Case W18

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 20 January 1989.

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P.M. Roach (Senior Member)

This application relates to a year of income which ended on 30 September 1983. The question for determination upon this reference is whether a partnership (to be referred to as ``financier''), which ``purchased'' (it is said) certain equipment from a trading company (``trader'') and which, having purchased the equipment, leased it all back to trader for a rent, is entitled to claim depreciation pursuant to sec. 54(1) of the Income Tax Assessment Act 1936 (``the Act'') and an investment allowance pursuant to Subdiv. B of Div. III of the Act in relation to all of that equipment. It has been conceded by the Commissioner that, if financier is entitled to a deduction for depreciation, it is entitled to the benefit of the claimed investment allowance. It was also conceded on behalf of the Commissioner that financier was entitled to claim both depreciation and investment allowance in relation to much of the equipment. What is in contention is confined to only so much of the equipment as I shall refer to as the ``disputed equipment''.

2. The applicant is one of two companies which together comprised the firm financier. At the commencement of the hearing, counsel for the applicant formulated the issue for determination as follows:

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``Whether the items in question, namely wall and floor tiling, cold water systems and sewerage system qualify as `plant' under sec. 54 of the Income Tax Assessment Act 1936 (`the Assessment Act'), by virtue of the extended definition of the words in para. 54(2)(c), and therefore as `eligible property' for the purpose of Subdiv. B of Div. III of Pt III of the Assessment Act.''

3. The case was presented before me on the basis of a statement of agreed facts adopted by both parties but supplemented by admissions. By defining the issues for determination as they have, the parties have asked me to adopt certain conclusions which they contend flow as a matter of law from matters of primary fact which have been agreed between them. With some diffidence I have agreed to follow that course and to determine the issue as defined by them upon the basis of the assumptions proposed by them.

4. I find that much of the equipment which was sold to financier by trader and leased back by financier to trader comprised discrete units of personal property but that some of the equipment, including all of the disputed equipment, comprised other items of property which had either come to be affixed to, or had become an integral part of, structures erected on real estate. As I understand it, that real estate was at all times the property of trader. I accept that all of the equipment was ordered by trader on 23 March 1982 and installed by the supplier in premises occupied by trader in the course of its income-earning activities and that such installation was complete prior to 1 July 1983. I accept that all of the equipment was ``sold'' by trader to financier on a date unspecified, but a date such as to make it appropriate for the parties to have agreed that ``at all relevant times during the year of income ended 30 September 1983'' all of the equipment was owned by financier; and that by a ``lease'' dated 1 July 1983, financier ``leased'' the entirety of the equipment to trader. I find that, during the year of income ended 30 September 1983, financier derived assessable income in the form of rent from its ``lease'' of the equipment to trader.

5. I find that the disputed equipment comprised what is agreed to constitute ``plumbing fixtures and fittings'' (including wall and floor tiling) such as are referred to in sec. 54(2)(c) of the Act. I further find that the disputed equipment was installed in an amenities block principally used for ``the personal purposes of employees'' of trader; but to a lesser extent used by persons who stood in relationship to trader as independent contractors; and that, to an even less degree, the facilities were used for the personal purposes of visitors to the premises. I find that during the year of income ended 30 September 1983 no employees of financier, or of either the applicant or the other partner in financier, used the amenities. I also acknowledge that it is common ground that at all material times the applicant was a ``leasing company'' for the purposes of Subdiv. B of Div. III of Pt III of the Act.

6. What occasioned the diffidence previously referred to is difficulty in accepting that ownership of the disputed equipment, which was an integral part of the structures in which and to which it was fitted, could be with anyone other than the owner of the structure - at least while so affixed. The principles recognised in
Rendell v. Associated Finance Pty. Ltd. ((1957) V.R. 604) hardly seem to be applicable. Hence, I express doubts as to whether there ever was a ``sale of goods'' or a ``lease'' whereby financier first became owner of, and later delivered possession to trader of, the disputed equipment in accordance with their agreement that it should be so.

7. The Commissioner, by his representative, concedes that if the applicant is entitled to a deduction for the depreciation claimed, it is also entitled to a deduction by way of investment allowance. Conversely, the applicant concedes that if it is not so entitled to a deduction for depreciation, it is not entitled to a deduction for investment allowance. For those reasons in what follows it will be sufficient to consider only the claim to depreciation. That being so, in short form, the issue can be said to be whether an owner of ``plant or articles'' used for the purpose of producing assessable income by leasing them to another for the use of that other is entitled to depreciation on such plant or articles if it only constitutes ``plant or articles'' by reason of the extended definition of ``plant'' set forth in sec. 54(2)(c) of the Act.

8. The system of income taxation provided for by the Act is based upon a determination of ``the taxable income of a taxpayer''. That sum

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is to be determined in accordance with sec. 48 of the Act which provides:

``In calculating the taxable income of a taxpayer, the total assessable income derived by him during the year of income shall be taken as a basis, and from it there shall be deducted all allowable deductions.''

9. The significance of the concept of ``depreciation'' in the process of assessment is that it makes some provision for deductions to be allowed in relation to capital losses incurred in the course of income-earning activities. Losses which would not be allowable pursuant to sec. 51(1) of the Act because that subsection excludes from eligibility as deductions ``losses or outgoings of capital, or of a capital... nature'', may be allowable as ``depreciation''.

10. When the present Income Tax Assessment Act was enacted in 1936 no provision was made for depreciation of any items such as the disputed equipment in this case. At that time sec. 54 merely provided:

``(1) 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.

(2) In this section, `plant' includes -

• (a) animals used as beasts of burden or working beasts in a business other than a business of primary production, and machinery, implements, utensils and rolling stock; and
• (b) fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits but does not include improvements used for domestic or residential purposes.''

It was only later that subsec. (2) was amended to read:

``(2) In this section, `plant' includes -

• (a) animals used as beasts of burden or working beasts in a business other than a business of primary production, and machinery, implements, utensils and rolling stock;
• (b) fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits, structural improvements (not including an improvement that is an access road as defined by section 124E) completed after the year of income that ended on 30 June 1963, on land that is used for the purposes of forest operations and structural improvements completed after 30 June 1958 which are used wholly and exclusively for the purposes of pearling operations and are situated at or in the vicinity of a port or harbour from which those operations are conducted, other than -
  • (i) structural improvements used for domestic or residential purposes except where the improvements are provided for the accommodation of employees, tenants or sharefarmers engaged in or in connexion with those pursuits or operations, as the case may be; or
  • (ii) structural improvements, bores, wells or pipes expenditure on which has been allowed, or is or has been allowable, as a deduction under paragraph (g), (ga), (gb), (h), (i), (j) or (l) of sub-section (l) of section 75, or section 76, from the assessable income, of any year of income of the taxpayer or of any other person; and
• (c) plumbing fixtures and fittings, including wall and floor tiling, in premises acquired after 30 June 1938, or installed in premises after that date, by a person carrying on a business for the purpose of producing assessable income, where those fixtures and fittings are provided principally for the use, for personal purposes, of persons employed by him in that business or for the care of children of those persons.''

11. On perusal of the section in its original form it can be seen that there were three factors to be taken into account:

• (a) the item to be depreciated had to be ``owned'' by the taxpayer. As a general rule, a taxpayer who did not own items

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  which he used in the course of deriving assessable income either suffered no expense in that regard, or the expense of procuring the availability of the article for use was allowable pursuant to sec. 51 of the Act;
• (b) the item had to be ``used (or `installed ready for use') for the purpose of producing assessable income'': a requirement akin to the sec. 51(1) requirement for a nexus between the expense and the system for producing assessable income; and
• (c) the item had to fall within the concept of ``plant or articles'': a limitation which was generally effective to exclude depreciation in relation to structures which constituted an integral part of real estate.

12. However, as to the latter point there were exceptions. They were those specifically addressed in sec. 54(2)(b); and those recognised by decisions of the courts in which it has been held that, for example, a structure such as a dye-house which plays an integral part in the process of manufacturing worsted yarn by dyeing and spinning is ``plant'', and is depreciable (
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095: (1969) 119 C.L.R. 1). It follows that there never has been an absolute rule that what constitutes real estate, or an integral part of real estate, cannot be depreciated.

13. None the less it was generally true that it was only owners who used plant and articles in the course of their income-producing activities who were entitled to claim depreciation. However, in that regard it did not matter whether the plant was ``used'' by the owner-taxpayer as possessor of the plant, rather than by divesting himself of possession and so deriving income for himself by letting others have the physical possession, control and use of the equipment.

14. Section 54(2)(a) and (b) introduced two extensions to the general rules. Animals constituted ``plant'', but only if they were ``used as beasts of burden or working beasts in a business other than a business of primary production''. Secondly, ``structural improvements'' constituted plant, but only if they were on ``land which is used for the purposes of agricultural or pastoral pursuits...''. In neither case was it expressly provided that the use of either the beasts or of the structural improvements had to be by the owner. But it is at least clear that, if there had been no other relevant provisions than sec. 54(1) and 54(2)(a) or (b) of the Act, there could have been no claim by the present applicant. It is common ground that the disputed equipment did not constitute ``plant or articles'' by the 1936 standards of the Act.

15. However, it is argued for the applicant that, by reason of amendments to sec. 54(2) of the Act enacted in 1946 (No. 6 of 1946) the disputed equipment now constitutes ``plant'' as defined by subsec. (2) of that section and thereby becomes depreciable in the hands of the applicant as owner of the disputed equipment by force of sec. 54(1) of the Act. The amendment altered sec. 54(2) to add subpara. (c) previously quoted. I am satisfied that the amendment was introduced to encourage improvement in industrial conditions in the immediate post-war period for the benefit of workers by providing tax concessions to their employers.

16. I find that the disputed equipment did constitute ``plumbing fixtures and fittings''. I find, but only on the basis of the admission made before me, that it was owned by financier. I find that the plumbing fixtures and fittings in question were not ``in premises'' at the date of acquisition of the premises by trader. I find that the disputed equipment was ``installed in premises after 30 June 1938''. I find that they were installed by trader, being ``a person carrying on a business for the purpose of producing assessable income''. I find that the disputed equipment was provided principally ``for the use, for personal purposes, of persons employed by (trader) in that business''.

17. The applicant argues that it is anomalous that trader, but for the ``sale'' and ``lease-back'' arrangement, would have been entitled to depreciation on the disputed items but that, by reason of that ``sale'' and ``lease-back'', neither financier nor trader will be entitled to claim depreciation on them. I do not find any great assistance in the argument. As lessee of the disputed equipment trader will be entitled to a sec. 51 deduction for all the costs it incurs in having the use of that equipment for its income-earning purposes and financier will be entitled to such allowances for depreciation on that disputed equipment as sec. 54 provides for. That that might not extend to the allowance of depreciation on plumbing

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fittings is no more anomalous, and no more significant, than the circumstance that, where a business is conducted by a sole trader or individuals in partnership, depreciation could be allowable upon plumbing fittings in the employees' amenities block, but not in relation to the ``executive bathroom''.

18. The more substantial argument for the applicant is that the ascertainment of whether an item of property qualifies as ``plant'' is anterior to the determination of whether that item of property qualifies for depreciation. The contention is that one must first ascertain whether the item in question is ``plant'' within the meaning of sec. 54(2) of the Act and then, should that question be answered affirmatively, determine whether the taxpayer satisfies the requirements of sec. 54(1) of the Act in relation to that plant.

19. To qualify for depreciation under the Act a taxpayer must satisfy a number of tests in relation to each year for which the claim to depreciation is made. Among those tests are tests which relate to the nature of the item: whether ``plant or articles'' as referred to in sec. 54(1); or (inter alia) ``animals'' or ``plumbing fixtures and fittings'' as referred to in sec. 54(2) and thereby deemed to be ``plant or articles''. Other tests require that additional tests as to the usage or character of the items be satisfied. To qualify, ``animals'' must be ``beasts of burden or working beasts in a business'', but the business must be ``other than a business of primary production''. The issue for determination in this reference requires that a similar analysis be made in relation to ``plumbing fixtures and fittings'', in order to determine whether the disputed equipment here in question is capable of constituting ``plant or articles'' for the purposes of sec. 54(1) in the year of income ended 30 September 1983.

20. In considering those questions it is helpful to have regard to the origins of the legislation. The amendment to the Act was introduced in 1946, closely following the end of the Second World War 1939-1945. I am satisfied that the amendment was introduced in the immediate post-war environment to encourage improvement in industrial conditions for the benefit of workers. It sought to do so by providing tax concessions to their employers. What was sought to be encouraged was the provision of ``plumbing fixtures and fittings, including wall and floor tiling'', for the use of employees. The taxation incentive was directed to the benefit of those whose outlays would result in the provision of those facilities. To qualify for the benefit a number of tests had to be satisfied:

• (a) the items in question had to be aptly described as ``plumbing fixtures and fittings'';
• (b) they had to be either existing facilities ``in premises acquired after 30 June 1938... by a person carrying on a business for the purpose of producing assessable income''; or they had to be ``installed in premises after that date, by a person carrying on a business for the purpose of producing assessable income''; and
• (c) they had to be ``fixtures and fittings... provided principally for the use, for personal purposes, of persons employed by him in that business...'' (emphasis added).

21. Because income tax is an annual imposition, eligibility for deductions has necessarily to be considered on a year-by-year basis. It is not sufficient, in relation to any one year, for a taxpayer to show that he had qualified for the deduction in any earlier year, let alone to show that another person had been entitled to the deduction in an earlier year. As I read the provision, what the Parliament intended was that the benefit of the amendment would be conferred upon owners, and only upon owners, of premises who provided amenities blocks for their employees in premises owned by the employer, but being limited to amenities blocks in premises acquired by the owner after 30 June 1938, or to amenities blocks installed in the owner's premises after that date.

22. Upon that view of the matter, I am satisfied that, had it not been for the ``sale'' and ``lease-back'', trader would have satisfied those tests and qualified for the deduction. Indeed, if title to the disputed equipment was incapable of passing independently of title to the land, it may be that trader remained eligible. But financier was not so eligible. It did not acquire the premises. It did not install the amenities block in premises it owned. It did not provide

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the amenities block for the advantage of its employees.

23. Accordingly, the determination of the Commissioner upon the objection is to be affirmed.