in every case be equated with failure to exercise reasonable care. Indeed, if it were, the Commissioner would be so inundated with applications for rulings that he would be unable to give answers to them. A taxpayer who relies upon expert advice as here where the advice is held generally in the industry and does not conflict with any statement made by the Commissioner and indeed is confirmed by enquiry of the ATO is not required to obtain a ruling to guard against an allegation that the taxpayer has not exercised due care.

54. Hence, even if I had been of the view that the applicants should fail on the question of the interrelationship of s 124ZH and s 82(2) I would have set aside the objection decision to the extent of the penalty imposed in purported reliance on s 226G of the 1936 Act.

THE COURT ORDERS THAT:

1. the application be allowed.

2. the objection decision dated 8 June 2001 against the amended assessment of MLC Limited for the year ended 30 June 1996 (Objection Reference Number CRS 59617 and 59625) be set aside and the matter remitted to the Respondent to be reassessed in accordance with law

3. the Respondent pay the applicant's costs.