AJ & PA McBride Ltd and Commissioner of Taxation (Taxation)
[2020] AATA 1909
•19 June 2020
AJ & PA McBride Ltd and Commissioner of Taxation (Taxation) [2020] AATA 1909 (19 June 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2018/4225
Re:AJ & PA McBride Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Britten-Jones
Date:19 June 2020
Place:Adelaide
The Tribunal determines the preliminary question posed by the parties on 19 September 2019 as follows:
The applicant is not entitled to immediately deduct, under subdivision 40-F of the Income Tax Assessment Act 1997, an amount of the purchase price paid for the acquisition of a sheep station, being an amount of the purchase price ascribed to the fencing assets acquired by the applicant together with the sheep station land.
............[Sgnd]...................................
Deputy President Britten-Jones
CATCHWORDS
TAXATION – Income tax – deductions – depreciating assets – capital allowance system – Division 40-F of the Income Tax Assessment Act 1997 – where a primary producer purchases a sheep station which includes fencing assets – where parties request a preliminary issue to be determined – the preliminary issue is whether the primary producer is entitled to an immediate deduction for capital expenditure on fencing assets acquired as part of the purchase of the sheep station – no deduction allowed
LEGISLATION
Income Tax Assessment Act 1997
Income Tax Assessment Act 1936
CASES
BGM16 v Minister for Immigration and Border Protection (2017) 252 FCR 97
Carr v Western Australia (2007) 232 CLR 138
Case W9 (1988) ATC 178
Deputy Commissioner of Taxation v Dick (2007) 226 FLR 388
Federal Commissioner of Taxation v Waldeck Nurseries Pty Ltd (1982) 12 ATR 666
Mills v Meeking (1990) 169 CLR 214
Prior v Sherwood (1906) 3 CLR 1054
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
R v L (1994) 49 FCR 534
SAS Trustee Corporation v Miles (2018) 361 ALR 206
Saeed v Minister for Immigration & Citizenship (2010) 241 CLR 252
Southern Estates Pty Limited v Federal Commissioner of Taxation (1967) 117 CLR 481
SZTAL v Minister for Immigration and Border Protection (2017) 347 ALR 405WAKN v Minister for Immigration and Multicultural and Indigenous Affairs (2004) 138 FCR 579
SECONDARY MATERIALS
The New Business Tax System (Capital Allowances) Bill 2001
The Explanatory Memorandum for the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015
REASONS FOR DECISION
Deputy President Britten-Jones
19 June 2020
The Income Tax Assessment Act 1997 (ITAA 1997)[1] provides for the calculation of a taxpayer’s liability to pay income tax. A fundamental variable in that calculation is taxable income which is made up of assessable income less any available deductions. Section 8-5 provides for specific deductions by allowing a taxpayer to deduct from assessable income an amount that another provision of the ITAA 1997 allows to be deducted. An example of a specific deduction provision is depreciation (or capital allowances) under Division 40. This case concerns the specific deduction for capital expenditure on a fencing asset.
[1] All references to legislation are to the ITAA 1997 unless otherwise stated.
The applicant taxpayer has sought a review of the respondent’s decision that it is not entitled to an immediate deduction in respect of fencing assets acquired as part of a purchase of a sheep station in the north of South Australia. The parties requested that prior to a final hearing of the application for review, the Tribunal hears and determines a preliminary issue. On 19 September 2019 the parties lodged a joint and agreed statement of facts and issues to be determined on a preliminary basis.
The Federal Court in WAKN v Minister for Immigration and Multicultural and Indigenous Affairs[2] endorsed the right of the Tribunal to hear and determine preliminary questions separately from the main hearing of an application. The Tribunal has agreed to determine the preliminary issue.
[2] [2004] FCA 1245; (2004) 138 FCR 579.
The Preliminary Issue
The issue for determination on a preliminary basis is whether the applicant (McBride) is entitled to immediately deduct, under subdivision 40-F of the ITAA 1997, an amount of the purchase price paid by McBride Yudnapinna Pty Ltd (MYPL) for the acquisition of a sheep station, being an amount of the purchase price ascribed to the fencing assets acquired by McBride together with sheep station land (the preliminary issue). For the reasons that follow I have decided that McBride is not entitled to the immediate deduction.
The Joint and Agreed Statement of Facts
Approximately 80 km north west of Port Augusta is a sheep station known as Yudnapinna Station. The Yudnapinna Station is situated on land the subject of a pastoral lease being Pastoral Lease 2372, Block 973, described in certificate of title volume 1296, folio 31 (the Land) see exhibit NW16. It covers an area of approximately 2,243 km2 and as at November 2015 was divided into 99 paddocks.
In 1992, the Yudnapinna Station was acquired by the Lord family. By no later than February 2015 the Yudnapinna Station was held for the Lord family by the Lord Lester Family Trust. The trustee of the Lord Lester Family Trust was Unalla Pastoral Co Pty Ltd.
McBride is the head company in an income tax consolidated group (the McBride Group).
Although the McBride Group is predominantly sheep and wool focused, it also produces beef cattle and has investments in viticulture as well as off-farm commercial property. The investment and business activities of the McBride Group are conducted by McBride.
At all relevant times, McBride conducted primary production businesses on land in Australia.
Subsidiary members of the McBride Group own land in Australia on which a primary production business is carried on, but do not separately carry on primary production businesses.
MYPL was registered on 8 September 2015 and at all relevant times was a wholly owned subsidiary of McBride and a member of the McBride Group.
MYPL acquires the Yudnapinna Station
By contract of sale dated 24 November 2015 (the Contract of Sale) MYPL agreed to purchase the Yudnapinna Station (including the Land, certain plant and equipment and livestock) from Unalla Pastoral Co Pty Ltd as trustee for the Lester Lord Family Trust.
The Contract of Sale is exhibit NW4 to the statement of Nathan Wessling filed in the proceeding. Without wishing to preclude the Tribunal from having reference to the full terms of the Contract of Sale for the purposes of determination of the preliminary issue, the parties jointly identify the following terms as relevant:
(a)the Vendor agreed to sell and the purchaser agreed to purchase from the Vendor the Land upon and subject to the terms of the Contract of Sale: clause 2;
(b)the Land was identified as ‘an estate as crown lessee in Crown Lease Register Book Volume 1296 Folio 31, Pastoral Lease Number 2372’: clause 1(n) and Item 3 of the Schedule;
(c)the Land was sold ‘together with … all improvements and fixtures on the Land’: clause 3(b);
(d)the Vendor also agreed to sell the ‘included chattels’: clause 4, which were identified in Item 5 of the Schedule as ‘The plant and equipment listed in Annexure B and certain livestock within the meaning of “Livestock” in Special Condition 1 of Annexure A’. Annexure B listed vehicles, trailers, well pulling equipment; water pumping related spares and other ‘spare parts on hand’;
(e)the Purchase Price was recorded in Item 11 of the Schedule as follows:
Amount payable for the Land and the included chattels (excluding Livestock) […]*
$5,600,000
Amount payable for the Livestock, which comprises a portion of the included chattels
Livestock Price (refer to Special Condition 3(2) of Annexure A)
Purchase Price […]*
$5,600,000 + Livestock Price
(*here amounts expressed in words have been omitted)
(f)unless otherwise agreed by the parties, the Purchase Price was to be unapportioned: Special Condition 6(1).
A settlement statement dated 12 April 2016 and issued in respect of a settlement anticipated on 14 April 2016 identified the following components of purchase price (not including fees, charges or adjustments):
Purchase price payable for land
$5,480,000.00
Purchase price payable for plant
$120,000.00
Purchase price payable for livestock (15,891 x $78 per head)
$1,239,498.00
There was no apportionment of the purchase price reflecting a separate amount payable for the fences either in the Contract of Sale or the 12 April 2016 settlement statement.
Settlement of the transfer of Yudnapinna Station was conditional on obtaining the consent of the Minister and if the Minister’s consent was not granted by the settlement day either party could terminate the Contract of Sale: Special Condition 5(4).
The Minister’s consent was not granted by the anticipated settlement day of 16 March 2016; however, McBride agreed to take over financial and operational responsibility of Yudnapinna Station as and from 16 March 2016.[3]
[3] Second statement of Nathan Wessling dated 9 September 2019 at [25] and Exhibits NW18 and NW 21.
Ministerial consent to the transfer of the pastoral lease was granted on 29 March 2016.
McBride’s depreciation claim
On 16 March 2017 McBride sought a private ruling to the effect that subdivision 40-F authorised McBride to claim a deduction in respect of an amount described as ‘the fencing portion of the purchase price’ of the Yudnapinna Station. The value McBride attributed to the fencing portion of the purchase price was $2,736,000.
On or around 16 December 2016 McBride lodged its income tax return for the income year ended 30 June 2016 (2016 income year).
By s 166A of the Income Tax Assessment Act 1936 the Commissioner was taken, on the day McBride furnished its return, to have made an assessment of the relevant taxable income consistent with the amounts specified in the return.
The return:
(a)did not include as a deduction a claim under subdivision 40-F of the ITAA 1997 or a claim under the general depreciation provisions in Division 40 of the ITAA 1997, in respect of the fencing acquired on the acquisition of Yudnapinna Station on 13 April 2019.
(b)did include as a deduction a claim for depreciation pursuant to subdivision 40-F of the ITAA 1997, in respect of fencing acquired by McBride and installed on Yudnapinna Station after settlement of the acquisition of Yudnapinna Station on 13 April 2019.
On 19 May 2017 the Commissioner determined McBride’s private ruling application. The Commissioner ruled that McBride could not deduct under subdivision 40-F the amount attributed to the fencing assets acquired as part of the purchase of the Yudnapinna Station.
On 17 July 2017 McBride objected against the Commissioner’s private ruling determination.
On 26 October 2017 McBride objected against the assessment of its income tax for the 2016 income year.[4]
[4]The further objection was necessary in that s 359-60(3) of Schedule 1 to the TAA rendered incompetent McBride’s objection against the Commissioner’s private ruling determination because there was an assessment for McBride for the 2016 income year, being the year to which the ruling related.
On 1 June 2018 the Commissioner gave notice of his decision on McBride’s objection dated 26 October 2017. The Commissioner disallowed McBride’s objection.
On 30 July 2018 McBride instituted its application for review in this Tribunal.
The Legislative Scheme
In 2001 a uniform capital allowance system was introduced to consolidate over 37 capital allowance regimes into one single division of the ITAA 1997 (Division 40). The New Business Tax System (Capital Allowances) Bill 2001 provided core rules (in subdivision 40-B) for working out the deduction for the decline in value of most depreciating assets but maintained separate rules for primary producers in subdivisions 40-F and 40-G allowing accelerated deductions for certain expenditure.
In 2015 amendments were made to the ITAA 1997 to allow primary producers to claim an immediate deduction for capital expenditure on water facilities and fencing assets, and this has now been extended to fodder storage assets.[5] Primary producers would be able to deduct capital expenditure on fencing assets in the year in which the expenditure was incurred instead of deducting the expenditure over the effective life of the asset, which could be up to 30 years depending on the asset. The amendments were included in subdivision 40-F and were to operate as an exception to the general rules in Division 40 applying to deductions of capital expenditure on depreciating assets.
[5] Capital expenditure on fodder storage assets first used or installed from 19 August 2018 is now deductible in full in the first year incurred: s 40-548.
Subdivision 40-F relates to primary production depreciating assets.
The Explanatory Memorandum for the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015 (the 2015 Explanatory Memorandum) provided that the amendments in subdivision 40-F would assist primary producers with drought preparedness and cash flow and encourage investment in productivity enhancing assets. The 2015 Explanatory Memorandum provided that this measure applies to assets that an entity starts to hold or to expenditure an entity incurs on or after 12 May 2015.
The Guide to subdivision 40-F provides what the subdivision is about.[6] It says:
You can deduct amounts for capital expenditure on depreciating assets that are water facilities, horticultural plants, fodder storage assets or fencing assets.
The amount you can deduct is equal to the asset’s decline in value during an income year (as measured under this subdivision).
[6] Section 40-510.
A fencing asset is defined in s 40-520(4) as:
a)An asset or a structural improvement that is a fence; or
b)A repair of a capital nature, or an alteration, addition or extension, to a fence.
A water facility includes plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water. It also includes an alteration, addition or extension to that plant or structural improvement.[7] Examples of water facilities would be dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.
[7] Section 40-520(1).
A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It is also a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to an asset or a structural improvement, that is primarily and principally for the purpose of storing fodder.[8]
[8] Section 40-520(3).
Section 40-515(1) provides: ‘You can deduct an amount equal to the decline in value for an income year (as worked out under this Subdivision) of a *depreciating asset that is … a fencing asset.’
Section 40-515(2) provides: ‘However, the applicable condition in section 40-525 must be satisfied for the *depreciating asset.’
You cannot deduct more in total than the amount of capital expenditure incurred on the fencing asset: s 40-515(3).
The applicable condition for a fencing asset is provided in s 40-525(4):
The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the *fencing asset must have been incurred primarily and principally for use in a primary production business that you conduct on land in Australia.[9]
[9] It is not in dispute that the capital expenditure was incurred for use in a primary production business.
A fencing asset starts to decline in value in the income year in which you first incur expenditure on the asset: s 40-530. The decline in value for fencing assets is determined by s 40-551 which provides:
The decline in value of a *fencing asset for the income year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset.
Section 40-555(5) provides:
You cannot deduct an amount for any income year for capital expenditure on the acquisition of a *fencing asset if any entity has deducted or can deduct an amount under this Subdivision for any income year for earlier capital expenditure on:
a)the construction or manufacture of the fencing asset; or
b)a previous acquisition of the fencing asset.
Case Law
There are no cases dealing with a deduction claimed under subdivision 40-F for capital expenditure incurred on a fencing asset where the fencing asset is acquired as part of a parcel of land.
The respondent relies upon a 1988 Tribunal decision of Case W9[10] which involved similar facts to this matter but under a previous legislative regime for tax deductions available to a primary producer. The provision considered in Case W9 was s 75B of the Income Tax Assessment Act 1936 (ITAA 1936) which applied ‘to expenditure of a capital nature incurred …, being expenditure incurred on the construction, acquisition or installation of plant or a structural improvement for the purpose of conserving or conveying water …’.
[10] (1988) ATC 178.
In Case W9 the taxpayer purchased a rural property for the sum of $1,739,450 which included, as stated in the sale contract, an amount of $330,000 for structural improvements for the purpose of conserving or conveying water. The structural improvements were water tanks and bores that were constructed long before the taxpayer acquired the property. The Tribunal refused to allow the deduction citing the cases of Southern Estates Pty Limited v Federal Commissioner of Taxation[11] and Federal Commissioner of Taxation v Waldeck Nurseries Pty Ltd.[12]
[11] (1967) 117 CLR 481.
[12] (1982) 12 ATR 666.
Member Bannon said in Case W9 at [180]:
Although the contract purports to apportion the consideration for the purchase between the land and the water plant, the plain fact is that the water plant was part of the land, and when the land was conveyed, everything was conveyed which was a fixture on that land, and that included the water plant – the tanks and the bores. Hence, whilst the contract is designed to differentiate in its terminology, the real effect of the contract is that the whole property was conveyed for the total consideration of $1,739,450.
Further, Member Bannon said at [181]:
When sec. 75B(2) speaks of expenditure incurred, on the construction, acquisition or installation of plant, or a structural improvement for the purpose of conserving or conveying water, for use in carrying on that business on that land it means expenditure by the taxpayer who carries on the business of primary production, and it means that he has to spend the money himself or have it spent to improve the property.
… it is clear to my way of thinking that sec. 75B(2) requires the taxpayer who is in the business of primary production, to himself incur the expenditure in carrying out the improvements. He cannot rely on expenditure incurred in improving the land by other people who owned the land before him, which inevitably involve him acquiring those improvements. He cannot, by putting a schedule in his agreement which purports to apportion the consideration for the purchase of the land, escape the fact that it was somebody else who spent the money.
The issue in Southern Estates Pty Limited v Federal Commissioner of Taxation[13] was whether the taxpayer was engaged in primary production, which is not in dispute in this case. It is relevant, however, because of the statement of Windeyer J as to the purpose of s 75 of the ITAA 1936, which provided that certain expenditure incurred by a taxpayer engaged in primary production on any land was an allowable deduction:[14]
The general purpose and policy of these provisions, it may be assumed, is not simply to relieve primary producers from taxation. It is to do so in order to encourage expenditures which increase the efficiency of primary industry. Section 75(1) clearly reflects a policy of encouraging capital expenditure which will improve the productive capacity of rural land in Australia. A policy and purpose behind s 75 may thus be seen.
[13] (1967) 117 CLR 481.
[14] (1967) 117 CLR 481 at 493.
In Federal Commissioner of Taxation v Waldeck Nurseries Pty Ltd,[15] the Federal Court was concerned with the construction of s 75A of the ITAA 1936 which provides a deduction for expenditure ‘incurred in’ certain specified activities. The Full Court said that the question of construction which arose was what is meant by the reference in s 75A(1) to ‘expenditure’ being ‘incurred in’ an activity specified in the sub-section. In answer to that question the Full Court at 672 said:
The majority of the activities specified in the various paragraphs of s 75A(1), in the form applicable to the 1977 tax year, have a purposive element in the sense that they either take the form of objectives which can be achieved by direct or indirect means (eg, extermination of pests, preventing or combating soil erosion or flooding) or are stated in terms which include a purpose or object: eg, for agriculture, for grazing purposes, for use in carrying on primary production. This tends to support the view that the question whether expenditure has been incurred in one or more of the specified activities is not to be determined by reference merely to whether it in fact achieves the particular result. The reason for incurring the expenditure is of critical importance. Expenditure will, for the purposes of the subsection, properly be said to have been incurred in one or more of the specified activities if the achievement of that activity or those activities constitutes an operative and substantial reason for the incurring of the expenditure …
[15] (1982) 12 ATR 666.
Applicant contentions
McBride contends as follows:
(a)On a straightforward reading of s 40-515(1) and s 40-525(4) McBride is entitled to deduct the cost of fencing assets on the sheep station because it incurred ‘capital expenditure … on the … acquisition of the fencing asset … primarily and principally for use in a primary production business that [it] conducts on land in Australia’.
(b)There were fencing assets on the sheep station acquired by McBride. The Contract of Sale provided that McBride purchased ‘all improvements and fixtures on the Land’. McBride incurred expenditure on the acquisition of fencing assets and therefore the statutory criteria have been satisfied.
(c)There is nothing in subdivision 40-F itself that suggests that the deduction is limited to fencing assets acquired separately from the land on which they are installed. Section 40-555(5) recognises that a fencing asset that is eligible for the deduction might be one that is acquired from another person who was also eligible to claim the deduction. Therefore, McBride can claim a deduction for the cost of fencing assets provided no deduction under subdivision 40-F has been claimed by previous owners of the sheep station.
(d)Subdivision 40-F has a plain meaning that is not assisted by reference to extrinsic materials such as the 2015 Explanatory Memorandum. The Tribunal should not read words into subdivision 40-F. In particular, the word “new” should not be read into s 40-525(4) because it overlooks the function of the words ‘construction, manufacture, installation’ that do appear in that section. The ‘construction, manufacture, installation’ of fencing assets naturally captures any “new” expenditure on fencing assets.
(e)Another indication that Parliament did not intend to limit the deduction for fencing assets to expenditure incurred directly on new fencing assets may be found by comparing ss 40–525(4) and 40–551 to the s 40–635(1) definition of ‘landcare operation’. So far as relevant, that section defines a landcare operation as ‘erecting a fence to separate different land classes…’. If Parliament had wanted to limit expenditure on acquiring fencing assets to expenditure incurred directly on acquiring new fences it could have adopted a similar formula – ‘… expenditure incurred on erecting a fence…’. The contrast suggests that Parliament intended to allow outright deductions in a broader range of circumstances than for expenditure directly on erecting a new fence.
(f)McBride says that in any case its interpretation of subdivision 40-F is not inconsistent with any Parliamentary intention, gleaned from the 2015 Explanatory Memorandum, to encourage investment in fencing assets. By allowing a deduction for the part of the purchase price attributable to the fencing assets, McBride was encouraged to invest in fencing assets through the purchase of the sheep station. The respondent’s alternative interpretation would produce two classes of fencing assets – those acquired with pastoral properties, which would be depreciated over time, and those newly constructed, which would be written off immediately. This outcome would conflict with the objectives of subdivision 40–F.
(g)The respondent is incorrect in stating that the consideration provided under the contract of sale was consideration for the acquisition of the sheep station rather than ‘capital expenditure … incurred on the … acquisition of the fencing asset’. There is no dispute that the sheep station included 816 km of fencing assets and that the price paid reflected the existence of those fencing assets. It is difficult to see why the additional cost of acquiring the property with the fences should be non-deductible while the cost of adding fences to an unfenced property would be deductible.
(h)Under s 40–195, if a taxpayer pays an amount for two or more things that include at least one depreciating asset, it must take into account as part of the cost of the depreciating asset only that part of what the taxpayer paid that is reasonably attributable to the depreciating asset. Therefore, Division 40 is designed to deal with a purchase price that takes into account a depreciating asset – here, the fencing asset – and other assets – here, the land. In these circumstances it requires the taxpayer to apportion the consideration between the two. Further, although the fencing asset is a fixture on the land, Division 40 treats it as a separate asset for the purpose of determining a deduction for the decline in value of the asset.
(i)The Federal Court’s decision in Federal Commissioner of Taxation v Waldeck Nurseries Pty Ltd[16] can be distinguished because it involved a different legislative regime. Whereas s 75A allowed a deduction for expenditure incurred in achieving one or more of the listed activities, s 40–525(4) allows the deduction when expenditure is incurred ‘on the acquisition of’ fencing assets. That s 40–525(4) allows a deduction on an acquisition distinguishes Waldeck.
(j)Case W9[17] should also be distinguished. The concern of the Deputy President in that case that two different taxpayers could achieve deductions for the same expenditure does not arise under subdivision 40–F because s 40–555(6) eliminates the possibility that any further deduction would be allowed.
(k)The Tribunal should give the provisions of subdivision 40-F their natural and ordinary meaning.
[16] (1982) 12 ATR 666.
[17] (1988) 89 ATC 178.
Respondent contentions
The respondent contends as follows:
(a)McBride did not incur capital expenditure ‘on the construction, manufacture, installation or acquisition’ of fencing assets. When properly understood, the capital expenditure incurred on the construction, manufacture, installation or acquisition referred to in ss 40-525(4) and 40-551 is capital expenditure incurred directly by the taxpayer on the construction, manufacture, installation or acquisition of new fencing assets.
(b)It is apparent from the 2015 Explanatory Memorandum that, by allowing accelerated depreciation for primary producers in respect of fencing assets, Parliament sought to encourage primary producers to invest in fencing assets as part of mitigating and managing the risks of drought. The object of encouraging investment in fencing assets on Australian agricultural land would not be achieved by allowing accelerated depreciation in respect of an acquisition of land having pre-existing fencing assets. The transfer of an old fence to a new company does nothing to improve the land. The provisions in subdivision 40-F should be construed so as to be consistent with the language and purpose of all of the provisions of the statute.[18] The phrase ‘construction, manufacture, installation or acquisition of the fencing asset’ is a compound phrase such that acquisition should be given a meaning according to its context and in particular its immediate positioning adjacent to ‘construction, manufacture, installation’.
(c)The respondent relies upon the decision of Waldeck Nurseries[19] so as to construe the provisions of subdivision 40-F as requiring more than merely incurring expenditure on a fencing asset, but rather requiring that the operative and substantial reason for incurring the expenditure was the acquisition of the fencing asset. The respondent contends that the operative and substantial purpose of the relevant capital expenditure by McBride was to acquire the estate in land. It did not incur capital expenditure on the acquisition of fencing assets but rather it incurred capital expenditure on the acquisition of the estate in land. Consequently, the respondent contends that subdivision 40-F does not apply to that expenditure.
(d)The respondent relies upon the decision in Case W9[20] and the reasoning that to be entitled to a tax deduction the taxpayer must itself incur expenditure improving the property.
(e)Subdivision 40-B continues to apply to the calculation of the capital allowance deductions available to McBride in respect of the fences acquired with the estate in land. Subdivision 40-F will apply to any capital expenditure and repairs of a capital nature, alterations, additions or extensions to those fences.
[18] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69].
[19] (1982) 12 ATR 666.
[20] (1988) 89 ATC 178.
The task of statutory construction
The task of statutory construction, as stated by McHugh, Gummow, Kirby and Hayne JJ in Project Blue Sky Inc v Australian Broadcasting Authority:[21]
… is to give the words of the statutory provision the meaning that the legislature is taken to have intended them to have. Ordinarily, that meaning (the legal meaning) will correspond with the grammatical meaning of the provision. But not always. The context of the words, the consequences of a literal or grammatical construction, the purpose of the statute or the canons of construction may require the words of a legislative provision to be read in a way that does not correspond with the literal or grammatical meaning.
[21] [1998] HCA 28; (1998) 194 CLR 355 at [78].
A more recent statement with respect to interpreting legislation was made by the plurality of the High Court in SZTAL v Minister for Immigration and Border Protection:[22]
The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. All this is not to deny the importance of the natural and ordinary meaning of the word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some of the meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.
[22] [2017] HCA 34; (2017) 347 ALR 405 at [14].
Gageler J referred to making a ‘constructional choice’:[23]
… The task of construction begins, as it ends, with the statutory text. But the statutory text from beginning to end is construed in context, and an understanding of context has utility “if, and in so far as, it assists in fixing the meaning of the statutory text”.
The constructional choice presented by a statutory text read in context is sometimes between one meaning which can be characterised as the ordinary or grammatical meaning and another meaning which cannot be so characterised. More commonly, the choice is from “a range of potential meanings, some of which may be less immediately obvious or more awkward than others, but none of which is wholly ungrammatical or unnatural”, in which case the choice “turns less on linguistic fit than on evaluation of the relative coherence of the alternatives with identified statutory objects or policies”.
Integral to making such a choice is discernment of statutory purpose. …
[23] SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 347 ALR 405 at [37] – [39] omitting citations.
A consideration of the purpose of a statute is also a statutory obligation imposed by s 15AA of the Acts Interpretation Act 1901.
Section 15AA requires the purpose or object of subdivision 40-F to be taken into account even in the absence of ambiguity in those provisions. The consideration of the purpose or object may lead to a determination that there is more than one construction available.[24] However, the actual words of the statute cannot be ignored and the requirement of s 15AA that one construction be preferred to another can have meaning only where two constructions are otherwise open.[25]
[24] Mills v Meeking (1990) 169 CLR 214 at 235.
[25] R v L (1994) 49 FCR 534 at 538.
Consideration
To determine the preliminary issue, the provisions of subdivision 40-F must be construed adopting a purposive and contextual approach.
The text of subdivision 40-F
Section 40-515 allows you to deduct an amount equal to the decline in value for an income year of a fencing asset. The amount of the deduction is limited to the amount of capital expenditure incurred on the asset.[26] The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset must have been incurred primarily in principally for use in a primary production business that you conduct on land in Australia.[27] The decline in value of a fencing asset for the income year in which you incurred the expenditure is the amount of the capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset.[28]
[26] Section 40-515(3)(d).
[27] Section 40-525(1)(a).
[28] Section 40-551.
The amount of the deduction allowed is determined by reference to the decline in value of a fencing asset. The decline in value is defined in s 40-551 as:
… the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset.
It follows that the amount of the deduction is equal to the amount of capital expenditure incurred on the construction, manufacture, installation or acquisition of the fencing asset.
If McBride incurred an amount of capital expenditure on the construction, manufacture, installation or acquisition of a fencing asset, then it is entitled, by operation of ss 40-515(1) and 40-551, to an immediate deduction for the amount of that expenditure.
There is no doubt that McBride incurred capital expenditure on the acquisition of the sheep station because the contract required a sum of money to be paid for the sheep station. Consequently, there was expenditure of a capital nature incurred on the acquisition of the sheep station. The question that arises is whether by incurring capital expenditure on the sheep station, McBride incurred capital expenditure on a fencing asset so as to be entitled to an immediate deduction? McBride says that one need not look beyond the words of the statute which entitles it to a deduction because it incurred ‘capital expenditure … on the ... acquisition of the fencing asset’. There is an attractiveness to the simplicity of this approach.
However, before accepting McBride’s contention that the meaning of the words in ss 40-515(1) and 40-551 correspond with the literal or grammatical meaning of those provisions, it is necessary to consider the ‘context of the words, the consequences of a literal or grammatical construction, the purpose of the statute or the canons of construction’.[29]
The purpose of subdivision 40-F
[29] Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at [78]. See also Australian Mines and Metals Association Inc v Construction, Forestry, Maritime, Mining and Energy Union [2018] FCAFC 223; (2018) 363 ALR 343 at [79] noting that common law principles are not inflexible rules and should be viewed as servants and tools of analysis in the task of statutory construction.
There is no objects clause for subdivision 40-F and the objects clause in s 40-15 for Division 40 is in general terms, which provide no guidance as to the construction of ss 40-515(1) and 40-551.
I consider that there is a ‘more specific purpose’[30] of subdivision 40-F which can be deduced from its text and is confirmed by reference to the 2015 Explanatory Memorandum for the amending legislation introduced in 2015.
[30] Carr v Western Australia (2007) 232 CLR 138 at 143.
The water facilities, fodder storage assets and fencing assets in subdivision 40-F are assets that enhance drought-preparedness and generally improve the land. Sections 40-515(1) and 40-551 create a commercial incentive to incur capital expenditure on these assets by offering an immediate deduction for that expenditure. It is apparent from these provisions that the purpose of the legislation is to encourage expenditure on assets so as to enhance drought-preparedness and generally improve agricultural land. The purpose ascribed to the predecessor regime for primary production deductions by Barwick CJ in Southern Estates Pty Ltd v Federal Commissioner of Taxation[31] was ‘the encouragement of the improvement of land’. Windeyer J agreed and said:[32]
The general purpose and policy of these provisions, it may be assumed, is not simply to relieve primary producers from taxation. It is to do so in order to encourage expenditures which increase the efficiency of primary industry. Section 75(1) clearly reflects a policy of encouraging capital expenditure which will improve the productive capacity of rural land in Australia. A policy and purpose behind s 75 may thus be seen.
[31] (1967) 117 CLR 481 at 487 – 488.
[32] (1967) 117 CLR 481 at 493.
I believe that the purpose and policy behind subdivision 40-F remains the same as for the previous regime, and the judicial statements from Barwick CJ and Windeyer J can be applied equally to the current regime.
I reach this conclusion as to the purpose of subdivision 40-F without resort to any extrinsic materials,[33] but I do note that support for this proposition is found within the 2015 Explanatory Memorandum.[34]
[33] See Saeed v Minister for Immigration & Citizenship (2010) 241 CLR 252 at [31]: Statements as to legislative intention made in explanatory memoranda or by Ministers, however clear or emphatic, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning.
[34] See BGM16 v Minister for Immigration and Border Protection [2017] FCAFC 72; (2017) 252 FCR 97 at [93] – [103].
The 2015 Explanatory Memorandum says that the immediate deductions ‘… will assist producers with drought preparedness and cash flow, and encourage investment in productivity enhancing assets’.
Further at [2.8] it states that ‘This will encourage primary producers to invest in these assets which are an important part of mitigating and managing the risks of drought’.
The 2015 Explanatory Memorandum at [2.69] further expressed the concern that ‘primary producers may undertake too little investment in preparing for drought’ and provided an objective of reform as follows:
While the Government can’t prevent drought, there is a clear role for Government to address impediments and create the right conditions for farmers to invest for the future. Accelerated depreciation encourages farmers to better manage and mitigate the risks of severe weather events, which can in turn reduce the significant cost on the government in responding to drought.
By reference to the language of subdivision 40-F and noting the consistent purpose derived from the 2015 Explanatory Memorandum, I conclude that the specific purpose of subdivision 40-F is to encourage capital expenditure on assets likely to improve the drought-preparedness, profitability and productivity of the Australian agricultural sector.
Context
The word ‘acquisition’ appears in the composite phrase ‘construction, manufacture, installation or acquisition of the fencing asset’. This immediate context must be taken into account when construing ‘acquisition’.
In Deputy Commissioner of Taxation v Dick[35] Spigelman CJ considered a compound phrase when construing s 1318 of the Corporations Act and said:
Although words such as “breach of duty” and “default” are capable of extending, respectively, to a breach of statutory duty and to a contravention of a statutory provision, there are textual and contextual reasons for concluding that that was not the intention behind the use of these particular words in s 1318.
The words appear interspersed in a context which extends to “civil proceedings … for negligence, default, breach of trust or breach of duty”. Words such as “negligence” and “breach of trust” would not extend, in their natural and ordinary meanings to statutory obligations. Each clearly refers to obligations under the general law. In my opinion, the other words should be similarly so confined, save with respect to many, if not all, of the obligations imposed by the Corporations Act itself.
The relevant principle of statutory interpretation is noscitur a sociis, which has been imaginatively translated by Lord McMillan as “words of a feather flock together”. As his Lordship went on to explain the principle: “The meaning of a word is to be judged by the company it keeps”: Lord McMillan, Law & Other Things (Cambridge University Press, Cambridge, 1937), p 166.
This general principle of the law of interpretation has a number of specific subprinciples, including the ejusdem generis rule. The relevant subprinciple for present purposes is the maxim propounded by Lord Bacon: copulatio verborum indicat acceptationem in eodem sensu — the linking of words indicates that they should be understood in the same sense. As Lord Kenyon CJ once put it, where a word “stands with” other words it “must mean something analogous to them”: Evans v Stevens (1791) 4 TR 224; 100 ER 986; see also Byrne WJ (ed), Broomes Legal Maxims (9th ed, Sweet & Maxwell London, 1924), pp 373-374.
[35] (2007) 226 FLR 388 at 391 [10]-[13].
The approach of McBride is to disregard as being irrelevant (or not applicable) the words ‘construction, manufacture, installation’ and to focus on the ordinary meaning of acquisition. It is true that the word ‘acquisition’ is capable of applying to the acquiring of a pre-existing fence as part of a transfer of land, but such a construction would not achieve the statutory purpose and would be at odds with the associated words ‘construction, manufacture, installation’ which involve a fence coming into existence on the land and not just the transfer of an existing fence from one person to another. It is appropriate to apply the maxim of copulatio verborum indicat acceptationem in eodem sensu - the linking of words indicates that they should be understood in the same sense – particularly where to do so achieves the purpose of the statute.
As I have already found, the purpose of giving a deduction for capital expenditure on a fencing asset is to improve the land and to make it more productive and drought resistant. The land purchased by McBride is not improved or made more productive as a result of the transfer. The fences that were previously installed on the land remain in the same condition and hence the productivity of the land has not increased. To give a tax deduction in these circumstances would be rewarding conduct that has produced none of the benefits envisaged by the statute.
Conclusion as to statutory interpretation
Seen in this light, the meaning of acquisition in subdivision 40-F does not include the acquiring of a pre-existing fence as part of a transfer of land. The meaning of ‘acquisition’ is limited by its use in conjunction with ‘construction, manufacture, installation’.[36] The statement of Edelman J in SAS Trustee Corporation v Miles[37] is apposite:
… the interpretation of a statute, like any other legal instrument, is an interpretation of its words. Those words are interpreted in their context and in light of their purpose although legal rules can sometimes exclude or restrict the use of some context. In ascertaining the reasonably intended meaning of Parliament context is, literally, those matters to be considered (simultaneously) together with the text. Context can give words an interpretation that is the opposite of their ordinary meaning and grammatical sense. Context can also permit a construction of words that excludes their application to matters that would have fallen within the application of their literal meaning.
[36] See Prior v Sherwood (1906) 3 CLR 1054 at 1072.
[37] [2018] HCA 55; (2018) 361 ALR 206 at [64].
In this case, context and purpose requires that ‘acquisition’ be construed so as to exclude its application to matters that would have fallen within the application of its literal meaning. McBride should be denied a tax deduction on this basis.
I also take into account the wider context of subdivision 40-F within Division 40. Until 12 May 2015, fences used in primary production businesses, whatever date they were built, were depreciating assets whose decline in value for an income year could be a deduction allowable under subdivision 40-B. There is no reason to conclude that, after 12 May 2015, the capital allowances regime in subdivision 40-B would not continue to apply to pre-12 May 2015 primary production assets of the kinds described in subdivision 40-F.
McBride did not incur capital expenditure on a fencing asset
A further reason for denying McBride an immediate deduction is that it did not incur capital expenditure on a fencing asset. The subject of the sale was a sheep station – McBride incurred capital expenditure on a sheep station. Subdivision 40-F allows a deduction for capital expenditure incurred on a fencing asset but in this case McBride is seeking to claim a deduction for the value of the fencing asset it acquired as part of the purchase of the sheep station. By operation of the definition in s 40-551 the focus of the subdivision moves away from a question of value (or decline in value) to a question as to the amount of capital expenditure incurred.
Subdivision 40-F does not allow a deduction for the value of a fencing asset which is acquired as a result of the capital expenditure incurred on the sheep station. It is possible to put a value on all the components of the sheep station which may have included water facilities (such as a dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills) and fodder storage assets together with the fencing assets. Parliament did not intend by subdivision 40-F to allow a person to value each of these pre-existing assets and claim a tax deduction. This would give many purchasers of land a windfall gain whilst not achieving the statutory purpose of improving the land. Parliament did not expect subdivision 40-F to operate in this way because, as noted by the 2015 Explanatory Memorandum at [2.129] ‘… the policy would only apply to new expenditure and many primary producers would already have existing infrastructure’.
McBride’s construction of subdivision 40-F, if accepted, would give a windfall deduction to the first primary producer after 12 May 2015 to acquire agricultural land with fencing assets affixed to it. The windfall would be a once off; subsequent acquirers of the land would enjoy no capital allowance of any sort in respect of the fencing assets. This would be a capricious and arbitrary outcome and Parliament should be presumed not to have intended it.
Conclusion
I find that McBride did not incur capital expenditure on the construction, manufacture, installation or acquisition of the fencing asset. I do not accept the literal construction given to subdivision 40-F by McBride because:
(a)an alternative construction is reasonably open and more closely conforms to the legislative purpose;
(b)it is apparent from reading the text of Division 40 as a whole and from the 2015 Explanatory Memorandum that the purpose of subdivision 40-F is to encourage capital expenditure on assets likely to improve the drought-preparedness, profitability and productivity of the Australian agricultural sector;
(c)the word ‘acquisition’ should be construed in the context of the words to which it is linked, namely ‘construction, manufacture, installation’ all of which result in a new fence on the land;
(d)the consequence of a literal construction:
(i)for McBride, is that it would obtain a deduction in circumstances where the land on which the fence is situated is not improved or made more drought resistant; and
(ii)generally, is that a person carrying on a primary production business who purchases land may obtain a once off windfall deduction for the value of any water facilities, fodder storage assets or fencing assets on the land without adding any improvements to the land or causing the land to be more productive or drought resistant.
Adopting a contextual and purposive approach, the meaning of the word ‘acquisition’ should be confined to an acquisition of a new fence or a fence that results in an improvement of the land.
I have reached this conclusion without relying on Case W9[38] or Federal Commissioner of Taxation v Waldeck Nurseries Pty Ltd[39] but there is nothing in those cases that would cause me to alter my conclusion. To the contrary, the reasoning in those cases support my conclusion. There is very little difference between the previous statutory regime in those cases and the current regime and the facts and outcome in Case W9 are on all fours with this case. I note that my reasoning is consistent with the reasoning employed by the Tribunal Member in Case W9.
[38] (1988) ATC 178.
[39] (1982) 12 ATR 666.
Decision of the Tribunal
My answer to the issue to be determined on a preliminary basis is that McBride is not entitled to immediately deduct, under subdivision 40-F, an amount of the purchase price paid for the acquisition of the sheep station.
I certify that the preceding eighty-five [85] paragraphs are a true copy of the reasons for the decisions herein of Deputy President Britten-Jones.
.............[Sgnd]........................................
Administrative Assistant Legal
Dated 19 June 2020
Dates of hearing: 5 December 2019
Applicant’s Representative: Michael Flynn QC with Lewis Gentry, instructed by WRP Legal
Respondents’ Representative: Sam Ure of counsel instructed by the Australian Taxation Office
0
15
0