I.C.I. Alkali (Australia) Pty. Ltd. (in Voluntary Liquidation) v. Federal Commissioner of Taxation.

Judges: Barwick CJ

Gibbs J
Mason J

Court:
Full High Court

Judgment date: Final orders made 19 December 1978.

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Gibbs J.: I have had the advantage of reading the reasons for judgment prepared by the Chief Justice and can in consequence deal with the questions that arise more shortly than would otherwise have been the case.

The taxpayer claims that the amount of moneys which it paid in effecting improvements upon certain land in each of the income years 1966 and 1967 is an allowable deduction under sec. 85(1)(b) of the Income Tax Assessment Act 1936 (as amended) (Cth). The claims in respect of three areas, Nos. 234, 389 and 600, typify all the taxpayer's claims. In order to succeed in full the taxpayer must establish -

• (1) that each of the areas was ``the subject of the lease'', within the meaning of sec. 85(1)(b);
• (2) that under sec. 85(1)(b) a taxpayer who assigns a lease is entitled to a deduction in respect of moneys paid in effecting improvements upon land which is the subject of the lease, notwithstanding that the moneys were paid before that lease was granted; and
• (3) that sec. 85 is not rendered inapplicable by the provisions of sec. 88B

The learned primary judge held that area 234 was subject to a lease. This part of his decision was not challenged and it was in my opinion correct. However he held that neither area 389 nor area 600 was subject to a lease. For reasons which will appear I need not decide this question, but will, where necessary, assume in favour of the taxpayer that each of those areas was subject to a lease.

The second question that I have mentioned arises in respect of areas 234 and 389. A lease of area 234 was granted to another company for a term of twenty-one years from 1 April 1928, and was assigned to the taxpayer on 17 August 1937. In 1949 the lease was renewed for a further term of twenty-one years. The expenditure claimed as a deduction in respect of area 234 was made by the taxpayer during the term of the original lease; there was no expenditure on improvements during the period of the renewed lease. A ``lease'' of area 389 for a term of twenty-one years from 1 April 1938 was renewed in 1957 for a further term of twenty-one years. Of the

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expenditure claimed in respect of this area some was made before and some after the renewal. In the case of area 600 there was no renewal and all the expenditure was made after the ``lease'' was granted. The taxpayer assigned the ``leases'' of all three areas on 26 August 1966.

It may in my opinion be accepted that a renewal of a lease is ``a new lease, a new demise'': see
Gerraty v. McGavin (1914) 18 C.L.R. 152 , at pp. 163-4 ;
Friedman v. Barrett , Ex parte Friedman (1962) Qd.R. 498 , at pp. 507-508 . It was contended on behalf of the Commissioner that sec. 85 allowed a deduction for an amount paid in effecting improvements only if the payment was made during the term of the lease current at the time of the assignment. The learned primary judge rejected this contention and in my opinion he was correct in doing so. The relevant words of sec. 85(1) are as follows:

``Where, in the year of income, a taxpayer assigns or surrenders a lease, any amount which has been paid by him -

• ...
• (b) in effecting improvements upon land which is the subject of the lease;
• ...

shall, subject to this section, be an allowable deduction.''

There is nothing in the subsection that says that the money is to be spent upon the land while it is subject to the lease. The words ``which is the subject of the lease'' describe the land by reference to the situation at the time of the assignment or surrender. ``The lease'' in para. (b) means the lease which the taxpayer assigns or surrenders. But if the land is subject to a lease which the taxpayer assigns or surrenders in the year of income it answers the description contained in the subsection, and there is no reason to import an additional requirement; not there expressed, that the expenditure should be made during the currency of the lease assigned or surrendered. It may be assumed that sec. 85(1)(b) was enacted to provide for the situation where a taxpayer who has expended money on land in the expectation that he will have the benefit of a lease for a particular length of time is defeated in that expectation. However such a situation may arise when the money is spent on the land before the lease is actually granted, as of course is clearly the position under sec. 85(1)(a) which refers to money paid by a taxpayer to acquire the lease. In any case, in a taxing statute it is impermissible to restrict the ordinary meaning of plain words which give a benefit to a taxpayer where this is not necessary to render those words harmonious with other provisions of the statute or to avoid an obvious absurdity or injustice.

The third question is whether sec. 85 applies to the present case. The provisions of that section, and of certain other provisions of Div. 4 of Pt. III of the Act, are rendered inapplicable to mining leases, or leases of land for mining purposes, by sec. 88B, unless an election is made under sec. 88B(5). It should, I think, be emphasised that sec. 88B does not entitle a taxpayer to a deduction. That is the effect of sec. 85. The provisions of sec. 88B, in their application to deductions, are disentitling; where they apply, they deprive the taxpayer of a deduction to which sec. 85 would otherwise entitle him; they take cases out of sec. 85, rather than bring them within it.

In the present case it can hardly be doubted that if there were leases in respect of each of three areas they were mining leases or leases for mining purposes, or that there were documents which satisfied the requirements of sec. 88B(4). However there are two matters to be considered in relation to the possible application of sec. 88B. One of those matters is whether, on the proper construction of sec. 88B, the election that is necessary to be made in order to prevent the operation of sec. 88B(1)(b), and thus to prevent sec. 85 from being rendered inapplicable, is an election made in respect of the grant. If that is the true construction of the section, the elections in the present case, which were made on 18 January 1967, and which stated that the taxpayer elected that sec. 88B ``shall not apply in relation to the said assignment'', were ineffective to prevent the operation of sec. 88B(1).

The learned primary judge was of the opinion that sec. 88B(5) should be construed distributively, and in a sense that is correct. But it does not follow that a notice made and lodged within the prescribed time after the assignment of a lease, and expressing an election that the section should not apply in

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respect of the assignment, is sufficient to prevent the operation of sec. 88B(1). The words of that subsection lead to the contrary conclusion. So far as is relevant they provide:

``Where a mining lease is granted, or a lease of land other than a mining lease is granted for mining purposes, and an election is not made under sub-section (5) of this section in respect of the grant -

• ...
• (b) section eighty-five of this Act shall not apply -
  • ...
  • (ii) in relation to an assignment or surrender of the lease by the lessee or the disposal by the lessee of goodwill or a licence in respect of a business carried on upon the leased land;
  • ...''

To repeat those words is to show that read alone they are plain and unambiguous; where a mining lease is granted, or a lease of land other than a mining lease is granted for mining purposes, and an election is not made in respect of the grant , sec. 85 shall not apply in relation to an assignment of the lease by the lessee. To ensure that sec. 85 will not be rendered inapplicable in such a case it is necessary to make an election in respect of the grant. The taxpayer relied on the fact that sec. 88B(5) speaks of an election that ``this section shall not apply in relation to the grant, assignment or surrender'', and submitted that these words refer to an election to exclude the operation of the whole section. But subsec. (5) is distributive in the sense that the words ``as the case may be'' need to be implied. The operative words of sec. 88B are to be found in subsec. (1), (2) and (3), which deal respectively with the grant, the assignment and the surrender of mining leases or leases of land for mining purposes. If an election is not made in respect of the grant, the effect of subsec. (1) is that sec. 85 shall not apply in relation to an assignment of the lease by the lessee. That subsection has the effect of excluding the application of sec. 85 in the present case (assuming that sec. 88B applies where the lease was granted before the section came into force, a question with which I am about to deal). Subsection (2) does not detract from the force of subsection (1). Paragraph (b) of that subsection provides that where a mining lease is assigned, or a lease of land other than a mining lease is assigned for mining purposes, and an election is not made in respect of the assignment, sec. 85 shall not apply -

``(i) in relation to the assignment of the lease by the assignor...; or

(ii) in relation to an assignment or surrender of the lease by the assignee...''

Thus if a mining lease is assigned by the lessee, sec. 85 will not apply in relation to that assignment unless an election is made in respect of the grant (sec. 88B(1)(b)(ii)) and in respect of the assignment (sec. 88B(2)(b)(i)). On the other hand, if a mining lease is assigned, and no election was made in respect of the grant, but an election is made in respect of the assignment, sec. 85 will not be rendered inapplicable in respect of a subsequent assignment by the assignee.

No election was made in respect of the grant of the ``lease'' of any of the three areas in the present case. In the case of areas 389 and 600, it follows that the taxpayer is not entitled to the deduction claimed. If those areas were not the subject of leases, of course sec. 85 does not apply. But assuming that they were the subject of leases, sec. 88B(1)(b) has the effect that sec. 85 still does not apply because no election was made in respect of the grant of either lease. There is no doubt that sec. 88B(1)(b) applies in respect of the grant of those ``leases'', both of which were made after 6 November 1954; in the case of the area 389 the original ``lease'' was granted before 6 November 1954, but the renewal, which as I have said was a new ``lease'', was made before that date.

The position is however different in respect of area 234. Both the lease and the renewal were made years before 6 November 1954. The question that then falls for decision is whether sec. 88B has any application to the case of area 234. That section was inserted in the Act by sec. 10 of the Income Tax and Social Services Contribution Assessment Act 1954. By sec. 13(4) of that Act it was provided as follows:

``The amendment effected by section ten of this Act applies in respect of a grant, assignment or surrender of a lease made after the commencement of this Act.''

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The Act commenced on 6 November 1954. I agree with the conclusion of the learned primary judge that in sec. 13(4) the word ``made'' qualifies the words ``grant'', ``assignment'' and ``surrender'' rather than the words ``a lease''. The amendments apply not only in respect of a grant made after 6 November 1954, but also in respect of an assignment or surrender made after that date. However it does not follow that where the amendment applies in respect of an assignment, made after 6 November 1954, of a lease granted before that date, it applies also in respect of the grant of that lease. I have already set out the commencing words of sec. 88B(1):

``Where a mining lease is granted, or a lease of land other than a mining lease is granted for mining purposes...''

Those words in their natural sense are prospective; they refer to the case where a lease of the kind referred to is granted after the section comes into operation. On the other hand, sec. 88B(2) commences as follows:

``Where a mining lease is assigned, or a lease of land other than a mining lease is assigned for mining purposes...''

That subsection applies where the assignment takes place after 6 November 1954, even though the lease was granted before that date. The same is true of subsec. (3) which deals with surrenders. The natural meaning of these words is confirmed by sec. 13(4). Section 88B(1) applies in respect of a grant made after 6 November 1954. Section 88B(2) applies in respect of an assignment made after 6 November 1954, even though the lease was granted before that date. However sec. 88B(1) does not apply in respect of a grant made before 6 November 1954 of a lease which was assigned after that date. If sec. 88B(1) applied to leases made before 6 November 1954, it would have an unfair and capricious operation: it would exclude sec. 85, because no notice of election had been given at a time when the section requiring the giving of the notice had not been enacted. That however is not the meaning or effect of the provision.

For these reasons, in my opinion, sec. 88B(1) did not apply in respect of the grant of the lease of area 234; for that matter, sec. 88B(2) did not apply in respect of the assignment of that lease to the taxpayer. The provisions of sec. 85 were therefore not rendered inapplicable in respect of area 234. It appears from two passages in the judgment of the learned primary judge that this was indeed conceded by the Commissioner at the hearing of the matter at first instance, that is, of course, on the hypothesis that there was a lease, which the Commissioner disputed.

For these reasons, I would answer the questions asked as follows:

• 1. Sections 85 and 88B(2) and (3) so apply, but sec. 88B(1) does not so apply.
• 2.
  • (a) Yes.
  • (b) Yes.
  • (c) Unnecessary to answer.
• 3. Unnecessary to answer.
• 4. Unnecessary to answer.
• 5.
  • (a) Yes.
  • (b) Unnecessary to answer.
• 6.
  • (a)(i) and (ii) Yes.
  • (b)
    • (i) In the case of Area No. 234, No.
    • (ii) In the case of Areas Nos. 389 and 600, Yes, the whole amount so claimed should be disallowed.
• 7. Unnecessary to answer.
• 8. No.
• 9.
  • (a) Yes, the whole sum.
  • (b) No.
  • (c) No.

The practical result will be the same as that flowing from the order made by the learned primary judge, although for different reasons. I would therefore dismiss both appeals, but would vary the order by substituting the answers shown above.