Case L24

Judges:
AM Donovan Ch
LC Voumard M
G Thompson M

Court:
No. 2 Board of Review

Judgment date: 24 April 1979.

A. M. Donovan (Chairman); L. C. Voumard and G. Thompson (Members): In this reference an unusual and apparently unprecedented question arises for decision. The problem to be solved involves the quantum of the deduction allowable in respect of depreciation of certain plant or articles owned by the taxpayer, a natural person, during the year of income ended 30 June 1976. The occupation of the taxpayer as stated in his return is ``Surgeon and Farmer''.

2. In short, the taxpayer on the last day of the said year of income, 30 June 1976, purchased two heavy haulage transport units and commenced business as a heavy haulage contractor on that day. His claim for depreciation amounted to $37,488 and was based on the relevant rates per centum of the cost price for a full year, namely 20% per annum under sec. 55, and doubled pursuant to sec. 57AD(3). But the Commissioner reduced this claim and allowed only 1/365th thereof, namely $103, that being the proportion of the amount claimed applicable to the relevant one day of the year concerned.

3. A statement of agreed facts was by consent tendered at the hearing. The factual picture will emerge clearly from these agreed facts, which read as follows:

(a) On 30 June 1976, the taxpayer became the owner of a four axle low loader and Mercedes Benz prime mover.
(b) The said low loader and prime mover were used by the taxpayer on 30 June 1976, for the purpose of producing assessable income.
(c) The cost of the said low loader was $24,743 and the cost of the said prime mover was $68,980.
(d) The said low loader and prime mover were each first used for the purpose of producing assessable income by the taxpayer on 30 June 1976, and before being used for that purpose by the taxpayer had not been used or held for use for any other purpose by the taxpayer or for any purpose by any other person.
(e) The taxpayer elected in accordance with sec. 56 of the said Act to claim depreciation in respect of the said low loader and prime mover on the basis of the percentage fixed by or under sec. 55 of the said Act of the cost of each unit.
(f) The annual depreciation per centum in respect of the said low loader and prime mover pursuant to the provisions of sec. 55 of the said Act was 20%.

4. In his return the taxpayer, in a schedule thereto, set forth the details of his commencement in business as a heavy haulage contractor. The relevant items of this schedule read:

``1. Commencement of Business

The proprietor purchased heavy haulage transport units and commenced business as a heavy haulage contractor on 30 June 1976.

2. Depreciation

Depreciation schedule is attached, with accelerated depreciation claimed under Section 57AD of the Income Tax Assessment Act, based on the prime cost method.

3. Investment Allowance

The assets were purchased and installed ready for use and were operating at 30 June 1976. Accordingly, the investment allowance of 40% is claimed on a total cost of $93,723.
      i.e. 40% of $93,723 = $37,489
                            -------
          
4. Net Loss for Year
      Net Loss as per Profit
          and Loss Account       $41,457
      Investment Allowance
      (as above)                  37,489
                                 -------
      Net Loss for year          $78,946
                                 -------''
        

5. The profit and loss account for the year ended 30 June 1976, showed details as follows:

        
                                             ``1976       1975
      Cartage Receipts                     $    210       Nil
                                               ----       ----
      Less: Operating Expenses
      Bank charges                               16
      Depreciation                           37,488
      Fuel and oil                              313
      General expenses                           10
      Insurance                               2,478
      Licences and permits                    1,058
      Wages                                     304
                                            -------       ----
      Total Expenses                        $41,667       Nil
                                            -------       ----
      Net Loss                              $41,457       Nil''
                                            -------       ----

6. The taxpayer in his depreciation schedule claimed, pursuant to sec. 57AD, in respect of the low loader, 40% of cost $24,743 in the sum of $9,896, and in respect of the prime mover, 40% of cost $68,980 in the sum of $27,592. Heavy haulage rates were claimed for the reason that the said items of plant were used principally for the transportation of heavy duty bulldozers. In his original assessment as indicated in the adjustment sheet the Commissioner, in effect, allowed 40% depreciation for one day only on the said low loader and prime mover. This resulted in a disallowance of the sum of $37,385 depreciation of plant and equipment, to which the taxpayer lodged objection.

7. The principal ground of objection upon which the taxpayer relied was: ``That the whole of the said sum of $37,385 is an allowable deduction under the provisions contained in Sections 54, 55, 56, 56A and 57AD of the Income Tax Assessment Act 1936 (as amended) relating to the depreciation of plant.'' The Commissioner disallowed the taxpayer's objections.

8. Subsequently the Commissioner raised an amended assessment in order to reduce the investment allowance on the said low loader by the sum of $7,201, which resulted in increasing the taxable income of the taxpayer from $50,504 to $57,705. At the hearing the Board was informed by learned counsel for the taxpayer that there is no dispute as to this particular disallowance.

9. This reference therefore raises the fundamental question of the proper quantum of depreciation to be allowed on the prime cost method - that is, broadly whether it is simply a mathematical calculation applying the appropriate rate of depreciation as the taxpayer contends, or whether, as the Commissioner has contended, the sum allowable is to be apportioned according to the period of time during the year of income for which the taxpayer has owned and used the said items of plant for the purpose of producing the assessable income. There is no question as to the percentage or rate of depreciation allowable over the entire span of the effective life of the said units of property. The question is rather what is allowable in the particular year ended 30 June 1976, since, in the ordinary course of events, the mathematical equation remains the same over the relevant period of years.

10. This brings the Board now to an analysis of the collocation of sections dealing with depreciation allowed or allowable, namely sec. 54 to 62 of the Act. The point of commencement is sec. 54, the relevant part of which reads:

``Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.''

11. Examples of the concept of allowing partial depreciation can be found in the Act, e.g. sec. 54(3), which has reference to leisure facilities, makes reference back to sec. 51AB(3) which should be read with sec.

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54(4), which in turn specifically provides that sec. 54(3) ``does not prevent depreciation of any property from being an allowable deduction to the extent, if any, to which the depreciation took place during a part of the year of income...''. [Emphasis added] This, as a matter of statutory interpretation, may also be compared with the perhaps more familiar concept embodied in sec. 51(1) of the Act which provides, in effect, for present purposes, for the allowance of losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. Further, there are specific provisions in the Act which permit an apportionment of depreciation, including sec. 61 to which some attention will be paid at a later juncture.

12. From sec. 54 one progresses naturally to sec. 55 of the Act, which merits some particular attention in this case. Subsection (1) of sec. 55 is the relevant provision for present purposes, and reads:

``In the first calculation of the depreciation to be allowed in respect of any unit of property, an estimate shall be made by the Commissioner of the effective life of the unit assuming that it is maintained in reasonably good order and condition, and the annual depreciation per centum shall be fixed accordingly.''

Subsection (2) is not relevant to present matters for decision.

13. It was submitted by learned counsel for the taxpayer that ``annual depreciation'' means simply the depreciation in each year, and the ``per centum'' is a fraction thereof. It was, of course, agreed by the parties that the annual depreciation in respect of the low loader and prime mover pursuant to the provisions of sec. 55 of the Act was 20 per cent. This in turn was doubled under sec. 57AD of the Act.

14. Section 56 of the Act is a critical provision in this reference and deals with, on the one hand, what is known as the diminishing or depreciated value method and, on the other, the prime cost or straight line method of depreciation allowable in respect of a unit of property. Subsections (1) and (2) of this section read as follows:

``(1) Subject to this section, the depreciation allowable under this Act in respect of a unit of property in relation to a year of income is-

(a) one and one-half times the percentage fixed by or under the last preceding section, or under the previous Act, of the depreciated value of that unit at the beginning of the year of income; or

(b) at the option of the taxpayer, to be exercised in accordance with the next succeeding section, the percentage fixed by or under the last preceding section, or under the previous Act, of the cost of that unit.

(2) The deduction allowable in respect of any unit of property shall not exceed the depreciated value of that unit.''

15. It will be specially noted that a distinction is drawn in sec. 56 between the depreciation allowable firstly pursuant to the depreciated value method, and secondly the prime cost method. The most relevant and important difference is that in the first case the depreciation allowable is ``one and one-half times the percentage fixed... at the beginning of the year of income''. In the second case, that of the prime cost method, which is the method in issue in this reference, the percentage is fixed in relation to the cost of the unit of property. It is agreed by the parties that the Board is here concerned with the latter method, and not the method known as the depreciated or diminishing value method. Counsel for the taxpayer in argument specifically pointed out that there may be other considerations in the latter case, with particular reference to fixing the value at the beginning of the year.

16. This latter method seems to us more readily to allow an apportionment of depreciation having regard to the value of the property at the beginning of the year. Thus, the action taken by the Commissioner might well be said to be correct if the depreciated value method had been adopted. But the Board is here concerned with the prime cost method, in which event it is argued that the taxpayer is not restricted to any proportion or partial depreciation for the one day of the year during which the plant was used.

17. Section 61, which can be said to be the general provision relating to apportionment of depreciation, reads:

``Property used partly for producing assessable income.

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Where the use of any property by the taxpayer has been only partly for the purpose of producing assessable income, only such part of the deduction otherwise allowable under section fifty four or section fifty nine of this Act in respect of that property as in the opinion of the Commissioner is proper shall be an allowable deduction.''

This section deals with the situation where property is used partly for producing assessable income and partly for other purposes. This provision is not applicable to the facts of the present case, and can be left out of further consideration.

18. Counsel for the taxpayer canvassed other sections of the Act in the course of argument but concentrated his attention largely upon the proper interpretation and application of sec. 54, 55 and 56 of the Act. Attention was also drawn to sec. 57AA, dealing with the special depreciation allowance to primary producers, and in particular to the introductory words:

``(1) Notwithstanding anything contained in the last four preceding sections, in the case of a unit of property to which this section applies-

(a) the annual depreciation allowable under this Act shall be twenty per centum of the cost of the unit; and

(b) the deduction shall be allowed in accordance with this section.''

It was then submitted that this sub-section ``goes back and leaves alone'' sec. 54 and following sections. It was also submitted that this provision effectively provides that depreciation allowable under this Act in respect of a unit of property in relation to a year of income is the percentage fixed by sec. 55 of the cost of the unit.

19. The Board was also referred to sec. 57AA(7) of the Act, which reads:

``Deductions allowable in accordance with this section in respect of a unit of property shall commence to be allowed in the assessment of the taxpayer upon his income of the year of income during which that unit is first used for the purpose of producing assessable income, or is first installed ready for use for that purpose, and no such deduction shall be allowed in the assessment of the taxpayer upon his income of a year of income after the fourth year of income succeeding that year.''

Some significance was attached to this provision in its relation to the issues in the present reference, but emphasis was again placed upon sec. 56 of the Act. The further point was repeated that no question of apportionment arises here. This case, according to the argument, is to be distinguished, for instance, from the provisions of sec. 73A(3) pursuant to which the Commissioner is empowered in his discretion to make an apportionment of a claim for expenditure incurred or made outside Australia and the business in relation to which it is so incurred or made is carried on partly in and partly out of Australia. This power is derived from the special statutory provision in the said sub-section.

20. The gravamen of these submissions appears to be that specific statutory power is required in the Act to enable the Commissioner lawfully to apportion any expenditure incurred or a depreciation allowance claimed. Reference has already been made in this decision to the specific statutory provisions of the important general section, sec. 51 of the Act, in their broad context. Without dealing further or more specifically with counsel's submissions on sections in pari materia, suffice it to observe that the most telling argument advanced on behalf of the taxpayer was that, in the present case, dealing as it does with the prime cost method of depreciation rather than the depreciated value method, there is no warrant in the whole of the collocation of relevant sections which authorises the Commissioner to make the apportionment which he did in order to allow only 1/365th of the sum claimed.

21. There arises next a question under sec. 54 of the Act concerning the true meaning and legal effect of certain terminology in that section, to wit, ``depreciation during the year of income'' and the use of the subject plant ``during that year'' for the purpose of producing assessable income. It was submitted in this context that ``during'' bears the meaning of ``at some time in'' or ``in'' the year of income, and that ``during'' means ``in the

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course of'' and not ``throughout''. The wording of other sections of the Act, such as sec. 17, sec. 53, sec. 56, sec. 67, sec. 69 and sec. 70, according to the argument of learned counsel, appears to demonstrate that the terms ``during'' and ``in'' are used interchangeably. If the term ``during'' were construed to mean ``throughout the whole year'', the case for the taxpayer must fail.

22. Much depends upon the particular context and the subject matter in question in deciding this point. As was held in
Thomson v. Minister of National Revenue (1945) 3 D.L.R. 45, per Thorson J. at pp. 58, 59: ``The word `during' may have two meanings, one being `throughout the whole continuance of' and the other `in the course of'''. This judgment was affirmed in (1946) 1 D.L.R. 689. In this case the Court was concerned with the true meaning of ``during'' a particular year under the Canadian Income War Tax Act. For our part we would accept that the term ``during'' in the context before us also bears the meaning of ``at any time in the year''. This construction, we think, is reinforced by reference to the statutory language of sec. 56 which distinguishes between the exercise of fixing the percentage in relation to depreciated value ``at the beginning of the year of income'', and that of ascertaining the prime cost percentage, which is simply the cost of a unit in relation to a year of income.

23. Accordingly, we are inclined to accept prima facie that sec. 54 ought to be construed in accordance with the submissions on behalf of the taxpayer and that sec. 55, which provides for an estimate by the Commissioner of the effective life of the unit for the purposes of annual depreciation, is a machinery provision, which lays down the arithmetical calculation of the amount of depreciation and does not purport to specify the actual length of time during which the depreciation is allowable in any given year.

24. We must now turn to the submissions on behalf of the Commissioner, and if need be notice further arguments proffered on behalf of the taxpayer. His first submission was that sec. 56(1)(b), which is applicable to the taxpayer's case, has existed in recognisable form for approximately 42 years and can be traced back to the 1936 Act. He pointed to the absence of judicial authority on the point and submitted that it can perhaps be assumed that the interpretation given to it by the Commissioner during that period has been largely satisfactory to the preponderance of people. This may well be so, but if the issue is squarely raised for a legal ruling, the matter must naturally be determined according to legal principle rather than common practice or usage. In practice, lawyers are familiar with examples of a casus omissus, or a case of first impression arising for decision for the first time in many years. In another context it has been said that what has been hallowed by usage may also become hoary with age.

25. The Commissioner's representative then submitted in substance that where a unit of property is owned and used for one day only in the year, the depreciation ought properly to be pro-rated. In support he pointed to the provisions of sec. 26AA which deals with the case where the assessable income of a taxpayer includes an annuity. There are particular statutory provisions laid down in that section relating to annuities, which we consider do not assist us in properly construing the language of the sections before us relevant to the allowance of depreciation. As the representative of the Commissioner subseqently argued: ``Now, judicially defined I think the way in which you would interpret the word `during' largely depends upon the context in which you find it.'' This proposition is trite but true.

26. When referring further to the relevant sections already mentioned, the Commissioner's representative continued to press the point ``that the deduction for depreciation should be rateably brought back to that portion of the effective life which has expired during the year in question''. Emphasis was also laid upon sec. 55 pursuant to which the Commissioner must make an estimate of the effective working life of the plant. Further reference was also made to the working of sec. 54 and 56. If a taxpayer brings his claim under sec. 56(a), i.e. the depreciated value method, it was said that he ``cannot get within the section because, and simply because, (he) cannot demonstrate, if (he has) purchased a unit of property at any time after 1 July in the particular year, a depreciated value at the beginning of the

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year''. This difficulty was recognized by counsel for the taxpayer in argument, and the Board is content also to recognise and put aside this particular problem since it does not specifically arise for decision in this reference. The essential matter for the decision of the Board relates to the prime cost method of depreciation for one day in the year of income, which seems to us to raise different considerations.

27. The Commissioner's representative frankly conceded that he was unable to find any cases which deal with the specific question raised under the depreciation provisions, but in further argument by analogy he cited authority in another context, particularly in relation to deductions allowable to a taxpayer in respect of leases. We feel unable to accept these arguments in favour of the Commissioner as a matter of law in this reference.

28. It was also submitted that we are not to construe an Act of Parliament so as to reduce it to rank absurdity, but we must give it such a meaning as will carry out its objects. This is a reference to the judgment of Lindley L.J. in
The Duke of Buccleuch (1890) 15 P.D. 86at p. 96. However, we do not perceive any rank absurdity, or any ambiguity patent or latent, in the construction of the relevant sections of the Act submitted by learned counsel for the taxpayer.

29. Although the result may appear somewhat unusual at first blush, we consider that it is consonant with proper principles of statutory interpretation. In our view it is unnecessary in this reference to canvass the case law relating to the interpretation of income tax statutes. Although for ease of administration and for other laudable practical considerations, the Commissioner may adopt a certain practice of assessing claims for depreciation, when the specific question such as the present one is raised in a reference the Board must attempt to decide that question according to law, without regard to any practice, longstanding though it may be. It is not for the Board to enquire into the practice of the Commissioner in this regard.

30. Indeed, we do not perceive our acceptance of the construction and result sought on behalf of the taxpayer here as being unjust or absurd, since other considerations may well arise subsequent to the question in question; for instance, a recoupment of depreciation pursuant to sale of the subject property which may fall into the category of assessable income under sec. 59(2) of the Act. Nor do we think that any highly unusual or revolutionary results will necessarily ensue from our interpretation and ruling. We consider that it is more a matter of timing relating to the claim for depreciation, and that when the whole span of the effective life of the unit is taken into account the overall result may arithmetically be similar to, or the same as, the approach adopted by the Commissioner in argument.

31. For these reasons the Board has come to the conclusion that the taxpayer's objection should be allowed.

Claim allowed

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