CASE 11/97

Members:
J Block SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 3 March 1997

J Block (Senior Member)

1. General and introductory

(a) The Applicant sought the review of a decision by the Respondent disallowing an objection dated 17 March 1995 against an assessment and an amended assessment issued on 25 October 1993 and 6 December 1994 respectively in relation to the tax year ended 30 June 1993.

(b) It is relevant to note, as a preliminary matter, that there were previously other disputes between the parties which were resolved. It remained for the Tribunal to resolve only three outstanding questions, namely:

(c) It is also relevant to note that the Applicant's objection against the disallowance of a depreciation deduction for the wardrobe, arose at a time later than set out in subclause (a), and was incorporated in these proceedings; case NT96/249 is specifically referable to the wardrobe.

(d) In the negotiations preceding the hearing, the Applicant withdrew his claim for a deduction in respect of certain travel expenses; it was agreed between the parties that the Tribunal's decision as to penalties (referable to the depreciation claims) would apply also in respect of the travel expenses claim, which was not before the Tribunal.

2. Appearances and evidence tendered

The Respondent was represented by Mr J Davis and the Applicant appeared personally. The Tribunal received into evidence the T Documents filed under s 37 of the Administrative Appeals Tribunal Act 1975. In addition the Tribunal heard evidence from the Applicant and accepted into evidence Exhibit A1, being an original valuation (the ``Valuation'') including colour photographs of the kitchen cupboards. It may be noted that the Applicant has specific and relevant tax expertise and was well able to present his case. (This aspect is relevant also to the question of penalties.)

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3. General outline

By way of general outline:

4. The tests

Much of the argument before the Tribunal turned on the decisions in Case N30 and Case Q8 (referred to in more detail later in these Reasons); these cases are Board of Review cases decided in the 1960s. Each of the parties seemed to support one basic proposition, namely that the relevant test is that referred to later in these Reasons as the ``affixation test'', and without reference (except in passing) to the test referred to later in these Reasons as the ``functional test''.

As will be seen, the Tribunal considers that the ``completeness test'' (also referred to later in these Reasons), which is closely linked to the functional test, is relevant in questions of depreciation of items used in rent producing properties. Put in other words, it is no longer (if it ever was) sufficient to consider only the degree of affixation.

5. Description of the items in question

(a) The Tribunal commences with a detailed description of the items in question. The kitchen cupboards were described in the Valuation as follows:

``THE CUPBOARDS: Comprise 7 lineal metres of both floor and wall cupboards, plus full height double pantry/broom cupboard unit, 1.235 metres wide. External finish is laminate with timber edge trims and handles and internally of melamine linings. The units have their own backs and floors and can stand independently of the unit's walls. Provision is made for particular storage in a 4 drawer set, a 5 `pot drawer' set, and a `lazy Susan' corner unit of plastic trays. The backs of the pantry doors also have storage racks affixed.

The set makes provision for a built-in dishwasher, refrigerator, wall oven, bench hotplates, range hood, microwave oven and twin circular sinks with centre tap.

The cupboards are fixed to the unit's walls by several screws fixed through the back walls of the cupboards into plastic plugs recessed into the brickwork, with the screw heads being disguised by plastic caps to match the cupboard's melamine linings.''

In his evidence the Applicant supplied the following further detail: the cupboards are attached not only to the walls of the unit but also to each other, by the same means, viz, screws with a plastic cap so as to disguise the connection. Moreover, the floor cupboards are each of the same height and include a laminate benchtop so as to form a single, continuous workspace. Removal of the cupboards thus occurs by removing the laminate benchtop, and then unscrewing the cupboards from each other and the wall. Though the cupboards are heavy, the Applicant submitted that their extraction could be successfully accomplished by any handyman.

(b) The wardrobe (described by the manufacturer as a ``Built-In Wardrobe'') was custom-made for the Applicant to fit the room in which it is currently situated, reaching from the floor of the bedroom to its ceiling. It is constructed from timber with an aluminium frame, and is of dimensions 222cm in length, 60cm in breadth and 250cm in height. The structure has two side panels and a floor panel, but no back panel: the wall against which it stands provides its posterior support. It has two sliding doors at its front which are carried by metal edging on the uppermost frame of the structure. The exterior of each door is a full-size mirror. The inside of the wardrobe is divided into three sections. One section has five shelves which are melamine covered, and which are

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each removable in order to increase the capacity of the shelf immediately below that which is removed. A second section has two hanging rails, one at full height and the other at mid- height. The third section also provides a hanging space, with a rail at three-quarter height. This third section also provides two further shelves, one above the railing and the other slightly raised from the floor, designed as a ``shoe shelf''. There is a top shelf spanning the length of the wardrobe just below the ceiling. The structure is attached to the walls of the bedroom using screws which are sent from the metal frame at various points into the floor, ceiling, and walls. The screws, similarly to those of the kitchen cupboards, enter plastic plugs inserted in the walls of the unit. The wardrobe cannot stand independently, it is entirely reliant on the support it gains from the wall and ceiling attachments. As with the kitchen cupboards, the removal of the wardrobe need not be carried out by a person with any specialised carpentry skill.

6. Section 54

Section 54(1) of the Income Tax Assessment Act 1936 (as amended) is in the following terms:

``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.''

(Emphasis added)

7. Taxation Ruling IT 242

The Tribunal commences with Taxation Ruling IT 242 (the ``Ruling'') entitled ``Depreciation on Hot Water Installations, Stoves, etc, in Income Producing Properties'', originally issued on 14 May 1964, because the Respondent referred to it extensively in the proceedings; it provides (relevantly):

``2. In brief, depreciation may be allowed in respect of the following items when used in relation to property, including residential quarters, which produces assessable income:

  • (a) hot water systems,
  • (b) bath heaters and slow combustion stoves which incorporate a hot water device,
  • (c) cupboards and the like which are capable of ready removal and repositioning,
  • (d)(i) `Warm Ray', `Wonderheat' and similar heating units,
    • (ii) gas and electric stoves and fires,
    • (iii) gas coppers,

where the degree of attachment to the building does not have the character of permanence.

3. On the other hand, depreciation should not be allowed in respect of items having the character of essential building fixtures such as sinks, baths, troughs and similar plumbing fixtures and fittings, built-in fire stoves, built-in cupboards and rotary clothes hoists.

4. It has been decided that these rulings should not be disturbed and, where the Board of Review decision in Case N30 and Case 107 is in conflict with them the decision, to that extent, should not be given general application. With due respect to the Board, it is thought that the reasons stated for disallowing depreciation deductions for stoves and hot water installations are not sufficiently cogent to warrant a variation of established departmental practice in this regard.''

Counsel for the Respondent (in reliance on the Ruling) contended that the kitchen cupboards and wardrobe were ``built-in'' or at least incapable of ready removal and repositioning, and in consequence were not depreciable. The Respondent further argued that by the nature of their installation and affixation the kitchen cupboards had become fixtures which were, as such, necessarily part of the fabric of the unit, and thus not to be treated as ``plant or articles''.

The Applicant, on the other hand, argued (although perhaps not in precise terms) that the Ruling was inconsistent with subsequent case law; the Applicant further argued that the kitchen cupboards and wardrobe were readily removable, and were not part of the fabric of the building.

As to whether the text of the Ruling, and the meaning to be attributed to ``plant or articles'' contained in it, accords with the law as it has been expounded in the cases, is open to question.

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8. Meaning of ``plant''

(a) The word ``plant'' is not defined in the Income Tax Assessment Act 1936, although it appears in the section and is expanded (in section 54(2)) by a list of inclusions which are not relevant for the purposes of these Reasons. It has thus fallen to the courts to provide a workable meaning; nonetheless the term has remained elusive. It has been held that: ``Its meaning cannot be paraphrased by any simple verbal formula which will readily provide the solution in the instant case'' per Mahoney J in
Macquarie Worsteds Pty Ltd v FC of T 74 ATC 4121 at 4124; (1974) 4 ATR 334 at 337, echoing the words of Taylor J in
Quarries Limited v Federal Commissioner of Taxation (1961) 106 CLR 310 at 315. The result of this has also been acknowledged: ``... there are cases which, on the facts found, are capable of decision either way'' per Lord Lowry in
Inland Revenue Commissioners v Scottish & Newcastle Breweries Ltd [1982] 1 WLR 322 at 327.

(b) It has also been held that deducing the meaning of ``plant'' is an exercise which is dominated by the income producing context in which the item is found in any particular case. Thus Lord Lowry in Inland Revenue Commissioners v Scottish & Newcastle Breweries Ltd [1982] 1 WLR 322 cited with approval the following words of Lord Cameron, a judge at the First Division stage of the Appeal (at p 325):

``... the question of what is properly to be regarded as `plant' can only be answered in the context of the particular industry concerned and, possibly, in light also of the particular circumstances of the individual taxpayer's own trade.''

(c) Similar views have been expressed by Mahoney J in Macquarie Worsteds Pty Ltd v FC of T 74 ATC 4121 at 4124; (1974) 4 ATR 334 at 337; and Taylor J in Quarries Limited v Federal Commissioner of Taxation (1961) 106 CLR 310 at 312. It thus seems that an item might be plant for one industry but not for another. It is therefore necessary in relation to any consideration of s 54 to isolate the meaning of ``plant'' within the context of the facts of the relevant case. Nonetheless it is relevant to consider, in general terms, some of the methods used by courts to arrive at the meaning of ``plant''.

(d) One device which has been utilised in distilling the meaning of ``plant'' is the ``functional test'', and although the cases in Australia have fallen short of expressly adopting it as the sole determinant of ``plant'' (see R O'Connor, ``Repairs To Premises, and Depreciation of Plant or Articles'', (1981) Taxation In Australia 107 at 127), it has nevertheless consistently been used in elucidating the distinction between that which has been held to be plant and that which has not:
Wangaratta Woollen Mills Ltd v FC of T 69 ATC 4095; (1969) 119 CLR 1;
FC of T v Broken Hill Pty Co Ltd (1968) 15 ATD 43 at 58; (1967-1969) 120 CLR 240 at 263; Imperial Chemicals Industries of Australia and New Zealand Limited v Federal Commissioner of Taxation (1970) 120 CLR 396; Macquarie Worsteds Pty Ltd v FC of T 74 ATC 4121; (1974) 4 ATR 334;
Carpentaria Transport Pty Ltd v FC of T 90 ATC 4590 - and a number of less often cited authorities, eg:
(1964) 11 CTBR(NS) Case 101; AAT Case T102,
86 ATC 1178; AAT Case Y52,
91 ATC 460.

(e) The functional test appears to require that the item under consideration be functional in relation to the income earning activities. This formulation, however, is itself imprecise; the complete test is not satisfied merely because the item has a function, but rather requires a more thorough analysis of the way in which it is used. To do otherwise runs the meaning of ``plant'' too closely into the concept of ``use'', which would result in the former's superfluity in the context of section 54: ``... any property, being plant or articles owned by a taxpayer and used by him'': the section clearly requires ``plant'' to take on a meaning distinct from that of ``use''. This point is made by Professor Parsons, Income Tax in Australia, Law Book Company, Sydney, 1985 at paragraph 10.151 which relevantly reads:

``... some of the language used in the judgments may suggest that, in order to be plant, an item of property must play a part in an industrial or commercial process carried on by the taxpayer who claims depreciation deductions in respect of it. This, it is submitted, is to confuse two distinct issues - whether the item of property is plant and whether it is used by the taxpayer to produce assessable income.''

(f) It is in this specific context that the concept of ``setting'', a crucial aspect of the ``functional test'' (as referred to in the cases), is apposite. It provides a specific example of

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property which is used but which is distinct from that which is ``plant''. By way of illustration, the venue (by that is meant the four walls and ceiling, without more) where the taxpayer's operations take place is ``used'' or ``fulfils a function''; at its very lowest, it protects the operations from the elements, but it has never been held that it is ``plant''. Thus it is said that that which is the ``setting'', (or in other words, venue) for the taxpayer's operations is not plant: FC of T v Broken Hill Pty Co Ltd (1968) 15 ATD 43 at 58; (1967-1969) 120 CLR 240 at 263; Imperial Chemicals Industries of Australia and New Zealand Limited v Federal Commissioner of Taxation (1970) 120 CLR 396.

On the other hand, in Macquarie Worsteds Pty Ltd v FC of T 74 ATC 4121; (1974) 4 ATR 334, Mahoney J said (at ATC p 4124; ATR pp 337-338):

``... It may be that when, in 1887, Lindley LJ said that, `in its ordinary sense' plant included `whatever apparatus is used by the business man for carrying out his business':
Yarmouth v France (1887) 19 QBD 647 at p 658; the mode of carrying on a business then common was of a kind sufficiently uncomplicated to enable a distinction to be made between those things which were stock in trade or the mere setting of the business on one hand, and those things which were plant on the other hand, by the use of the term `apparatus'. However, now the nature of business operations often requires that the setting of the business be more specialised than a setting which merely excludes wind and weather, and be a setting in which particular conditions or facilities are available, and the term `apparatus', or its contrast with `setting' and `stock in trade', does not provide a test by the application of which an inevitable answer is produced, in such a case as the present.''

Thus it has been held that the concepts of ``setting'' and ``plant'' are not necessarily mutually exclusive:
Jarrold (Inspector of Taxes) v John Good & Sons Ltd [1963] 1 All ER 141 at 145, 147. In other words, there are some exceptional contexts where the venue in which the operations take place is specially configured in such a manner that it lends more than merely its ``setting'' functions to the income earning operation. Examples are found in Wangaratta Woollen Mills Ltd v Federal Commissioner of Taxation (1969) 119 CLR 1, where McTiernan J found that a specially constructed dyehouse was ``plant''; and
Inland Revenue Commissioners v Barclay, Curle & Co Ltd [1969] 1 All ER 732 where a dry-dock was held to be ``plant''. Again, the meaning of ``plant'' is determined by the context in which the question arises.

The ``setting'' distinction in a rental property context

(g) However, in the context of residential income-producing properties, the distinction between that which is ``setting'' and that which is ``plant'' remains valid; a residential unit will not ordinarily fall within the exceptional circumstances referred to in subclause (f). It has repeatedly been held that the rental property itself is not ``plant'', but is rather more aptly characterised as the ``the `setting' of the income-earning operations''. Thus in
(1966) 12 CTBR (NS) Case 109 (``Case 109''), a case which concerned a claim for depreciation by a taxpayer on items in a property which was utilised to derive rent, Mr Dempsey said (at p 635):

``Depreciation is not allowable on structures used for residential purposes...''

Mr McCaffrey in the same case held likewise (at p 636). A similar approach was taken in
(1962) 10 CTBR (NS) Case 107,
(1962) 13 TBRD Case N30 (``Case N30'') where the issue to be determined related to depreciation on items in flats let by a company to tenants, and again in
(1964) 11 CTBR (NS) Case 102,
(1964) 15 TBRD Case Q8 (``Case Q8'') where the taxpayer company earned rent from the letting of several flats and penthouses (these cases are again referred to later in these Reasons). The same approach was also expressed in
(1964) 11 CTBR (NS) Case 101 (``Case 101'') at 603, where Mr O'Neill, although the case directly concerned items in a bakery, used the residential property context by way of analogy. Yet again, in an income- producing real estate context (but not in relation to a residential property) Case Y52,
91 ATC 460, held that roller doors in a building leased for commercial use by the taxpayer were not plant. Implicit in the reasoning of Mr Burns in that case is the fact that the premises were merely the ``setting'' in a lease context. A similar finding was made in
(1970) 16 CTBR (NS)Case 17, Case B70,
70 ATC 335 (``Case B70'').

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(h) The Tribunal considers then that the starting point, for the purpose of these Reasons, is that a residential property will almost invariably (in the absence of exceptional circumstances) be the setting of the income- producing operation and will therefore not be ``plant''.

(i) It follows that that which forms the rental property as ``setting'', that which contributes to its usefulness as ``setting'', gives it efficacy as ``setting'', will also not be treated as ``plant''. Thus it has been held that those items which are an ``integral part'' of the property as a residential unit, or in other words, which form ``part of the fabric'' of such property are not ``plant''.

As Mr O'Neill, in Case 101 referred to above, still in the context of his residential property analogy, explained (at p 603):

``Rather are such things commonly regarded as part of the `setting' of a building - being such things so much appurtenant or incident to a building simply as a building that they cannot appropriately be described as `plant'... They are, I think, fairly described as an integral part of a building as premises from which, without disintegration or disconnexion (sic), they are in- separable.''

(Emphasis in original)

Mr McCaffrey, in Case N30, supra, likewise said (at p 111):

``It follows, I think, that as the flat is not a depreciable unit of property, the integral items which go to make it a profit-yielding flat are not separately depreciable, ie. the... items in the above context, are not `plant' of the landlord.''

Similar comments can be found in Case Q8, supra, at 34, 36; Case 109, supra, at 633-634; and Case B70, supra, at 337.

The same view has also been taken in other contexts, for example, in Inland Revenue Commissioners v Scottish & Newcastle Breweries Ltd [1982] 1 WLR 322, where Lord Lowry identified a ``line which can be held without trouble'', namely (at p 332):

``... something which becomes part of the premises, instead of merely embellishing them, is not plant, except in the rare case where the premises are themselves plant, like the dry dock.''

See also Imperial Chemicals Industries of Australia and New Zealand Limited v Federal Commissioner of Taxation (1970) 120 CLR 396 at 398;
(1982) 25 CTBR (NS) Case 126 at 884; AAT Case T102, 86 ATC 1178 at 1181; AAT Case 4883
(1989) 20 ATR 3278 at 3281; and Carpentaria Transport Pty Ltd v FC of T 90 ATC 4590 at 4593.

(j) The critical question is, then, as to the circumstances in which an item will be treated as ``part of the fabric'' of a building, such that it will be regarded as a ``part of the setting''. It is clear that the item must in some way be attached or connected to the building. By the same token, the Tribunal does not consider that every attached item, simply by virtue of attachment, will be regarded as integral with the premises. And nor can it be shortly concluded that once a ``fixture'', in the technical legal sense, an item is ipso facto part of the fabric of a building. Fixtures may be ``plant'' (
Pearce v FC of T 89 ATC 4064; (1988) 20 ATR 113; (1988) 85 ALR 359;
Negative Instruments Pty Ltd v FC of T (No 2) 94 ATC 4813; (1994) 29 ATR 429; see especially Case 101, supra, at 597;) just as they may be part of the setting (Imperial Chemicals Industries of Australia and New Zealand Limited v Federal Commissioner of Taxation (1970) 120 CLR 396; see also
(1960) 11 TBRD Case L19 at 112-113).

(k) The classification of an item as a fixture therefore begs the crucial question: by what means can it be determined that an attached item forms part of the fabric of a building? What is the test to be applied in deducing whether an item is or is not part of the fabric of a building?

(l) The starting point in the consideration of this question in the rental context is Case N30, (1962) 10 CTBR (NS) Case 107, (1962) 13 TBRD at 109. In that case the taxpayer claimed depreciation on stoves, sinks, baths, toilets, hand basins and water heaters installed in a block of flats which were let as residential units. The Third Board of Review held that the items were not depreciable plant. Mr McCaffrey said (at p 111):

``As has been stated, the taxpayer's business was the letting of flats. Four walls and a roof might make a good fowl-house or dog kennel, but a building does not become a profit yielding flat unless and until it has amenities such as baths, toilet, stove, etc., installed in it. They are just as essential to making it an integral, habitable profit- yielding unit as is the roof itself. From the

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methods of installations, the p.c. items concerned became annexed to the freehold, and thus formed part of the entirety - the flat for letting... It is as well, I think, not to confuse the uses to which the subject items are put by the landlord and the tenant respectively. The landlord is not like the owner of a fish and chip shop, he does not contract to cook the tenant's meals for reward on the stove in the flat. On the contrary he uses the stove, the toilet, the bath, etc., to combine into an integral structure which thus becomes a flat useable by him for profitable letting, and he gets his profit-yield from the letting of that unit.''

It can be seen that two distinct elements emerge from this line of reasoning. The first looks at the role of the relevant items in the context of a property utilised for residential lease. It examines whether the items are an essential aspect of that which makes up the residence as a lettable entity. If, in other words, the items are part of the complete entity which must be provided by a landlord, at the very minimum, to a tenant; almost as, one might say, a de facto precondition of the residential leasehold agreement, the item will be part of the ``setting''. This is the test referred to by the Tribunal for the purposes of these Reasons as the ``completeness test''. The second element looks to the method of installation, that is, the nature and extent of the item's attachment to the building in a purely physical sense; this then is the test referred to by the Tribunal for the purposes of these Reasons as the ``affixation test''. It is appreciated that the test referred to by the Tribunal as the ``completeness test'' has never been categorised in these terms in the cases.

The only other member of the Board who dealt with the issue was Mr Dempsey, who, although treating the items as falling into the category of ``articles'' for the purpose of s 54 (a categorisation which is dealt with later in these Reasons), likewise included both of these elements in his decision. Thus he said (at p 113):

``No doubt the items can be properly classified as `Articles', but in my opinion they are articles which have lost their character and identity as such, and have become merged in the multitude of articles which go to form a complete dwelling. It is inconceivable, in my view, that one would regard a structure intended to be occupied as a dwelling as complete and suitable for that purpose if it lacked such essential items as a stove, sink, basin, bath and toilet. A hot water system may be regarded as non- essential, but when one finds that the whole of the plumbing work for same is built into and concealed within the walls, then I would consider that it also has become part of the building.''

(m) The reasoning in Case Q8, (1964) 11 CTBR (NS); Case 102, (1964) 15 TBRD at 32, decided by the First Board of Review, also indicates both elements, although the conclusion differed from that in Case N30. In that case the taxpayer was the owner and landlord of a block of flats comprising thirty six units and two penthouses. The Commissioner had disallowed a deduction for depreciation claimed by the taxpayer on the hot water services, electric stoves, prefabricated kitchen cupboards (of very similar description to those in issue here), kitchen sinks, bathroom cupboards, toilets and hand basins in each flat; and the laundry tubs and electric coppers in the building's communal laundry. The Board of Review unanimously held that the stoves, hot water units, coppers and cupboards were ``plant'' but the toilets, hand basins, laundry tubs, kitchen sinks and the piping for the hot water units were not. The only difference between the members was in relation to the bathroom cupboards: Mr Burke and Mr Smith (in joint reasons) held that they were not ``plant'', whereas Mr O'Neill found the contrary. It is to be noted that the Board of Review in this case thus (unanimously) disagreed with the Third Board of Review in Case N30 as regards the stove and hot water service.

In finding that the toilets, basins, laundry tubs and sinks were not plant, Mr O'Neill (in the majority on this point) said the following (at p 36):

``... it is difficult, in seeking where to draw the line between integral parts of a building erected as a block of residential flats and its `plant or articles', to suppose that the legislature intended to marshal as `plant or articles' objects which... are now... provided as part and parcel of the building and which can only be detached at the cost of rendering the building unusable... Here the [toilets], basins, tubs, and sinks, even

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though they are all easily removable without damage to themselves (except perhaps the [ toilets]) are so truly appurtenant or incident to the use of the building... that their removal would destroy the utility of the building as a building or at least as a residential building.''

(Emphasis added)

(n) The Tribunal considers that Mr O'Neill's statement in Case Q8 quoted in subclause (m) aptly describes the completeness test. That statement indicates moreover that the degree of affixation is by no means determinative.

(o) The test adopted by Messrs Burke and Smith in Case Q8, while couched in different terms, is in substance the same. The test derives from the case of
Commissioner of Inland Revenue v Le Sueur (1960) 23 South African Tax Cases 261, decided by the Appellate Division of the Supreme Court of the Union of South Africa (as it then was), cited by the Board in Case Q8 as also previously in Case 101, (1964) 11 CTBR (NS) 587. That case concerned the question of whether battery cages were to be regarded as part of the building in which they were attached, so as to allow the taxpayer to take advantage of provisions in the legislation granting deductions for the erection of buildings. In ascertaining whether an item forms part of the fabric of a building, the court applied the test of whether, by physical attachment, the item is ``deprived of its separate identity'' (per Botha AJA at p 274) or, to the contrary, whether the item ``retains its character'' of individuality (per Ramsbottom JA, at p 268).

Applying this test, Mr Burke and Mr Smith in Case Q8 said (at p 34):

``The wash hand basins, toilet suites, laundry tubs and hot water service piping in our opinion fall on the other side of the line... although, when affixed, they are recognizable (sic) as units, nevertheless their character is such that they yield their individuality to the structure of the building as a whole. They are integral to the plumbing system which itself is integral to the building structure... The units in question are truly part of the building, and in our opinion do not constitute `plant or articles' for the purposes of s. 54.''

Saying that items have ``yielded their individuality to the structure of the building as a whole'' is, in the opinion of the Tribunal, tantamount to saying that they have ceased to perform a function independent of, and isolated from, the general function which the building to which they are attached itself serves. It also implies a degree of dependence: that the building would not be capable of fulfilling these functions if the items were not attached. This is essentially what the ``completeness test'' explores in asking whether the building is a complete entity, for the purpose it is being used to achieve, without this item. Thus in view of the Tribunal, Mr Burke and Mr Smith, albeit in different words, had in mind the same considerations as those involved in the ``completeness test'' used more expressly by their colleague Mr O'Neill. It is to be again noted that the ease of their detachment from the building was not determinative (at p 34).

(p) In relation to the hot water units, stoves, kitchen and bathroom cupboards, Mr O'Neill again considered the ``completeness test'', though in this context placing more emphasis on the significance of the manner by which the items were affixed. He said (at p 39):

``The distinction I draw between items in group (a) [the toilets, sinks, etc] and those in groups (b) and (c) [the stoves etc, and the cupboards] depends to some extent on the quantum of damage to the object itself or to the premises if the mode of annexation were severed. Although those in group (a) are removable without damage to the objects themselves (excepting perhaps the [toilets]) their removal would, in the sense already explained, involve substantial and continuing damage to the building as such. On the other hand any of the items in both groups (b) and (c) are removable without significant damage either to the objects themselves or to the building as such.''

(Emphasis in original)

Mr O'Neill's reference to the ``continuing damage to the building as such'' ``in the sense already explained'' is in effect no more than a reference to the completeness test; and the reference to the damage to the item itself is in effect a reference to the affixation test. He later clarified the extent to which an item's affixation is relevant:

``The mode of installation of the items in groups (b) and (c) is only such as is appropriate for their more complete enjoyment and use as chattels, whereas the installation of the items in group (a) is for

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the permanent use and enjoyment of the building as such.''

Thus it can be seen that Mr O'Neill regarded considerations of affixation as going towards (and not distinct from) the more fundamental question posed by the ``completeness test''.

Mr Burke and Mr Smith again concentrated on whether these items ``retain their identity as an item of plant'' (at p 34 in relation to the stoves and hot water units), whether they are ``clearly identifiable as cupboards'' or whether ``they retained their character as such'' (at p 35 in relation to the kitchen cupboards). As set out previously, they differed from Mr O'Neill only in finding that the bathroom cupboard was too far ``let into the wall'' to be regarded as having retained its identity as an individual item.

(q) The Tribunal thus considers that although the Board of Review in Case Q8 came to a conclusion contrary to that of the Board of Review in Case N30 (in relation to the hot water units and stoves), Mr O'Neill as also Mr Burke and Mr Smith in the former case in fact applied substantially the same test as the Board of Review in the latter case, although perhaps differing somewhat as to the extent to which the affixation test is distinct from the completeness test. The essential disagreement emerges from differing conceptions of what the constituent elements of a complete residential dwelling actually are, and this is an issue of fact. So much was recognised by Mr Burke and Mr Smith (at p 36):

``In each instance it will be a question of degree depending on the facts of the particular case.''

(r) The Third Board (the same decision makers as in Case N30) had the opportunity to revisit the issue in 1966, in Case 109, (1966) 12 CTBR (NS) at 630. In that case a taxpayer who owned and let a house and two flats claimed depreciation in respect of the baths and rotary clothes hoists. It is to be noted that the subject clothes hoists were set into concrete in the back yards of the dwellings, such that they were permanently affixed to the properties. The baths were similarly regarded (at 633). The Board found that these items were not ``plant''. Significantly however, the Board, in coming to their conclusion, relied almost entirely on the ``completeness'' test, identified above. Thus Mr McCaffrey, declaring an ``enlargement'' of the views he expressed in Case N30, said (at pp 633-634):

``As I see it, the taxpayer here has taken the shell of a building, which he might have let thus as perhaps a barn or a storehouse of some sort; he has incorporated certain fixtures, including baths and rotary hoists into the building in such a manner that the entirety becomes a comprehensive unit especially designed for putting to profitable use by him, by letting as a dwelling house or home unit. Both physically and functionally, the baths and hoists are integral with the comprehensive income-producing entirety, i.e. the dwelling house. As such house is not in the nature of `plant' neither can its integral constituents, as described above, be regarded as such.''

(Emphasis added)

Mr Dempsey also essentially applied the ``completeness test''. He said (at pp 635-636):

``When rent is received from a house, a flat, a home unit or any other type of dwelling place, it is my view that it is received for the rental of such abode as a complete unit and not for the rental of any of the components which go to make up the abode... A place to live in is not, in my view, complete, and normally could not be let as such unless it was equipped with what one might say were the essentials, i.e. cooking facilities, bathroom facilities and normal laundry facilities. The provision of such items as hot water systems or washing machines is in my view the provision of items outside the basic requirements.''

(Emphasis added)

It is clear, however, that Mr Dempsey did regard the degree of attachment to the building as having a bearing on the issue. Thus he said immediately after the paragraph cited above (at p 636):

``Similarly, furniture which is not so built in that it becomes part of the building would be outside of my view of the basic requirements.''

These words suggest, though, an altered role for the ``affixation'' test than that originally supposed by the Board in Case N30: such considerations are not determinative of themselves, but are rather a factor to be taken into account in addressing the more probative ``completeness'' enquiry.

This case thus reveals a significant modification of the views applied by the Board in Case N30. It is apparent that the Board resiled somewhat from their expression of dual

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tests to be utilised in determining that which is to be regarded as part of the setting of a residential unit; instead, they favoured an approach which centres rather on the notion of ``completeness'', towards which affixation considerations are relevant but not final. A close reading of Case Q8 supports this approach.

(s) A similar methodology can be observed in Imperial Chemicals Industries of Australia and New Zealand Limited v Federal Commissioner of Taxation (1970) 120 CLR 396, albeit in a different context. In that case the taxpayer sought depreciation on ceilings which were specially designed to absorb noise, so as to increase the efficiency of the people working beneath them. Kitto J held that these ceiling panels were not ``plant''. His Honour said (at pp 398-399):

``Obviously the ceilings and every part of them, the removable panels no less than the supporting framework, are fixtures and form part of the buildings. The mode of affixation is slight but adequate, and its purpose is to provide the building with ceilings as essential parts of the structure. The purpose, in other words, is to make the building a complete building. The ceilings are there for the sake of the building, not the building there for the sake of the ceilings... they are no more than parts of the shelter, so to speak, in which the appellant chooses to carry on its activities... The construction of the building as a building of the general type to which it belongs would be incomplete without them, and their function does not go beyond making the building a suitable general setting for a wide range of possible activities.''

(Emphasis added)

Although there is a difference in context, this statement clearly reveals a preference for a consideration of the relationship of the items to the complete entity, as opposed to their degree of affixation.

(t) Looking at these cases overall, therefore, the test for determining that which is part of the fabric of a residential dwelling can be distilled as follows: an item will be regarded as an integral part of the structure of the unit, as part of its ``fabric'', if it is an essential aspect of that which makes up the residence as a lettable entity; or put in other words, if it is a basic requirement of a leased residential dwelling without which the dwelling cannot be used for such a purpose. Considerations of attachment; namely the mode, manner and degree of affixation; are relevant, but only insofar as they contribute to an understanding of the more probative question as to the item's role in the premises as a complete lettable entity.

(u) One further observation is pertinent in this context. That which is to be regarded as an aspect of a residence as a complete lettable entity is ultimately a function of the time in which the question arises; in addition to other considerations, such as the location of the residence, the nature of that which is being let (eg different considerations might apply when a luxury penthouse as against student accommodation is in issue), and the con- comitant market expectations, may be relevant. The findings of the Boards of Review in the cases referred to in this clause 8 must, therefore, be considered in this light.

9. Beyond the setting distinction

(a) A finding that an item is not an integral part of a building does not, however, end the matter. All that has been shown is that the item is not part of the ``setting''. It would be a logical fallacy to argue that because an item is not one thing, it must therefore be another. Thus it is necessary, if the item is not part of the ``setting'', to show positively that the item is ``plant'' for the purposes of s 54. As Mahoney J said in Macquarie Worsteds Pty Ltd v FC of T 74 ATC 4121 at 4124-4125; (1974) 4 ATR 334 at 338:

``It has been held that a thing is not plant if it has no other function than to provide a convenient stand for the operation in question... but I do not think that the fact that a thing is, for example, more than a convenient stand for performing the operations means that therefore and necessarily it is plant within the present section...

To be plant, a thing of the kind here in question must be more than mere setting for the taxpayer's operations; but if it is, the question still remains whether its relationship to the operations is such that it should be held to be within the meaning of the term.''

(b) The comments set out in subclause (a) were endorsed by Davies J in Carpentaria Transport Pty Ltd v FC of T (1990) 90 ATC 4590 at 4592. They emphasise the role which

ATC 184

the ``setting'' distinction plays in determining the meaning of ``plant''. It is used, as indicated previously, merely as an heuristic in isolating that which is used by the taxpayer but which is not ``plant''; as opposed to determining qualitatively that which is plant. In relation to the positive finding which is required beyond the setting distinction, Mahoney J went on to say (at ATC p 4125; ATR p 338):

``Where the question has been whether buildings, structures or the like, or parts of them, constitute plant, the process of decision appears generally to have been, not of deriving the decision merely by deduction from a verbal formula or test, but of deciding whether the function performed by the thing is so related to the taxpayer's operations or special that it warrants it being held to be plant. There does not appear to have been evolved any formula of words to describe the relationship exhaustively.''

(c) The task is therefore, once an item is found not to be part of the ``fabric'' of a residential unit to determine whether it, in being provided by the landlord, performs a function sufficiently related to the income-earning dynamic to be considered ``plant''. Put in other words, although the item may be outside of the basic requirements necessarily provided by the landlord in order to let the space as a residence, that item will be treated as plant where it nonetheless performs a function which is sufficiently related to the provision of the leased residence.

10. Summary of conclusions on ``plant''

The Tribunal as a matter of convenience summarises its conclusions thus far as follows:

11. Articles

(a) An item may qualify for a depreciation deduction, even if it is not ``plant'', if the item can be regarded as an ``article'' for the purposes of s 54: Quarries Limited v Federal Commissioner of Taxation (1961) 106 CLR 310. The word ``article'' is also not defined in the Income Tax Assessment Act, but it has been given a very wide meaning in the cases. Thus Taylor J said in Quarries Limited v Federal Commissioner of Taxation (1961) 106 CLR 310 at 316:

``I see no reason for denying to the word `article' the comprehensive meaning which it normally bears or for thinking that it was not used in the section by way of extension [ to the word `plant'].''

(b) And Mason J (as he then was) said in
FC of T v Faichney 72 ATC 4245 at 4250; (1972) 3 ATR 435 at 440:

``The word `article' according to The Shorter Oxford Dictionary bears the meaning `a piece of goods or property'. The word would, I think, according to its normal and ordinary meaning include a carpet or curtain, a desk and a bookshelf.''

(c) However, an item cannot be an ``article'' if it is a structure attached to land. Per Taylor J in Quarries Limited v Federal Commissioner of Taxation (1961) 106 CLR 310 at 316:

``Of course, `article' cannot ordinarily be taken to comprehend a structure erected or built in situ...''

(d) The same would apply if the item were regarded as an integral part or the ``fabric'' of such a structure. So much appears from Kitto J in Imperial Chemicals Industries of Australia

ATC 185

and New Zealand Limited v Federal Commissioner of Taxation (1970) 120 CLR 396, where his Honour said in relation to false ceilings found to be part of the structure of the building (at p 398):

``In my opinion, while they are in position they are plainly not `articles'.''

This is not to say, however, that an item simply attached to a building will not qualify as ``articles'': the carpet held to be an ``article'' in FC of T v Faichney 72 ATC 4245; (1972) 3 ATR 435 was more than likely in some way attached, though it was clearly not an integral part of the home there under consideration.

Thus, as a finding that an item is part of the ``fabric'' of a structure (where the structure is itself the ``setting'' of the taxpayer's operations), will result in its being held to not be ``plant''; such a finding will also preclude any characterisation of the item as ``articles''.

12. Does the Ruling accord with the case law?

Having considered the case law on the issue, it is now appropriate to discuss the Ruling which was relied upon by the Respondent. It is to be noted that the Ruling was first issued on 14 May 1964, at a time after Case N30, but before Case Q8 or Case 109, and has not since then, (so far as the Tribunal is aware) been the subject of amendment. It is not surprising therefore that the Ruling contains both the elements which are apparent in the reasoning of Case N30, but none of the refinements of the later cases. Thus it holds that ``essential building fixtures'' are not depreciable, which is consistent with the later cases; but at the same time holds that ``cupboards and the like'' which, though not essential, evidence a high degree of attachment, are not depreciable - implying that considerations of affixation are foremost - which as has been shown above, is not consistent with the later cases. A more fundamental criticism is that the Ruling does not deal adequately with what has been identified as the essence of the common law approach - the ``completeness'' aspect. The result is that the Ruling is not altogether useful in determining when items in residential premises used to derive income, such as those which are in issue here, are depreciable.

13. Application to the current facts:

(a) The Kitchen Cupboards: Much of the evidence related to the degree and mode of attachment of the kitchen cupboards to the unit. Thus the Applicant testified that their connection to the unit is merely by easily removable screws, that removal could be carried out simply and without expense, and that he himself had been contemplating a renovation and upgrading of the unit which involved a replacement of the kitchen. It was also accepted in the Valuation that each cupboard has its own back and sides and can stand independently. No doubt they did stand independently before installation in the unit. As I have indicated previously, however, such considerations are not determinative. Of far more relevance is a consideration of the role these cupboards play, once installed, in the unit as a lettable whole. In deference to the views of the Board in Case Q8, I do not think that it is true to say that a flat is lettable as a residential unit without the attachments necessary for a proper kitchen.

All that would be left in the area of the unit designated as the ``kitchen'', were the cupboards to be removed, would be the unsupported stainless steel sinks and taps and the tiling above them. This would not constitute a ``kitchen'', as I understand the meaning of the word. The items in question are not merely ``cupboards'' in the sense of discrete entities fulfilling a storage function in themselves. The cupboards, significantly identified in the Valuation as a ``set'', play a role in the unit as an entirety which extends beyond each particular cupboard's storage capacity, that is, together they create a ``kitchen''. It is to be noted that the floor cupboards also provide the bench top on which to place a kettle, or prepare a meal; moreover the wall cupboards are designed to create suitable gaps into which appliances may be inserted. The cupboards can thus be seen, rather, as the infrastructure of the kitchen itself, as the ``kitchen'' is part of the infrastructure of the unit as a lettable entity. This qualifies them, in my view, as aspects of the setting, and not as ``plant''. They would also not qualify as ``articles'', for precisely the same reason.

The Applicant relied on the finding in Case Q8 that kitchen cupboards, admittedly of similar description to those in issue here, were not part of the fabric of the unit. But as I indicated previously, the finding of the Board of Review in that case has to be considered in the light of the period in which it was decided. It may have been that in the 1960s such cupboards

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were not regarded as essential requirements of a leased premises; indeed the Board of Review apparently thought so, but I do not think that the same could be said today (or in the relevant 1993 year for that matter).

(b) The Bedroom Wardrobe: I have come to a different conclusion in relation to the bedroom wardrobes. As a starting point I do not think that these items can be truly regarded as ``built-in''. The Respondent, pointing towards the description of ``built-in wardrobe'' by the manufacturer, argued that it fell directly into paragraph 3 of the Ruling, and the finding by the Board in Case Q8, in which the Board held (per Mr Burke and Mr Smith at 36; per Mr O'Neill at 39) that built-in cupboards are an integral part of a building and not depreciable. That may be so, but the sense in which the phrase ``built-in'' was there used, however, is not the same as in the present case. In Case Q8 ``built-in'' referred to those cupboards which are created by inserting shelves into an alcove- shaped-wall. As Mr O'Neill in his decision writes (at 39):

``Perhaps I should add that none of the cupboards in question is a `built-in' cupboard in the sense that the walls of the building are so constructed that a recess therein when fitted with shelves and doors functions as a cupboard. Such a `built-in' cupboard would I think be an integral part of the building and not `plant' and none the less so because it replaces, or is a substitute for, something which is `plant'.''

In the present case the wardrobe was manufactured according to the exact specifications of the Applicant, and is measured to the height of the ceiling, but this of itself is not sufficient to result in it being ``built-in'' in the manner described. The wardrobe is clearly not part of the walls of the unit and in that sense I do not see how it can be regarded as ``built- in'' at all. It is a prefabricated wardrobe labelled ``built-in'' by the manufacturer because it creates the verisimilitude, which is exactly what is in fact being sold (viz, the impression), of a cupboard which is created out of the walls of the unit.

The Respondent also submitted that the wardrobe was not ``capable of ready removal and repositioning'', following the words of the Ruling. The evidence, however, suggested quite the opposite. The wardrobe it appears could be dismantled quickly and easily by the simple removal of a few screws, leaving no damage to the structure of the wardrobe or to the unit, besides a gap in the carpet where the wardrobe would have been. Such removal could be carried out by any person with generally handy skills, and repositioned against any other wall.

But as I have stressed, such considerations do not end the matter. It is more to the point to consider whether the wardrobe, attached as it is but not built-in, is a basic requirement of the residence as a lettable entity. I believe that it is not. It appeared from the evidence (at pp 22-23 of the Transcript) and from the Applicant in argument (at p 60 of the Transcript) that, at least in relation to the tenancy under consideration, the Applicant as landlord was not expected to provide such an amenity. As such I do not think that this item can be regarded as a part of the essence of the unit as a lettable entity. In these circumstances I am satisfied that this wardrobe is not part of the ``fabric'' of the unit.

It therefore falls to be considered whether the wardrobe can be seen, in a positive sense, as fulfilling a function sufficiently related to the rental scenario to be considered ``plant''. I think that it does. The provision of rental accommodation involves more than merely the providing of a place to sleep. It also encompasses the providing of the place for a number of other activities, including the preparation of meals, the maintenance of personal hygiene, the washing of clothing as well as the storage of clothing and other personal possessions (this list is not exhaustive). Where the items which fulfil these functions are provided by the landlord and fall outside of what is properly regarded as part of the ``setting'', they will be considered ``plant''; (see for example, Taxation Ruling IT 2167 at paragraph 8). Thus, as the function of the wardrobe is to provide a designated space for the storage, whether temporary or more permanent, of clothing and the like, I think that it does bear the necessary relationship to the relevant income earning operations required for characterisation ``plant''.

My conclusion therefore is that while the kitchen cupboards are an integral part of the unit as a residential dwelling, making it part of the setting, and therefore not ``plant''; the wardrobe is not part of the setting as it cannot be considered an integral part of the unit. Moreover the wardrobe has a function

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sufficiently related to the provision of rental accommodation so as positively to be considered ``plant''.

14. The penalty

(a) Having found against the Applicant in relation to the kitchen cupboards, the issue arises as to what (if any) penalty should be applied. The jurisdiction of this Tribunal to review the Respondent's imposition of a penalty arises from s14ZZA and s 14ZS of the Taxation Administration Act 1953. It is to be noted that since the issues in this matter relate to a return submitted in the year ending 30 June 1993, the relevant regime is that set out in the Income Tax Assessment Act 1936 (``the Act'') as amended by Taxation Laws Amendment (Self Assessment) Act 1992.

(b) The Respondent submitted that having regard to the Applicant's tax knowledge, he should have been aware of the law in this area. The Respondent further contended that in misapplying the law the Applicant's conduct evidenced a failure to take reasonable care under s 226G, and more than that, actually amounted to recklessness under s 226H. With both of the last contentions I disagree. Taxation Ruling TR 94/4, although issued on 6 January 1994, operates from 1 July 1993, and provides in relation to ``reasonable care'' (at paragraph 14(f)):

``(f) on questions of interpretation, reasonable care requires a taxpayer to come to conclusions that would be reasonable for an ordinary person to come to in the circumstances of the taxpayer. If the taxpayer is uncertain about the correct tax treatment of an item, reasonable care requires the taxpayer to make reasonable enquiries to resolve the issue. This is different from the reasonably arguable position standard, which does not look at the taxpayer's efforts in resolving the issue, nor the circumstances of the taxpayer, but solely at the merits of the arguments in support of a position.''

(c) As set out previously, the applicant does have tax knowledge, and indeed relevant knowledge of this particular area. But to say that he misapplied the law, or that he failed to come to a reasonable conclusion is, in the light of his reliance on the decision in Case Q8, not correct. Nor is it right to contend, as did the Respondent, that as the Applicant failed to adhere to a public ruling, that a penalty must follow. See in this context clause 14(b) of TR 94/4 as follows:

``(h) where a Public Ruling is available on a particular matter, a taxpayer would generally be expected to follow it. However, taking a contrary position to a Public Ruling does not necessarily mean that the taxpayer would fail the reasonable care test for that reason alone. Where the taxpayer has taken a position contrary to a Public Ruling, it would be necessary for the taxpayer to consider the arguments raised in the Public Ruling and be able to demonstrate that the Public Ruling does not apply to his/her particular circumstances in order to satisfy the reasonable care test....''

(d) The law in this area is, as these Reasons demonstrate, by no means clear. Moreover the approach taken by the Applicant was essentially consistent with both Case Q8 and the Ruling. In summary, the Tribunal is of the view that the Applicant in claiming depreciation deductions in respect of each of the kitchen cupboards and the wardrobe acted reasonably.

(e) In all the circumstances I consider that any penalty at all would be inappropriate and the whole of the penalty imposed is thus set aside. This applies (having regard to clause 1(b)) also to the travel expenses in respect of which the applicant withdrew his claim.

15. The Respondent indicated that in respect of the wardrobe, the level and rate of depreciation was acceptable.

16. Accordingly, the objection decision is set aside; all of the assessments (including amended assessments) are remitted to the Respondent for reassessment in accordance with these Reasons, so as to allow depreciation in respect of the wardrobe, but not the kitchen cupboards, and so as to set aside the whole of the penalty.

 

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