Federal Commissioner of Taxation v. Veterinary Medical and Surgical Supplies Limited

Judges:
Pincus J

Court:
Federal Court

Judgment date: Judgment handed down 24 August 1988.

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Pincus J.

This is an appeal from the Administrative Appeals Tribunal in an income tax case [reported as Case U132,
87 ATC 771] in which the applicant, the Commissioner, claims the Tribunal has gone wrong in law. It is my opinion that there is no ``question of law'' within the meaning of sec. 44(1) of the Administrative Appeals Tribunal Act 1975; if there were such a question, however, the appeal would suffer the same fate, for the conclusion arrived at by the Tribunal is in my view correct.

The respondent taxpayer, during the year of income ended 30 June 1983, installed a new Commander telephone system in its warehouse complex, and the system was held by the Tribunal to constitute a ``unit of property'' within the meaning of sec. 82AB of the Income Tax Assessment Act 1936. It therefore qualified for a deduction under that provision as a unit rather than as a number of units.

Section 82AB(1) read as follows, at the relevant time:

``(1) Subject to this Subdivision, where -

• (a) on or after 1 January 1976, a taxpayer has incurred expenditure of a capital nature (in this section referred to as `eligible expenditure') in respect of the acquisition or construction by him of a new unit of eligible property in relation to which this Subdivision applies;
• (b) the eligible expenditure exceeded $500;
• (c) the eligible expenditure was incurred -
  • (i) in respect of a unit of property acquired by the taxpayer under a contract entered into on or after 1 January 1976 and before 1 July 1985; or
  • (ii) in respect of a unit of property that was constructed by the taxpayer and the construction of which commenced on or after 1 January 1976 and before 1 July 1985; and
• (d) the unit of property was first used or installed ready for use before 1 July 1986,

there shall be allowed as a deduction from the taxpayer's assessable income of the first year of income during which that unit was either used for the purpose of producing assessable income, or installed ready for use for that purpose, an amount (in this section referred to as the `relevant amount') ascertained in accordance with the following provisions of this section.''

There is no definition of the expression ``unit of property'', but some help in deciding whether, in a case like the present, each element of the system is to be regarded as a separate unit may be obtained from the

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expression ``the unit of property was first used or installed ready for use before...'' which recurs in the section. That tends, albeit slightly, to support the idea that a unit is something which is capable of being used by itself, rather than only as part of a larger whole.

I take the description of the system in question from the reasons of the Tribunal [ATC pp. 772-773]:

``2.... The system incorporated four exchange lines providing for access to and by other telephone users in the total telephone system. Those exchange lines could be accessed at each of seven handsets provided at `stations' within the warehouse complex....

3. The making of a connection to the system from outside was indicated aurally and visually. The aural signal emanated at a particular handset within the warehouse and could be heard at all stations. Incoming calls would first ring on a particular handset, if it was not already engaged by connection to another exchange line or to another station within the system. If that handset was not available, incoming calls would ring on other handsets programmed sequentially. The visual signal was constituted by a flashing light which appeared on all handsets not in use. The aural signal was ordinarily audible throughout the complex, but if it should ring in either the office or the tearoom (which was not suggested) it would not be audible in other of those places. The visual signal could be observed from within each area on all handsets within that area, but not otherwise.

4. When an exchange-line connection was made, either by accepting an incoming call or upon making an outgoing call, a steady light indicated which of the four exchange lines was engaged. An incoming call could be received at any station, but initially only by the first station to respond. Subject to the availability of lines, outgoing calls could be made from any stations. Upon the evidence, `party calls' could be made with multiple connections from stations within the system in connection with a telephone outside the system. Further, outside calls, whether originating from within or outside the system, could be transferred from one station to another within the system, and, accordingly, from person to person.

5. The second dimension of the system was that it provided an intercommunication facility, enabling two or more stations within the system to be connected. This feature of the system was not dependent upon the existence or use of any exchange lines. It could be activated to provide a conference facility in which three or more stations were connected.

6.... Exchange lines (to a maximum to four in number) are connected to a `frame' which is in turn connected to the `main equipment' (`the central processing unit') which regulates and controls the operation of the system. Within the `main equipment' up to eight `station boards' (or modules) can be connected, each capable of servicing two stations. That gave the particular system a maximum capacity of four exchange lines and 16 stations - hence the reference to `four-sixteen'. It was common ground that the particular system was installed with four station boards and was therefore capable of operating eight stations, although only seven had been established. An eighth station could be added by connecting a further handset to the main equipment without adding any further station boards. However, to increase the stations to nine or more would require additional station boards. If a system providing more than four exchange lines or more than 16 stations was required, a larger system would have to be installed.

7. The characteristics of the system are controlled through the main equipment and capable of many adaptations and variations. They were not detailed. Although the intercommunication system could function without the availability of any exchange lines (provided only that at least two stations remained), and although exchange lines could be operated so long as one station remained within the system, no part of the system could operate without the integrity of the physical connection between the main equipment and the stations being preserved. Despite the existence of an intercommunication facility, the evidence presented to me does not persuade me that the dimensions and layout of the complex are such that the system would be resorted to with any significant frequency as an `intercom' facility. Nor does anything in the

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evidence suggest that `intercom' capacity was a matter of any significance in the decision to acquire the system.

8. The evidence also establishes that the relationship between the stations and the main equipment, and the nature of the handsets is such that handsets can be disconnected or replaced by any suitably qualified person without damage to the system or any need to modify the main equipment. On the other hand, to add an eighth station would require the connection of that handset to the main equipment; and to increase the number of stations in the range from nine through to 16 would require the addition of further station boards to the main equipment.''

There was evidence that one could subtract handsets from the system without changing the rest of it, but the evidence was that unless that were done ``with a bit of care you may do some damage to the programming...'' The handsets could be bought separately and could be used in Commmander systems other than the type in question.

After discussing the facts the Tribunal, treating the matter as depending on application of common sense, expressed a view favourable to the present respondent and added that it would reject the contrary view unless compelled by authority; it then discussed cases mentioned below.

Question of law

Senior counsel for the applicant identified two questions of law as founding this Court's jurisdiction. Firstly, he said that the Tribunal misunderstood and misapplied a decision of the Supreme Court of New South Wales in
Monier Colourtile Pty. Ltd. v. F.C. of T. 83 ATC 4399, an appeal from which was dismissed by the Full Court of this Court (84 ATC 4846; (1985) 6 F.C.R. 489). Secondly, the applicant said that, the facts being known, the question whether the system was properly described as a ``unit of property'' on the proper construction of the relevant provision was one of law.

Consideration of the former point requires an analysis of what was decided in the Monier Colourtile case and the Tribunal's treatment of it. There were two issues in Monier Colourtile. The first concerned some pallets used in tile production, and the second and more pertinent one concerned a radio system, ``comprising a base station and mobile receiver transmitters and an executive handset'' (83 ATC at p. 4401). Initially the system comprised only a base station and 14 mobile out-stations, but a month after acquiring those items, the taxpayer got two further mobile out-stations and an executive handset. The case concerned a different tax year from the present and the section was changed between the two years, but not in any way which requires analysis for present purposes or bears upon the problem to be solved. Lee J., in the Supreme Court of New South Wales, held that neither the initial acquisition nor the whole collection of equipment constituted a unit of property within the meaning of sec. 82AB of the Act in its then form. He found [83 ATC p. 4406] that the:

``... base station, each mobile station and the handset were separate units of property, within the meaning of the section. Each had a distinct function and each could be acquired at a particular price. The base station was capable of being put into operation, i.e. performing its function as a base station, without any mechanical dependence at all on the mobile stations. Likewise the mobile stations and handset were capable of exercising their function without any mechanical dependence upon the base station. The base station and each of the mobiles were physically separate from each other and intended to remain so. The fact that the base station would not receive any communications unless a mobile or some mobiles were brought into play, or that any transmission by it would be fruitless unless there were mobiles, does not prevent this conclusion.''

An appeal against the decision was dismissed, the Full Court remarking:

``The trial Judge found as a fact that each of the mobile stations was functionally complete in itself and each had a separate independent existence. He noted that it was stressed by the taxpayer that the base station was useless without one or more mobile stations and vice versa. Whilst he acknowledged that this was true in a commercial sense as far as the user was concerned, he regarded this circumstance as no basis for a conclusion that the entirety was to be regarded as one unit for the

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purposes of sec. 82AB. In his view each was capable of independent operation although such operation was not the operation for which the taxpayer acquired the property.''

(at 84 ATC p. 4850; F.C.R. p. 495)

Mr Bathurst Q.C., senior counsel for the applicant, contended that the Tribunal entirely misunderstood this decision. That contention was based upon the following remarks made by the Tribunal [ATC pp. 776-777]:

``21. In my view all of the foregoing authorities cited on behalf of the Commissioner compel the conclusion that `the unit' in this instance is the entirety of the telephone system as installed. Just as the handsets were not considered by the courts to be separate units of property to the mobile stations (cf. Monier (ante)), so too, in this case the handsets are an integral part of the telephone system. Although the system of radio communication in Monier (ante) did not involve any mechanical interdependence between base station and mobile stations (as distinct from telephonic communication) so that they could be physically separate, that was not so in relation to the operation of the mobile stations by handsets. They were mechanically interdependent and could not be physically separate. To that extent they are not to be distinguished from the relationship between the telephone handsets and the other equipment of the system which enabled the system to be used as a means of telephonic communication.''

The expression ``all the foregoing authorities'' of course includes the Monier Colourtile case. Clearly, the tendency of the Monier Colourtile decision is to support a conclusion opposite to that at which the Tribunal arrived here. It is impossible to agree that the case contributes to compelling the Tribunal's conclusion. Further, the reasons of Lee J. speak of only one handset; the first reference to ``handsets'' in the Tribunal's reasons, just quoted, appears to be a slip, albeit an important one. The Tribunal appears to have misunderstood, as to this point, the facts and issues in the Monier Colourtile litigation and to have acted on the erroneous view that there the Court held certain handsets not to be separate units of property.

Mr Bathurst contended that there was, therefore, a legal error entitling the Commissioner to appeal. In one sense, certainly, a misunderstanding of the facts and issues in a previous case is a legal error, but it is not necessarily such an error as gives this Court jurisdiction under sec. 44 of the A.A.T. Act. The Tribunal did not extract any erroneous legal rule or, indeed, any legal rule, from the Monier Colourtile case. What the applicant has to do is to identify a legal question underlying the Tribunal's decision. Using the second criterion set out in
Lombardo v. F.C. of T. 79 ATC 4542 at p. 4545, it cannot be said that by its misunderstanding of the Monier Colourtile facts and issues the Tribunal manifested a misunderstanding of ``the law in some relevant particular''.

Of course, if the error relied on had led the Tribunal to apply some wrong principle, this Court would have jurisdiction. But the purpose for which the Tribunal used its understanding of the Monier Colourtile case was merely to draw comfort from a supposed resemblance between one aspect of the ultimate conclusion arrived at on the facts there proved and the conclusion which the Tribunal favoured. As the respondent pointed out, the Tribunal's conclusion was founded, not on the cases referred to, but simply on its own view of the common sense of the case.

The second respect in which, it was said, a question of law was raised by the appeal was of the kind mentioned by Mason J. (as his Honour then was) in
Hope v. The Council of the City of Bathurst 80 ATC 4386 at p. 4389; (1980) 144 C.L.R. 1 at p. 7:

``... whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law.''

In those reasons, however, his Honour went on to deal with the question whether the proper application of a statute which uses words ``according to their common understanding'' raises a legal question. He appeared to hold that it did not, unless only one conclusion on the point was reasonably possible.

It has to be conceded that, if one purchaser of a collection of equipment may be held by the Tribunal to have purchased a unit of property and another purchaser of identical equipment may be held not to have done so, neither decision being open to attack in this Court, the

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tax collection system may appear to have an element of caprice in it. If one asks, in a case of the kind before me, whether the whole system is a single ``unit of property'', the answer must be: ``It depends on what you mean by that expression.''

One proffered solution to that sort of anomaly is the suggestion that if the jurisdiction vested under sec. 44 is ``limited to less than the whole of the controversy and thus less than the whole of the matter arising under federal law'', a question of validity might arise:
T.N.T. Skypak International (Aust.) Pty. Ltd. v. F.C. of T. 88 ATC 4279 at p. 4283. The implicit assumption is that the Commonwealth may not vest jurisdiction in respect of less than a whole controversy and therefore may not empower a court to decide questions of law only, a proposition for which I have found no authority. Some may think it not very easy to believe that Parliament's intention, as to the disposition of cases heard in the first place in the Tribunal, was that only those questions of construction which involve ``technical'' expressions or words used in some special sense should be treated as fit for consideration in this Court. The law is rather short of expressions which are technical in the relevant sense and the Income Tax Assessment Act, for example, does not seem to use many of them. However, although the cases are by no means easy to reconcile, it must be accepted that some appeals from the Tribunal involving questions of construction of statutes do and some do not raise questions of law. Unfortunately, much of the Court's and the parties' effort in some of such appeals is expended on this sort of jurisdictional controversy.

Mr Slater for the respondent contended, correctly in my view, that the Full Court's decision in Monier Colourtile cannot easily be reconciled with the conclusion that the meaning and application of ``unit of property'' in sec. 82AB are questions of law. I have quoted above, in another connection, a paragraph from the Full Court's reasons. Immediately after that, the Court remarked:

``In our opinion there is no reason to disturb this finding of the trial Judge.''

That implies that the ultimate conclusion arrived at, by applying the trial Judge's understanding of the section to the facts, was a ``finding''. Further, the Court, as to the pallet branch of the case, used similar expressions: ``There is therefore no reason to disturb this finding which again was one of fact.'' And as to the radio system branch it said, ``the ultimate finding is a matter of fact and degree''. A similar expression, quoted below, was used in disposing of another such appeal:
F.C. of T. v. Tully Co-operative Sugar Milling Association Limited 83 ATC 4495 at p. 4500; (1983) 51 A.L.R. 751 at p. 756.

Even when the primary facts are known and not disputed, the better view, on the authority of the Full Court's reasons just referred to, is that there is ordinarily no question of law involved in such a case as this. Of course, if it could be said that the conclusion arrived at was not one which was reasonably open, the Court would have jurisdiction, but that was not contended here and could not be.

It follows that, in my opinion, the case is not one within sec. 44 of the Administrative Appeals Tribunal Act and the appeal must, for that reason, fail.

Counsel agreed that, if I accepted that the appeal was one on a question of law and that the Tribunal had gone wrong in deciding the relevant question, then I should decide the case myself rather than remitting it to the Tribunal to be heard and decided again, under sec. 44(5) of the A.A.T. Act. That situation has not arisen, but in the circumstances, and in particular because of the uncertainty surrounding the issue whether a question of construction of the kind raised here is one of law, I propose to set out my view on the substantial controversy.

Substantive point

There, can be no doubt that a ``unit of property'' may consist of a number of elements which have been assembled together in a process of construction; that is implicit in the section's reference to construction of a unit of property. Where the unit has not been constructed, however, it is unclear whether an interacting collection of items all acquired at once should be regarded as one unit or several units. The result of the radio system aspect of the Monier Colourtile case is at first sight consistent with the view that such a collection of items as is here in question constitutes as many units as there are items.

However, in
Tully Co-operative Sugar Milling Association Limited v. F.C. of T. 82 ATC 4454

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a conclusion was come to which some may find hard to reconcile with that in the later case. There the ``mixed juice pumping station'' dealt with by Thomas J. at p. 4457 et seq. consisted of a number of items, at least some of which could presumably be disconnected and put to other uses; I refer to the pumps and motors mentioned at pp. 4457 and 4458. It does not appear that all these elements were necessarily obtained from the one supplier. Thomas J., at p. 4459, suggested that perhaps the pumps could have been claimed for as separate units, but concluded by saying that:

``whether or not the section gives a taxpayer a choice in the matter, I think that the mixed juice pumping station has been correctly designated as a unit in this case''

(p. 4460).

An appeal to the Full Court failed (51 A.L.R. 751) and in the leading judgment (that of Fox J.), one finds expressions which imply positive agreement with the primary Judge's conclusion, although ultimately Fox J. said: ``This was essentially a finding of fact, and I see no reason to disturb it''.

There was debate before me about the interchangeability of elements and the possibility of using some elements elsewhere than in the system in question. Handsets could be taken away, or additional handsets could be incorporated into the system. Similarly, in the Monier Colourtile case, the mobile units could have been used for communicating with other base stations, subject to both being on the same frequency.

It does not appear to me, however, that it is consistent with the result arrived at in the Tully case to hold that the existence of these possibilities precludes the whole system's being treated as one unit. As long as the elements interact with one another, I do not think it matters whether their interaction is immutable; no doubt the motors, which were held in the Tully case to be part of the mixed juice pumping station and therefore part of one unit, could have been put to another task within the taxpayer's sugar mill or elsewhere.

The degree and permanence of physical connection differ in the cases I have mentioned: presumably it would be easier to disconnect the handsets in issue in this case than to take out the motors in the Tully case; in Monier Colourtile, the various elements were not physically connected at all. That factor appears, in the passages I have quoted above, to have weighed heavily with Lee J., but not necessarily with the Full Court. Counsel for the applicant argued that the lack of physical connection in the Monier Colourtile case is not a satisfactory basis for distinguishing it and pointed out that a ``function or purpose test'' appears to have been accepted by the Full Court (6 F.C.R. at p. 493). That is to be contrasted with a test emphasising physical connection.

The test of function is of no use unless one decides what sort of function is relevant. It is true to say of the system here in question that it has a function as a whole; also, each element has its own separate function. I doubt if one can satisfactorily explain the difference between the outcome of the Tully case, in so far as it related to the mixed juice pumping station, and the outcome of the Monier Colourtile case in so far as it related to the radio communication system, other than by reference to the lack of physical connection in the latter case. Whether or not that is a satisfactory reconciliation, it appears to me that if the function test is to have any sensible use, the function identified must be, so to speak, the external function - the practical use to which the unit is able to be put in the taxpayer's business. If identification of any function will do to justify treating an element of the system as one unit, then odd results must be arrived at; one can specify a function, of course, even for each component of each handset.

It is preferable to apply the function test here by denying that an individual handset has a separate function for present purposes, and affirming that each element should be treated as part of a system intended to function as a whole. A handset can do nothing by itself.

Entirely separate questions arise where (as in the first branch of the Monier Colourtile case) one is dealing with elements which are not permanent parts of the system, or dealing with later additions to an initial installation. Leaving those special cases aside, it appears to me that where a system consisting of diverse elements is bought as a system intended to function as a whole and each element interacts with at least one other, one should find unity in the function of the whole system, at least where the elements are physically connected.

Had I come to a different view on the first issue - whether the appeal is one on a question

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of law - I would have upheld the Tribunal's conclusion, on the merits.

The appeal will be dismissed with costs.