Case V102

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 July 1988.

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P.M. Roach (Senior Member)

The applicant company in this reference is successor in title to a man who was responsible for constructing a substantial factory building in the central Sydney area in the 1930s. In 1973 the applicant, a proprietary limited company, purchased the freehold, which it has held since that time and applied to income-producing purposes. In 1973 the applicant company was controlled by some of the children of the previous owner but, since 1973, it has been a company under the control of one his daughter and son-in-law of the original owner.

2. The son-in-law gave evidence. He was born in 1919 and had commenced working in the building at the age of 16. He recalls being aware of the building while it was under construction. The building comprised five storeys above that at street level. It measured approximately 35 metres by 13 metres. It was constructed with concrete floors and brick facing. The design of the building was that the several floors were serviced from a central core. It comprised a main staircase; a lift centrally located, fronting on to an entrance lobby; and fire stairs to the rear of the liftwell. The lift was fitted with doors on both sides - one providing access to the lobby and the other to the fire stairs. The fire stairs led to an egress door at ground level. As a fire safety measure, sliding metal fire doors were fitted to the doorways separating the main staircase from the usable areas on both sides of the core. Similarly, metal roller doors were fitted to each side of the fire stairs. In recent times, the building has been so utilised as to provide for two tenancies on each of the five upper floors; a

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caretaker's flat on one of those upper floors; and three tenants occupying five of six shop sites set at ground level. One shop site constituted the entrance to the upper sections of the building. Rents were also derived from the letting of advertising space on the roof of the building.

3. In addition to the fire security system already described provision was made, according to the standards of the 1930s, for the provision of fire-fighting equipment and other safety devices within the building. A water supply, drawn from the main supply, was passed to all floors of the building through piping set in vertical columns. On each floor canvas fire hoses were fitted with fixed-head brass nozzles. The canvas hoses were connected to the water supply and were stored in niches near the main stairwell. There was one such hose for each floor. It was believed that each hose was sufficient to enable a water supply to be directed to all points of the floor in the event of fire but, fortunately, this belief had not been put to that test. Again, in accordance with the standard practices of the day, standard electric lights illuminated by incandescent globes, activated by pull switches, provided for light to the stairways.

4. By 1981 the physical circumstances touching the fire safety system had changed somewhat. Following an inspection by the Sydney City Council and the Board of Fire Commissioners, the applicant was called on to carry out works modifying some aspects of the fire control system. No change was required in relation to the provision of the lift; the main staircase; the fire stairs; or of the fire doors which existed to effect the isolation of areas. However, work was required to be done as to the provision of water supply and the water reticulation system. The company was also called on to modify its lighting system. As a result, the company first incurred expenditure in effecting the installation of a 15 point Wormald fire hose-reel system. The system was to comprise 2 x 25 mm drillings at the rear of the building (including repositioning of the existing water meter); a Davies Model Pump to boost the supply to the fire hose-reels; pipework in accordance with the requirements of the Board of Fire Commissioners comprising medium-grade galvanised tube to AS1074 with screwed fittings throughout; and at each of fifteen points a wall-mounted 30 metre Wormald fire hose-reel. I find that it was required that the pump be installed because it was feared that, by 1981, the mains supply would be insufficient to satisfactorily deal with any emergency. I also find that the pipe work was to be exposed and run fixed to the underside of the building structure. The applicant accepted the quoted price of $10,125 and that sum was paid in due course.

5. The second class of work called for was in the way of lighting. The applicant was required to install a new lighting system, providing for clear lights in some locations and ``Exit'' sign lights in each area leading to the fire stairs. The price which was in due course paid amounted to $3,435 and $3,200 respectively. A feature of the lighting work was that all lighting was to be established on a separate power circuit and was to be so designed as to come on automatically with failure of power and then illuminate for three hours. I accept the evidence of the son-in-law that the lights served no different purpose to the lights which they replaced but that, in the event of fire, it is reasonably to be expected that, by reason of independent circuitry and superior design, they will more usefully serve the purpose for which the lights they replaced were designed.

When incurred?

6. Save for an item of $1,125 there is no dispute as to when the losses and outgoings were ``incurred'' for the purposes of the Income Tax Assessment Act 1936 (``the Act''). It is common ground that, subject to that exception, all the losses and outgoings were incurred in the year of income ended 30 June 1982. The item in dispute relates to portion of the amount paid to Wormalds. The applicant had accepted Wormalds' quote of $10,125 in or about November 1981. I find that Wormalds were entitled to monthly progress payments, with the balance being payable upon completion. Wormalds made a first claim for $6,000 in February 1982, which was paid the following month. Wormalds made a second claim for $3,000 in March 1982, which was not paid until July 1982. Despite the late payment, the Commissioner accepted before me that the liability for the $3,000 was incurred. That being so, I do not propose to question the soundness of that view. The third and final claim was made in September 1982 and resulted in payment being made in November

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1982. Being conscious of the ongoing works and that the company would in due time be obliged to effect payment, the accountant to the company made provision in its accounts to 30 June 1982 in which the company acknowledged its obligations to Wormalds for $1,500 (an error for $1,125) in its balance sheet under the classification ``Current Liabilities''. I find that the company had no obligation in that sum to Wormalds until Wormalds made demand. Until that demand was made, there was merely in prospect a liability which might never mature (cf.
Hooker Rex Pty. Limited v. F.C. of T. 1988 ATC 4392 and the cases cited therein at p. 4400). Accordingly, I find that, as to $1,125 there was no loss or outgoing which was ``incurred'' during the year of income ended 30 June 1982.

Repairs ``to premises''

7. The applicant claims the deductions it seeks on the basis that what was done constituted works of ``repair''. Such a claim might be sustained by reference to the provisions of sec. 51(1) of the Act or by reference to sec. 53. The applicant particularly rests its case upon the latter provision which, in its material terms, provides:

``53(1) Expenditure incurred by a taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises,... used by him for the purpose of producing assessable income... shall be an allowable deduction.''

So put, the question which arises is whether what was done is appropriately said to have been done ``to premises'' - referring to the totality of the building erected on the freehold; or whether it should be considered as something done to some lesser entirety - the fire safety system, being ``part of the premises''; or as something done to something other than the premises - the fire safety system considered independently of ``the premises''.

8. In considering the question of what it was that is alleged to have been the subject of the ``repairs'' I must be guided by the decision of a Full Bench of the High Court of Australia in
Lindsay v. F.C. of T. (1961) 106 C.L.R. 377. In that case the appellant carried on the business of slip proprietors and ship repairers. Substantially the whole of one of two slipways was demolished, the new work was executed in concrete and a new, substantially longer, slipway constructed. It was argued that ``the entirety... consisted, either, of the whole of the partnership's premises on which its business was conducted and in connection with which the slipway was used or, alternatively, of a number of what were called components and which together were said to constitute the slipway''. The Full Bench, in a joint judgment, said of those submissions (at p. 393):

``It would be artificial in the extreme to approach the problem in either of the suggested ways for the slipway was, in itself, a very substantial erection and the real question for decision was whether the work which was done was done in the execution of repairs to it.''

Recognising, as the Court said, that ``the question, of course, is one of fact and degree...'', I am of the view that it would be anything but ``artificial'', let alone ``artificial in the extreme'', to consider the fire safety system as something which was anything but an integral part of the building. I am satisfied that if the works constituted ``repairs'', they were by way of repairs ``to (the) premises''.

Whether works ``repairs''

9. In Lindsay's case (ante) the High Court (at p. 394) adopted, with approval, the observation of Buckley L.J. (in
Lurcott v. Wakely and Wheeler (1911) 1 K.B. 905) in which his Lordship had said:

``Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject matter under discussion.''

10. Their Honours proceeded on that basis to reject the contention that the replacement of the slipway was merely a repair of the premises: the premises being the slipway. The same question needs to be addressed in this reference. As to the fire-hose system there was a replacement of each component: pipes, taps, hose connections and nozzles; and, in addition, there was the installation of a pump. I shall consider the question of the pump separately. As to the lighting system each of the original lights was replaced by modern light fittings

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and, in addition, an independent power supply, designed to be automatically activated in the event of fire, was installed. In my view, having regard to what was done, it is appropriate to say, in the words of Windeyer J. in
W. Thomas and Co. Pty. Ltd. v. F.C. of T. ((1965) 115 C.L.R. 58 at p. 72) that:

``(Those works) were done to make good a deterioration that had occurred by ordinary wear and tear or by the operation of natural causes during the passage of time.''

I do not mean that in the sense that leaks had developed in the pipes or hoses so as to make them incapable of performing reliably the function for which they were intended; or that their capacity had been diminished, either by use or by deterioration with age. What I mean is that, with the passage of time, the equipment originally installed had come to be accepted as no longer adequate to meet the standards reasonably required of a fire safety system. It is true that, as a result of what was done, the fire safety system of the building was improved but, as his Honour observed in Thomas (ante):

``obviously repairing a thing improves the condition it was in immediately before repair.''

(The thing in this instance being the building.)

11. Further, I adopt with modifications what his Honour went on to say:

``But repairs to a whole (the building) are often made by the replacement of worn-out parts (of the fire safety system) by new parts. Repair involves a restoration of a thing (the building) to a condition it formerly had without changing its character. But in the case of a thing (the building) considered from the point of view of its use as distinct from its appearance, it is restoration of efficiency and function rather than exact repetition of form or material that is significant.''

12. His Honour in that case held that, even the very extensive works there carried out upon a factory, constituted repairs to the factory which were:

``The result of normal wear and tear in operation.''

In this instance, it was not the normal wear and tear occasioned by use but rather attrition due to the effluxion of time which had made it appropriate to replace parts perceived to be inadequate by new parts. There was essentially a restoration of efficiency in function. The circumstance that there was no exact repetition of form or material does not alter that.

13. However, by the same criteria, I am not persuaded that the installation of the pump constituted a ``repair''. When the building was constructed it seems that there was no need for any pumping system. Pressure from the mains supply was sufficient to meet the fire safety purposes of the system. But with the passage of time, quite independently of any question of deterioration in the capacity of the installed system, there was a change in mains pressure which made it necessary to introduce a new element not previously required in order to make the fire system functional. The applicant argued that, on the authority of
Morcom v. Campbell-Johnson (1955) 3 All E.R. 264, that was a matter of no moment. In that case a single new pipe had been installed to serve the function previously carried out by two pipes and a single bulk storage tank was provided to replace six smaller water tanks. Even so, the work was characterised as ``repairs''. But, in my view, the pump does not fall into the same category. It was an entirely new element within the fire-safety system of the applicant. Accordingly, I have concluded that expenditure on the pump did constitute a capital outlay.

The question of depreciation

14. Having found that the expenditure on the installation of the pump did not constitute ``repairs'' because it constituted a work of ``capital'', and because I am satisfied that the pump constituted ``plant or articles'' within the meaning of sec. 54 of the Act, I am satisfied that depreciation should be allowed as appropriate to the pump cost of $2,100. The parties were agreed that, on that basis, the sum of $47 is the figure appropriate to be allowed for the year of income ended 30 June 1982.

Investment allowance

15. The applicant claims that, on the basis of the findings I have now made, the applicant was also entitled to claim investment allowance in relation to the pump installation. It is common ground that there was such an entitlement but the Commissioner's representative makes the point and, assuming it to be sound properly makes the point, that the Tribunal has no power to grant relief to the applicant in that regard.

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16. The issue so arising was whether the action of the Parliament in 1986 in amending sec. 190 of the Act so that it no longer read:

``Upon every such reference or appeal -

• (a) the taxpayer shall be limited to the grounds stated in his objection;...''

and to substitute:

``190 Upon every such reference or appeal -

• (a) the taxpayer shall, unless the Tribunal... otherwise orders, be limited to the ground stated in his objection;...''

has empowered the Tribunal to now grant the relief to which it was entitled as a matter of substantive law.

17. The applicant's solicitor points to a decision in Case U47,
87 ATC 326 in which I said at p. 330:

``However, I am equally clearly of the view that the notice of objection lodged on behalf of the applicant did not set forth grounds which would entitle the applicant to the relief sought. By the objection, the applicant claimed that the entitlement arose in relation to a loss on sale allowable pursuant to sec. 52 of the Act or as depreciation allowable pursuant to sec. 59 of the Act. The former claim was abandoned at the hearing and there was nothing in the evidence to suggest that during such fleeting interval of time as the vehicle may have been owned by the taxpayer that it was used in the course of his income-producing activities. That being so, had this reference fallen to be determined at any time prior to 1 July 1986 it would have been the responsibility of any Tribunal adjudicating the matter to have affirmed the decision of the Commissioner upon the objection.

From 1 July 1986 the Taxation Boards of Review (Transfer of Jurisdiction) Act has been effective and there is now a discretion in this Tribunal not to strictly limit the taxpayer to the grounds stated in his objection. As a result justice may now be done where previously it was denied. At the commencement of the hearing the representative of the applicant sought to amend the grounds of objection by adding the following:

• `7. Alternatively the said loss constituted a loss or outgoing wholly or partially incurred in gaining or producing the assessable income or in carrying on business for the purpose of gaining or producing such income and did not constitute a loss or outgoing of capital, or of a capital, private or domestic nature, and was not incurred in relation to the gaining or production of exempt income.'

As the Commissioner's representative advised that the Commissioner was not taken by surprise and would not be inhibited in the presentation of his case; and as I considered the amendment necessary to enable justice to be done, I have allowed the amendment. That being so, the order of the Tribunal will be that the determination of the Commissioner under review will be varied by reducing the taxable income of the applicant for the year of income ended 30 June 1981 as assessed by the Commissioner on 22 February 1982 by $2,775.

For once, delay on the part of the Commissioner in effecting transmission of an objection pursuant to a request for reference has worked to the advantage of the applicant.''

18. However, the Commissioner by his representative points to another decision which he says indicates that the relief sought by the applicant may not be granted by the Tribunal. He refers to Case V49,
88 ATC 381. In that case, upon the hearing of his request for reference, the applicant had sought to raise and put in issue the disallowance of a deduction at point of assessment. When the Commissioner had issued his assessment the applicant had objected to some adjustments, but not to the disallowance of the item now sought to be put in issue. As the Commissioner was taken by surprise by the applicant I indicated that, if the application should be granted, an adjournment would be necessary. But I then went on to say [at p. 386]:

``However, there is an insuperable obstacle. For 50 years prior to 1 July 1986, the procedural rules for the conduct of tax litigation were so harsh that taxpayers were always strictly bound to the grounds of their objection as cast in the strictly limited period of 60 days following service of the

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disputed notice of assessment. Once those 60 days had passed there could neither be any extension of time to permit the raising of new issues nor any relief from the provision strictly binding a taxpayer to the grounds of his objection. From 1 July 1986 relief from both of those rules came to be available. Firstly, power was conferred upon the Tribunal to extend time for objecting (and also the time for requesting reference for independent review). Secondly, because it is now provided that the applicant will not be held to the grounds of his objection if `... the Tribunal otherwise determines...' (sec. 190). However, even then, the Parliament acted in such a way as to ensure that in some instances the claims which had occasioned so much injustice in the past would continue to operate and, as here, could occasion injustice. It was provided by sec. 221 of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 that the power to extend time

• `does not apply in relation to an assessment, decision or determination if the period within which, apart from the amendments made by this Act, an objection or request, as the case may be, of the kind mentioned in that section could have been lodged with the Commissioner in relation to the assessment, decision or determination had ended before that day.'

As a result, the Tribunal has no power which would authorise an extension of time to permit a fresh objection to be lodged to place this matter in issue. Even if it had that power, that would require that the objection be cast up and presented to the Commissioner so that he might consider it, because it would only be after the Commissioner had considered and disallowed such an objection, that a request for reference for independent review by this Tribunal could be made. Of course, such an extension of time would not be necessary if the Tribunal could simply exercise power which would have the effect of permitting the applicant to amend his objections to raise entirely new issues and then to permit amendment of the `grounds of objection' in order that he might be provided with the relief he seeks. However, the view I have of that matter is that the first power does not exist. The power which the Tribunal has to amend is not a power to enable the scope of the relief sought to be enlarged but only the amendment of grounds upon which relief which has been sought should be allowed.''

19. The issue now presented is not ``on all fours'' with either of those decisions. It happens that the applicant claimed relief in the alternative by way of depreciation should the claim to full deductibility in respect of repairs fail. However, even had he not done so, it might be thought that the claim by the applicant to a deduction for the full cost of what was expended in the works in question carried implicit within it, such as would be understood by any competent assessor, that, should the only reason for disallowing the ``repairs'' claim be the capital nature of the expenditure by reason of bringing into existence depreciable plant or articles, the lesser relief of a deduction for depreciation should be understood. However, I am not persuaded that it is similarly implicit that, if a claim to a deduction for ``repairs'' fails for that reason, it carries with it and ought to be understood to carry with it, a claim to investment allowance. I say that because there are many circumstances in which depreciation may be allowable even though investment allowance is not.

20. The Act makes provision for taxpayers to challenge assessments raised by the Commissioner. To do so it is necessary that they should object in writing. The objection should identify what is objected to: in this instance stated to be the non-allowance of a deduction for $17,135 in respect of ``repairs''; and why: the specification of grounds of objection. In that way the Act provides the Commissioner with an opportunity to reconsider his assessment and it obliges him to determine whether to ``disallow it, or allow it either wholly or in part...'' (sec. 186). If dissatisfied with the Commissioner's decision on the objection, the applicant may request an independent review before this Tribunal of the Commissioner's decision upon the objection. The Tribunal does not have power to review anything else. Alternatively, the applicant may request that his objection be treated as an appeal and forwarded to the Court (sec. 187(1)). Prior to 30 June 1986 the taxpayer was ``limited to the grounds stated in his objection''. Since that date the Tribunal or the

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Court, as the case may be, has a discretion not to so limit the applicant ``to the grounds stated in his objection''. In my view, bearing in mind that the object of the assessment and of the review and appeal process is, so far as the law allows, to achieve a correct assessment of taxable income, there is much to be said for the liberal exercise of the discretion not to restrict applicants ``to the grounds of their objection''. But, on the other hand, the power to relieve should not be so exercised as to defeat the structure of the review process.

21. In my view it is a prerequisite to the exercise of the power to review that the Commissioner must have had an opportunity to consider the issue sought to be raised. In this instance, there was nothing in the objection to suggest to the Commissioner that the applicant was contending that the Commissioner should have allowed a deduction by way of investment allowance. On the material before me, that proposition was only first advanced by the solicitor for the applicant when he assumed responsibility for the matter. (He was not the person who had drawn the notice of objection.) In those circumstances, I am of opinion that there is no power in this Tribunal to grant relief in relation to any matter of investment allowance. No such relief was explicitly sought in the objection and no such claim to relief was implicit in the issues which were raised.

22. Accordingly, the order of the Tribunal will be that the determination of the Commissioner upon the objection under review be varied and that the taxable income of the applicant for the year of income ended 30 June 1982 be reduced by $14,707.