Pearce v. Federal Commissioner of Taxation

Judges:
Northrop J
Spender J
Pincus J

Court:
Full Federal Court

Judgment date: Judgment handed down 22 December 1988.

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Northrop, Spender and Pincus JJ.

This is an appeal under the Administrative Appeals Tribunal Act 1975, in an income tax matter, from a decision of the Administrative Appeals Tribunal [reported as Case U137,
87 ATC 794]. The applicant is not himself a taxpayer against whom an assessment has issued, but has objected to assessments issued to a company, Sayani Pty. Ltd., relating to its income in the year ended 30 June 1980.

The basis upon which the applicant has the right to challenge the assessments issued in respect of Sayani Pty. Ltd. does not require detailed explanation. In brief, the Taxation (Unpaid Company Tax) Assessment Act 1982 permits such persons as the applicant the same rights under Div. 2 of Pt V of the Income Tax Assessment Act 1936, in relation to Sayani Pty. Ltd.'s tax liability, as that company has: see sec. 18 of the 1982 statute.

Each of the assessments against Sayani Pty. Ltd. was made on the basis that the company is liable to pay tax under sec. 26AAA of the Income Tax Assessment Act in respect of the sale of the Flamingo Motel at Surfers Paradise pursuant to a contract made on 3 August 1979. The issue in the case is whether sec. 26AAA, properly construed, makes the company's profit taxable and it is common ground that the profit is taxable unless saved by subsec. (5) of the section. The relevant provisions of the Act will be spoken of in these reasons in the present tense, although there have been some amendments to those provisions since the transactions in question occurred.

Before the Tribunal, the applicant substantially failed; it succeeded only in persuading the Tribunal that the amount of profit was overstated and that issue was remitted to the respondent. In this Court, the only question agitated was whether sec. 26AAA(5) excludes the profit in question from the operation of sec. 26AAA and we are not concerned with any question of quantum.

It is necessary to refer to the facts as found, but the applicant's argument did not depend on their details; it was that as a matter of law subsec. (5) of sec. 26AAA excludes from the section's operation any sale of real property which includes depreciable fixtures.

It appears from the Tribunal's reasons that some items of plant, such as sinks, an oil heater, a pool filter and neon signs were fixtures on the land sold and were the subject of depreciation. However, for reasons which it is unnecessary to set out, it was impossible for the applicant to show what the depreciated value of any item was; no attempt had been made to place a value on the items when the motel was bought by Sayani Pty. Ltd.

The motel was bought for $425,000, by a contract dated 26 September 1978 and sold for $667,000, by a contract dated 3 August 1979. Prima facie, since the contract date is deemed to be the date of sale (sec. 26AAA(1)(g)), the assessable income of Sayani Pty. Ltd. for the year ended 30 June 1980 included the profit under sec. 26AAA(2), reading as follows:

``Where -

• (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and
• (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property.

then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest.''

Subsection (5), which, according to the applicant's argument, applies to the circumstances of the sale, reads in part as follows:

``Sub-section (2) does not apply in relation to a sale by a taxpayer of property if -

• (a) the property was included in the assets of a business carried on by the taxpayer and, as a result of the sale, an amount will be included in the assessable income of the taxpayer of the year of income under a provision of this Act other than this section;
• (b) section 54 applied in relation to the property and, as a result of the sale, section 59 applies in relation to the property; or

...''

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ATC 4066

It is evident that the words ``the property'' in para. (b) refer to the motel as a whole and not simply to the depreciated fixtures. Accepting that, counsel for the applicant contended that para. (b) excludes the sale from the section's operation. No reliance was placed on para. (a).

It is necessary to discuss the operation of sec. 54 and 59 at some length, but their general purpose should first be mentioned. Section 54 gives a deduction for depreciation of ``plant or articles owned by'' a taxpayer on the basis of an annual percentage fixed under sec. 55; sec. 59, so far as relevant, has the effect of giving a deduction or including an additional amount in assessable income on a sale of depreciable property, depending on whether the price is less than or greater than the depreciated value at the time of sale. Section 54(1) is as follows:

``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.''

Under the general law, ``plant'' can include fixtures (
The Australian Gas Light Company v. The Valuer-General (1940) 40 S.R. (N.S.W.) 126 at p. 139 per Jordan C.J.) and any doubt whether it can do so for the purpose of sec. 54 is dispelled by sec. 54(2). It makes ``plant'' include, inter alia, certain, ``fences, dams and other structural improvements on land'' and certain ``plumbing fixtures and fittings''. In this case, it was not disputed that some of the motel's fixtures constituted ``plant''; they included a swimming pool filter and a diesel hot water boiler.

Under sec. 55, mentioned above, an annual depreciation per centum is to be fixed on the basis of the Commissioner's estimate of the effective life of any ``unit of property''. The expression quoted is apt to refer to, amongst other things, a fixture not separately sold or saleable, such as a dam; although that is not truly a distinct piece of property, sec. 54 treats it as one.

There appears to be no great practical difficulty in applying sec. 54 and ancillary provisions to fixtures (such as pipelines used for transporting petroleum, dealt with in sec. 58), at least as to depreciation deductible by the original owner; the amount of depreciation depends upon the cost of the plant. The problem which is at the root of this case, however, arises when one attempts to apply sec. 59 to depreciated fixtures. The application of that section depends upon ascertaining the ``consideration receivable'' on sale; it is not immediately clear how one determines that consideration, with respect to a fixture which is sold only in the sense that it is affixed to land which is sold. Sections 59(1) and (2) read as follows:

``59(1) Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction.

59(2) If that consideration exceeds that depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for income tax under this Act and any previous law of the Commonwealth in respect of depreciation, shall, subject to the succeeding provisions of this section, be included in his assessable income of that year.''

It should be added that the expression ``depreciated value'' which appears in sec. 59 is defined in sec. 62, subsec. (1) of which reads as follows:

``In this Division, `depreciated value' of any unit of property at any time means the cost of the unit to the person who owns or owned the property at that time less the total amount of depreciation (if any) allowed or allowable in respect of that unit in assessments of the income of that person, for any period prior to that time, under this Act or any previous law of the Commonwealth.''

If the Act, properly read, provided no guidance, one could suggest more than one way of meeting the difficulty as to ``consideration receivable''. Section 59 could be treated as simply inapplicable where the property sold is only partially depreciable - e.g. where it is a

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ATC 4067

motel including some depreciable fixtures. That avoids altogether the difficulty of fixing a ``consideration receivable'' in respect of the disposal of the fixtures. Another possibility is to treat the consideration receivable as being the amount (if any) which the parties fix by their contract of sale and purchase as being apportionable to the fixtures. The third (a variant of the second) is to assume that the legislature intended that the consideration receivable is prima facie to be based on the parties' apportionment, but if there is no apportionment or the apportionment is unacceptable to the Commissioner, he may make his own apportionment; this appears to be the Commissioner's practice.

It would, in our view, be rather anomalous to treat sec. 59 as having no application in cases of this sort, where depreciated property is affixed to land sold. On that assumption, there would be no means of making an appropriate adjustment on sale, either in favour of or against the taxpayer, so that if depreciation turned out to have been overclaimed or underclaimed, there would be no remedy. It is hard to think of a reason why the legislature should have intended to exclude a particular sort of depreciable property from the operation of sec. 59, on the basis of its affixation to realty.

The solution suggested by the applicant in this case was that the expression ``any property'' in sec. 59(1) should be treated as referring to the motel and that one may say that depreciation has been allowed ``in respect of'' the motel, within the meaning of the section, on the basis that the depreciated fixtures are part of it. The result would be that if realty including depreciable fixtures were sold at a substantial loss, then the whole of the loss, whether or not attributable to depreciation of the fixtures, would be a deduction under sec. 59(1) - an unlikely result.

It seems probable that the draftsman of these provisions intended that the whole subject of allocation of prices to different items should be dealt with by sec. 59(3)(c), which reads as follows:

``Subject to sub-section (4), the consideration receivable in respect of the disposal, loss or destruction means -

• ...
• (c) in the case where the property is sold with other assets and no separate value is allocated to the property - the amount determined by the Commissioner;
• ...''

(Again, it should be noted that the provision is quoted in its form at the relevant time; it has been amended since.)

The alternative view is that the provision just quoted was intended to deal with the sale of a number of separate and unattached items, such as a sale of land and chattels, and also with the sale of land and items which are attached to it, but only if attached in such circumstances as not to make them fixtures; e.g. items affixed for purposes of trade, such as the glasshouses dealt with in
Mears v. Callender (1901) 2 Ch. 388.

We think that in the expression ``sold with other assets'', the word ``with'' is not intended to require one to discriminate between assets which are technically fixtures and those which are not, but to refer broadly to items, whether actually severed or not, capable of being depreciated under the Act as separate pieces of property.

The problem just alluded to, arising from the absence of any unambiguous explanation as to how one fixes the ``consideration receivable'' in respect of disposal of depreciable fixtures not sold separately, caused a division of opinion among the members of the High Court in
Ferling v. F.C. of T. (1965-1966) 115 C.L.R. 603. It appears to us desirable to resolve the point which divided the Court in Ferling's case. That is so because it bears directly upon the ultimate question, namely whether sec. 26AAA(5)(b) applies so as to exclude sec. 26AAA, in sales of land having affixed to it depreciable assets; if the applicant's primary contention is right, then the property the subject of the calculations to be made as required by sec. 59(1) and (2) is the whole land, including the fixtures. If so, then the conclusion seems inescapable that sec. 59 ``applies in relation to'' the whole property within the meaning of sec. 26AAA(5)(b). Ferling's case concerned a claim by a taxpayer to deduct a sum under sec. 59(1) on the basis of a ``consideration receivable'' for fixtures fixed by an agreed apportionment; as here, there was in truth no separate sale of fixtures. Windeyer J. at first instance said at pp. 613-614:

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ATC 4068

``Then it is said that the depreciated value of the property sold exceeded `the consideration receivable', and therefore the difference (described in the return as a `loss') should be allowed as a deduction. But this proposition is, I consider, quite mistaken. `The consideration receivable' in the case of a sale means the sale price less the expenses of the sale of the property (s. 59(3)(a)). The amounts written in to the schedule were not in truth the prices of separate items: and in my opinion s. 59(3)(c) does not mean that they must be treated as if they were. That provision applies when, as I have already said, a `value' is `allocated' to the property when it is `sold with other assets'. That was not so here. The depreciated property was not sold with other assets. It was an inseparable part of the thing sold.''

When the matter went on appeal, McTiernan A.C.J. assumed (pp. 618 and 625) the possibility of doing that which Windeyer J. rejected. Taylor J. discussed the matter (at pp. 630-631) in a way consistent with the view of Windeyer J. The passage reads in part:

``In these circumstances there is, in my view, much to be said for the proposition that the provisions of s. 59 have no application to a case such as the present. I appreciate the difficulties which would flow from such a view but it is one to which, as at present advised, I would be prepared to subscribe since it seems to me to follow inevitably from the language of the section.''

Menzies J. also dealt with the point, saying at p. 635:

``The difficulty with which we are concerned arises because disposals are within the scope of s. 59 and, when land is disposed of, that disposal carries with it all that is part of the land. There is something unreal in treating what is simply part of the property as a whole as disposed of `with other assets'. The difficulty caused by the words `is disposed of' in s. 59 is perhaps mitigated to some extent by the provisions of s. 59, sub-s. (3), which provides for the ascertainment of `the consideration receivable in respect of the disposal, loss or destruction' of depreciated property. Thus, if an agricultural property on which there is a house which has been depreciated in accordance with s. 54 has been disposed of by sale, it seems to have been within the contemplation of those who framed s. 59 that the Commissioner could determine the value of the house for the purposes of s. 59 in circumstances where `no separate value is allocated' (see s. 59(3)(c)). It would, I think, be yielding too much to difficulties of a formal nature and having too little regard to the substance of the matter to treat s. 59 as inapplicable in the case where a property is disposed of which consists in part of `plant' upon which depreciation has been allowed in accordance with s. 54.''

We would remark that we find the reasons just quoted to be, with respect, compelling.

Lastly, it should be mentioned that Owen J., although somewhat briefly, expressed a view appearing to accord with that of Taylor J.: p. 649.

Although the opinion of Taylor J. on the point was expressly inconclusive, the views advanced or (in the case of McTiernan A.C.J.) assumed in the Full High Court with respect to the point were evenly divided. In those circumstances, it appears to be open to this Court to reach its own conclusion. As we understand the matter, in the 22 years since Ferling's case was decided (and long before) the Act has been administered generally in accordance with the view that sec. 59 applies to sales of depreciable fixtures as part of realty, and we are of opinion that that view is correct.

We think that sec. 59(1) and (2) apply to such sales and do so on the basis that the fixtures are to be treated as ``sold with other assets'', within the meaning of sec. 59(3)(c). It is true that the provision would, much more clearly, cover such a case as this if it read ``where the property is sold with or as attached to other assets''. But it does not appear to us to require too great a straining of language to speak of, for example, a permanent swimming pool filter (being undoubtedly a fixture) as being sold with the land to which it is attached. In the passage which has been quoted from the reasons of Taylor J., his Honour spoke of the improvements there in question as having been ``bought and sold by the taxpayer, as indeed they could only be, as part of the land itself''. That is accurate enough with respect to certain fixtures mentioned in sec. 54 such as dams and

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ATC 4069

bores, but is not true of fixtures generally. Further, as we have pointed out, it is plain that sec. 54 intended that fixtures within its scope shall be depreciated as separate ``units of property''. It seems to us that the draftsman of sec. 59(3)(c), in using the expression ``sold with other assets'', intended to catch all instances of sales of property including depreciable property, whether the depreciable property consisted of chattels, removable fixtures or irremovable fixtures. He used the general words ``sold with other assets'', rather than some more elaborate and precise expression, but the general intention is, in our opinion, clear enough and should be given effect to.

The alternative would be to create a gap in the Act inconsistent with an accepted interpretation, which neither side sought to challenge in Ferling's case. The broad construction of sec. 59(3)(c) favoured by Menzies J. in Ferling's case makes it unnecessary for the Commissioner or taxpayers to attempt to distinguish, when property is sold, between those items which are physically attached and constitute fixtures in the strict sense and those items, which although affixed to a degree, are chattels. That is a distinction which has given rise to a wealth of authority: e.g.
Leigh v. Taylor (1902) A.C. 157,
Jordan v. May (1947) K.B. 427,
Anthony v. The Commonwealth of Australia (1973) 47 A.L.J.R. 83. When faced with a choice between, on the one hand, entrenching such a distinction and, on the other, giving the relevant Act a broad, practical interpretation according with the understanding of both taxpayers and the Commissioner over many years, this Court is justified in selecting the latter course.

It follows that we read sec. 59(1) and (2) as capable of application to depreciable fixtures sold as part of the realty, whether or not any apportionment is agreed. Applying that to the present case, it must be held that there were fixtures constituting property ``in respect of which depreciation has been allowed or is allowable'' within the meaning of sec. 59 and a consideration for which capable of being fixed under sec. 59(3)(c).

The next question is whether, having regard to the construction of sec. 59 which we have adopted, sec. 26AAA(5)(b) applies. The applicant said, firstly, that sec. 59 applies to the motel as a whole (a contention we have rejected above) and, secondly, that the proper construction of the phrase ``in relation to'' in sec. 26AAA(5)(b) is such as would be fully expressed by the words ``in relation to the whole or part of'' the property.

Section 26AAA(5)(b) was considered in a similar context by a Full Court consisting of Deane, McGregor and Lockhart JJ. in
F.C. of T. v. Mullins 81 ATC 4643; (1981) 56 F.L.R. 256. The case concerned, as does the one before us, a sale of realty including depreciable fixtures; there the fixtures were fences.

McGregor J., who dissented as to the other point in the case (the application of subsec. (5)(a)) said at ATC p. 4653; F.L.R. p. 270:

``In my opinion, sec. 54 does not apply in relation to the estate or land though it does apply in relation to fences. It cannot be said, I consider, that if sec. 54 applies to a depreciable asset (fences) on land it applies thereby `in relation to the land'.... Section 59 is designed to protect the revenue as well as the taxpayer on disposal of depreciable assets and does not, I consider, apply in relation to the disposal of an estate or land merely because on it are to be found depreciable assets.''

In short, his Honour was of the view that neither sec. 54 nor 59 applies in circumstances of this sort, in relation to the whole property.

Deane J. said that, as then advised, he agreed with McGregor J. as to para. (b). We think it is worthwhile quoting his Honour's view at some length (at ATC p. 4645; F.L.R. p. 258):

``With due respect to those who see the matter differently, it seems to me that sec. 54 and 59, in their application to an item of plant, structure or structural improvement, apply to, or in relation to, the item, structure or structural improvement itself. They do not apply to, or in relation to, the whole are of land, however vast or small, to which that item of plant, structure or structural improvement may happen to be affixed or on which it may happen to be found. I am, in indicating this tentative view, conscious of the difficulty posed by structural improvements which consist of the shaping of the land itself, such as dams (see sec. 54(2)(b)). It seems to me, however, that sec. 54 and 59, in the application, effect, even in such cases, a

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ATC 4070

notional isolation of the relevant item of plant, structure or structural improvement with the result that it cannot properly be said that either sec. 54 or sec. 59 applies in relation to the overall area of land. It is, however, unnecessary that I form or express any concluded view on that question...''

Lockhart J. did not consider any question relating to subsec. (5)(b).

Counsel for the applicant suggested that we should not follow the views of Deane and McGregor JJ. He argued that the words ``in relation to'' in para. (b) are capable of a wide meaning; we agree. However, the expression ``in relation to'', with reference to each of sec. 54 and 59, directs the reader's attention back to those provisions. Section 54 makes depreciation ``of any property, being plant or articles'' of a certain kind an allowable deduction. The property ``in relation to'' which the section applies, is, in our view, naturally to be taken to be that mentioned in it, namely plant or articles, not the land on which they are to be found or to which they are affixed. As to sec. 59, a similar mode of reasoning reaches a similar result. The section deals, so far as relevant, with a disposition of ``any property of a taxpayer, in respect of which depreciation has been allowed or is allowable...'' and either creates an allowable deduction or brings a balancing charge into assessable income, depending on the relation between the consideration received and the depreciated value of the property. On the construction we have given sec. 59, ``the property'' mentioned therein is, in a case of this sort, the fixture and not the land to which it is attached. Thus sec. 59 does not apply ``in relation to'' the land, within the meaning of sec. 26AAA(5)(b), but in relation to the fixture.

The conclusion appears to us to be consistent with the ordinary meaning of the language used and with the views expressed by Deane J. and by McGregor J. in Mullins' case. It also has the advantage of reaching a result which is in accordance with what common sense suggests was the purpose of sec. 26AAA(5)(b). It seems unlikely that Parliament intended that the tax generally imposed in respect of resales within 12 months should be inexigible, as to sales of realty, in any case where the property sold happens to have any depreciable improvements on it, of however small value.

In the result, we are of opinion that the appeal should be dismissed with costs.