Case X63

Members:
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal

Decision date: 31 July 1990.

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D.J. Trowse (Member)

These applications relate to adjustments made by the Commissioner of Taxation (``the Commissioner'') to shares of income allocated from a family trust to the two applicants during the 1985 year of income. Those adjustments result from the Commissioner's view that a claim for investment allowance on fuel storage tanks did not qualify for deduction under Subdiv. B of Div. 3 of Pt III (as it then was) of the Income Tax Assessment Act 1936 (``the Act''). It is recorded that other issues originally forming part of these references have been resolved and are no longer in dispute.

2. The applicants are husband and wife and by consent their references were heard concurrently. They were represented by Mr Randle of counsel and the Commissioner was represented by one of his officers. No witnesses were called by either party and the hearing proceeded on the basis of a statement of agreed facts.

3. The Tribunal's findings as to the facts appear below and in para. 4 to 7. A unit trust (``UT''), formed some time during the 1985 year of income, acquired during that initial period a parcel of land in the Northern Territory and upon that property it constructed a service station. That structure was completed by 1 June 1985 with the overall cost, including the land, being in the region of $3.9m. Also included in that figure are amounts expended on fuel storage tanks, $154,000, and air-conditioning, $71,500. The tanks were isolated from other improvements and were located underground. As at 30 June 1985 all of the issued units in UT had been allocated to a discretionary trust (``DT''), the possible beneficiaries of which included both applicants. There is no dispute that the trustee of DT had effectively distributed the 1985 net income equally between the two applicants.

4. Upon completion of the building project, the trustee of UT entered into an arrangement to lease the service station property to yet another associated discretionary trust (``ST''). The function of ST was to conduct the service station business on those premises. Once more the applicants were named amongst the beneficiaries and, in fact, they participated in the 1985 distribution of income. It is of interest to observe that the 1985 income tax return of UT described its business as property leasing.

5. The terms and conditions of the leasing arrangement are extremely vague. There was no written lease or tenancy agreement nor was Mr Randle possessed of any knowledge on the subject. The only information available to the Tribunal is that the rental, either paid or credited for the month of June 1985, amounted to $25,064. How that figure was arrived at is not clear and yet the revenue statement prepared for UT for the period 1 June 1985 to 30 June 1985 reveals, as will be seen from the following summary, a near break-even result -

Income                        $           $
     Rents received                     25,064
Less Expenditure
     Bank fees                 70
     Depreciation          18,019
     Interest               6,282
     Rates                     19       24,390
                           ------      -------
Net operating profit                      $674
                                       -------
      

It should, however, be appreciated that the above result is prior to an investment allowance claim of $41,643 and which, from an income tax point of view, would have created a net loss to the trust. That apparent disadvantage was overcome by an injection of $50,000 by way of an allocation of income from a further trust under the control of the applicants. It is notable that the storage tanks were brought to account in the determination of the claims for depreciation and investment allowance and that in the latter calculation the amount involved was $27,720, i.e. $154,000 at the prescribed figure of 18%.

6. The applicants accept that the tanks in question were made available to ST and that that entity used them for the storage of its trading stock.

7. It will be recalled that at the relevant time all units of UT were held by DT and thus the disallowance by the Commissioner of the claim for investment allowance on the storage tanks owned by UT indirectly increased the net income of DT to the extent of $27,720. The applicants were the selected residuary beneficiaries in DT for the period to 30 June 1985 and this explains the Commissioner's action of increasing each of their taxable incomes by $13,860. It is those adjustments which are the subject of these appeals.

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ATC 485

8. The question of whether a deduction is allowable in terms of the Subdivision turns on the operation of sec. 82AA(1) which, so far as it is relevant, is in the following terms:

``Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -

• (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
  • (i) in Australia; and
  • (ii) for the purpose of producing assessable income otherwise than by -
    • (A) the leasing of the eligible property;
    • (B)...
    • (C) the granting to other persons of rights to use the eligible property...''

If those conditions are met, then, subject to stipulated time parameters attaching to the dates of acquisition or construction, sec. 82AB bestows the deduction. That deduction is calculated as a percentage of the capital cost of the property.

9. As between the parties, there is no dispute that the storage tanks constituted units of eligible property and that they were used by UT wholly and exclusively in Australia for the purpose of producing assessable income. However, the applicants are not prepared to accept the Commissioner's contention that both the exclusions mentioned in (A) and (C) have application.

10. In considering the provisions of sec. 82AA one should not, unless otherwise instructed by the legislation, depart from the ordinary and natural meaning of the words of the section (see comments of Kelly J. in
)>W.A. Hughes Pty. Ltd. v. F.C. of T. 80 ATC 4478) nor, if there are rights of use, is there a need for those rights to be formally defined and capable of being legally enforced (see decisions of Deane J. (as he then was) in W.A. Hughes Pty. Ltd. v F.C. of T. 81 ATC 4317).

11. The Tribunal now turns to a consideration as to whether the tanks were subject to the leasing arrangement and in so doing, refers to the following definition of lease as set out in sec. 82AQ(1):

```lease', in relation to property, means grant a lease of the property or let the property on hire otherwise than under a hire-purchase agreement, and cognate expressions have corresponding meanings;''

It is apposite to observe that one of the meanings given to the word ``let'' in the Shorter Oxford Dictionary is - ``to grant the temporary possession and use of, in consideration of rent or hire'' and as one of the meanings of ``hire'' - ``payment contracted to be made for the temporary use of anything''.

12. Mr Randle raised the proposition that a distinction should be made as between the service station proper and its constituent parts. He contended that the leasing of the service station did not of itself extend to the ancillary fixtures erected thereon. The Tribunal has difficulty in accepting such a concept, the more so after considering what was said by Blackburn J. in the case of
Holland v. Hodgson (1872) L.R. 7 C.P. 328:

``There is no doubt that the general maxim of the law is, that what is annexed to the land becomes part of the land; but it is very difficult, if not impossible, to say with precision what constitutes an annexation sufficient for this purpose. It is a question which must depend on the circumstances of each case, and mainly on two circumstances, as indicating the intention, viz., the degree of annexation and the object of annexation.''

On the question of intention, the Tribunal is of the view that the installation of the tanks was permanent and not temporary and that the purpose of the tanks was for the betterment of the freehold rather than the chattel itself. Furthermore, the Tribunal is satisfied that the tanks are securely fixed and that their removal could not be achieved without some significant damage. The Tribunal concludes that the tanks became part of the property being leased to ST. Indeed a finding to the contrary could lead to the conclusion that these items were not being used for the purpose of producing assessable income which of itself would represent a disqualifying event.

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ATC 486

13. It is the view of the Tribunal that the lease arrangement between UT and ST falls squarely within the exclusions mentioned in sec. 82AA(1)(a)(ii)(A) and accordingly the claim for investment allowance fails.

14. For the sake of completeness the Tribunal now turns to consider the possible application of sec. 82AA(1)(a)(ii)(C), i.e. whether UT had granted to ST the right to use the tanks. The case of
Tourapark Pty. Ltd. v. F.C. of T. 82 ATC 4105 demonstrates the wide ambit that should be given to the expressions ``right of use'' and ``use'' by another person. It that regard the comments of Gibbs C.J. (as he then was) and Aickin J. are to the point.

Gibbs C.J. said at p. 4108:

``All these provisions support the view that (except in the case of leasing companies) the Parliament intended that the allowance should not be payable unless the taxpayer kept both the property and the exclusive right to use it, and did use it only for the purpose of producing assessable income.''

Aickin J. at p. 4111 put it as follows in relation to sec. 82AA(1)(a)(ii)(C):

``It seems to me that the purpose of subsubpara. (C) is to operate as a `drag net' provisions to pick up any other right to use which might be devised or which might arise in the conduct of some particular kind of business.''

Later on the same page, Aickin J. commented that subsubpara. (C) added:

``... a `catch all' provision in quite general terms to pick up cases where there is no grant of possession but there is a right to use. An example would be the grant of a right to enter an owner's premises and there use the owner's machine tools or other equipment, and the ingenuity of financiers and manufacturers might provide other examples.''

15. The factual position of these references clearly shows that UT had not retained to itself the exclusive right of use of the storage tanks and accordingly the provisions of sec. 82AA(1)(a)(ii)(C) preclude any deduction for investment allowance.

16. In the presentation of his submissions, Mr Randle placed substantial emphasis upon what he saw as a conflict between the provisions of sec. 82AA(1) and 82AF(1). He contended that such conflict could be resolved only by taking a more moderate stance on the interpretation of sec. 82AA(1) and that an extension of the Commissioner's attitude in these references would leave the provisions of sec. 82AF(1), particularly those touching upon the tourist industry, with no function to perform. In his view such a result is contrary to the rules of statutory interpretation and thus, in order to ensure that the Act operates as a whole, a less stringent view should be taken of the exclusion clauses contained in sec. 82AA(1). It is this line of reasoning that leads to the conclusion that ancillary items on the freehold should not be treated as forming part of the lease arrangement.

17. The following example was given to highlight the conflict. A motel operator purchases a TV set and installs it in a room to be occupied by lodgers. According to Mr Randle, the clear intention of sec. 82AF(1) is to provide a deduction by way of investment allowance on the set and yet, if the occupancy of the room by the lodger is seen as the granting of a right to the lodger to use that item, sec. 82AA(1)(a)(ii)(C) cancels out that benefit. On that basis, so the argument ran, the portion of sec. 82AF(1) that related to the tourist industry was made otiose by the provisions of sec. 82AA(1)(a)(ii)(C). But in any event this is not so and the submission is rejected. There are many items of household appliances and furniture which, but for the operation of sec. 82AF(1), would not have attracted the investment allowance, some of them being floor coverings in reception and restaurant areas together with counters, cupboards, tables, chairs and TV sets in those same locations. It may be that the use of the TV set by the lodger in his room may trigger the operation of the exclusion clause, but that event by itself plays no role in determining whether a claim exists in connection with the types of items mentioned and which are not subject to any lease or specific right of use. The view of the Tribunal is that whilst sec. 82AA(1) may be restrictive in some circumstances, it does not render sec. 82AF(1) totally ineffectual.

18. Finally some comment on Taxation Ruling IT 49 is required. That Ruling, issued on 12 October 1978, addresses the problem of whether fixtures such as air-conditioning, lifts, escalators, employees' amenities, burglar and

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ATC 487

fire alarm systems located in a building leased by its owner, attract a claim for the investment allowance. The Commissioner rules that in those circumstances, the fixtures answering those descriptions are to be regarded as being used by the owner in producing assessable income otherwise than by leasing or granting rights to use them. In short, fixtures of that kind are considered to qualify for the investment allowance, other conditions of the allowance being satisfied. Portable air-conditioners are specifically excluded from the concession. It is notable that the Ruling is in brief terms and is void of any reasoning.

19. In these references it should be observed that UT had incurred considerable expenditure on air-conditioning and that the corresponding claim for the investment allowance had been accepted by the Commissioner. The question as to why the air-conditioner claim had been allowed and not that for the storage tanks warrants an answer. By way of reply, the Commissioner's representative made two submissions, first that there was a functional difference inasmuch that ST made active use of the tanks in its day-to-day operations whereas the use of the air-conditioning was passive by nature. The Tribunal finds that explanation unconvincing and lacking in merit. Secondly, recognising that the Ruling is pre-Tourapark and Hughes (supra), the information comprised in the Ruling is incorrect.

20. It will be appreciated that Rulings issued by the Commissioner are no more than an expression of his opinion and are of no binding force. After considering the wide ambit given in Tourapark to the words contained in the exclusionary clauses, the Tribunal takes the view that the Ruling is at odds with the decision in that case. Accordingly the Tribunal declines the invitation to apply the Ruling to the facts of these references.

21. In conclusion, for the reasons enunciated above, the Tribunal affirms the objection decisions.