G.P. International Pipecoaters Pty Ltd v The Commissioner of Taxation

[1989] HCATrans 265

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No PS of 1989

B e t w e e n -

G.P. INTERNATIONAL PIPECOATERS

PTY LTD

Appellant

and

THE COMMISSIONER OF TAXATION

Respondent

BRENNAN ACJ
DAWSON J
TOOHEY J
GAUDRON J

McHUGH J

Pipecoaters(2)

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON FRIDAY, 27 OCTOBER 1989, AT 9.40 AM

(Continued from 26/10/89)

Copyright in the High Court of Australia

P1T3/l/DR 22 27/10/89

BRENNAN ACJ:	Mr Fletcher.
MR FLETCHER:	Your Honours, yesterday afternoon two matters were

raised:  one was a question put by Justice McHugh

concerning the proposition that the outgoings incurred

by the appellant in this case in constructing the

plant were, in the circumstances, perhaps analogous

to those incurred in a BP case and I believe that my

answer to that was that they were not. I think it is

appropriate that that be dealt with in somewhat more

detail as to why the appellant contends that the cases

are not in any way analogous.

I referred yesterday briefly to the GAGA case -

the COMMERCIAL AND GENERAL ACCEPTANCE LTD V FEDERAL

COMMISSIONER OF TAXATION - and I - I beg your pardon, Your Honours, the RECKITT AND COLMAN case.

And, in that case, in passing I pointed out that it

was noted that the significant determining the

characterization of a receipt - in that case, a

subsidy - it was significant to determine what was

the effect of the payment upon the business structure

of the taxpayer concerned. Now, the same inquiry

is relevant to the question, "What is the appropriate

characterization of an outgoing?" and that is, in short,

the reason why the BP case has no similarity to

this case - it bears no similarity to this case.

If I could ask Your Honours to refer to

BP AUSTRALIA LTD V THE FEDERAL COMMISSIONER OF

TAXATION - a copy has been provided.

BRENNAN ACJ:  Could you give us the reference so that it can

go into the transcript?

MR FLETCHER:  The reference to that, Your Honours, is

(1965) 112 CLR 386. This is the judgment of the

Privy Council but I would ask Your Honours to refer firstly to page 391 where Lord Pearce is dealing with, or reviewing, the reasons for decision of

His Honour the Chief Justice Dixon. And he points

out at the bottom of page 391 that His Honour the

Chief Justice had said that: 

For my part I cannot think that all the course adopted changed the character of the transactions

of the company from those of a continual attempt

to establish its product in a consumers'

market and to meet all the obstacles which

arose in a long and rather troubled period to

obtaining a reputation for its product.

It is significant that, in essence, the Privy Council

upheld the decision of His Honour the Chief Justice

and His Honour Justice Kitto. And over the page at page 392, reference is made by Lord Pearce, a third

of the way down the page with the sentence starting,

"The purpose" to - - -

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BRENNAN ACJ:  Mr Fletcher, I do not like to interrupt you but

I understand that the only copy that tipstaves

have is in the appeal cases reference. Do you

happen to have a corresponding page reference to

the appeal cases reference?

MR FLETCHER:  No, that is an unexpected hitch, Your Honour. I

was not aware that the wrong copy had been provided

to you.

BRENNAN ACJ:  Is it necessary that we have it in front of us

or can you read it to us?

MR FLETCHER: Well, no perhaps not, Your Honours. I do believe

I can refer to the relevant passages and I will

read small portions of them into the transcript.

That might suffice. In referring to the reasons for

judgment of His Honour Justice Kitto, a passage was

read by Lord Pearce and that was:

The purpose was not to create a situation in

which to set about selling motor spirit; it

was to secure the particular sales which would
be necessary for the satisfaction of the
service station's requirements of the period.

The emphasis there is upon the fact that the exigencies of marketing from period to period

determined what had to be done to meet those demands.

The difference between that and the situation the
appellant found itself in is quite marked in that,

I would suggest, the appropriate statement in

relation to the appellant was that the purpose was

to create the situational structure in which to set

about coating pipe.

DAWSON.J:  But, Mr Fletcher, if - that is what you say,

of course - but if the Commissioner is right in
saying that the moneys which you received were

assessable income, is not the corollary of that

that the expenditure of those moneys was in the

form of deductible outgoings, otherwise there is

an inconsistency, It may be that there is an

inconsistency, but those two things go together

do they not?

MR FLETCHER: Yes, the two things do go together but, as in

my answer to His Honour Justice McHugh yesterday,

I suggested that the appropriate way of approaching

this and as has been done in the GAGA case is to

look in this case to see whether or not the outgoings

are deductible and if they are not then, since our

task is to characterize the - - -

BAWSON J:  They may have been but you did not claim them.

You treated the moneys as capital expenditure and

claimed depreciation.

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MR FLETCHER:  For the reason, Your Honour, with respect, that

they are not deductible and I think that that can be

clearly demonstrated that there is no prospect that

they are deductible whatsoever. Furthermore, as I

have set out in -

DAWSON J:  But the point is, if the Income Tax Commissioner

had been consistent and you had claimed them as

deductible outgoings he would have had to have
allowed it, would he not, to be consistent?

MR FLETCHER:  He, in fact, ought to have allowed them in any

event if they were deductible outgoings. If we had

incorrectly claimed them as capital outgoings it was

his role to allow them.

DAWSON J:  Well, I do not know about that.

MR FLETCHER: In my submission, Your Honour, it is the

Commissioner's role to determine whether or not they
have been properly attributed to capital account

as outgoings or to current account as income, the

point being, of course, that if they were deductible

then there would be no depreciation allowances

arising. But, the further point that I have raised

in the additional contentions in my outline of

submissions is that, quite apart from anything else,

or quite apart from the fact that the appellant

says most firmly that these outgoings quite clearly

are not deductible and it would have been a futile

exercise to have mounted an argument in the tribunals

andcourts that they were deductible which is doomed

to failure, the case has never been fought on that

basis and there was a most clear concession at the

trial by the counsel for the respondent to that

effect.

If I could refer Your Honour to page 13 of

my outline of argument.

DAWSON J:  . So:,, th?t you used it the other way. You said to

be consistent the Commissioner now cannot treat the

payments as other than of a capital nature, the payments

to you?

MR FLETCHER:  No, absolutely, that it would be completely

inconsistent. Leaving quite aside for the moment,

Your Honour, the appellant would be perfectly

happy if the question, whether or not overall
it was possible to construe payments such as these

in these circumstances as deductible, that can be

left unanswered. It does not require to be answered

in this case. It is not the issue in this case.

TOOHEY J:	Well, it cannot be answered.
MR FLETCHER:	No, it cannot.

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TOOHEY J:  It is not an issue and never has been an issue

at any stage of the litigation.

MR FLETCHER: That is my point, Your Honour, yes.

TOOHEY J:  But I am not sure where this is taking us,

Mr Fletcher. At one stage I thought you were suggesting

that perhaps by focusing on the nature of the

outgoing one could get some clue as to the character

of the ingoings and if that is a useful exercise in
any case, it does not appear to be here because of

the way in which the taxpayer has treated the

outgoing and it suited the Commissioner, no doubt,

to accept that characterization of it. So, how does it

help us to, as it were, begin the inquiry by looking

at the outgoing?

MR FLETCHER:  Because, as was said by His Honour Mr Justice Gibbs

in the CAGA case - and I can quote from page 377:

It can only be regarded as part of the

assessable income if it was referable to
expenditure incurred in or for the purpose

of discharging or providing for liabilities

on revenue or income account.

So, even though the question whether the Commissioner

should or could have allowed deductions under

section 51 for the outgoings incurred here, even

tl~ugh that is precluded in this particular case,

the actual inquiry as to the characterization of the

outgoings is still entirely pertinent.

TOOHEY J:	Yes, I understand why you are putting it.
BRENNAN ACJ:	Mr Fletcher, I am not sure that I understand this

argument and I had better ask the question although

I do not wish to interrupt the course of your presentation but, if, for example, there is a contract for coating of pipes or some other service

which is to run for three years or over a given

quantity and it is necessary to establish a capital

plant in order to provide that service, and looking	at the costs the supplier sees that there is going
to be a certain up front cost and a certain unit
cost, he decides that.::.:. he would like to have
the up front cost paid for by the first of the contractors that he will ever contract with,and so he says, "Well, I am going to provide you with a
million linear feet, but I will give you that at a
very low rate, but I want you to give me the up front
cost so that I can establish my plant to supply you
and everybody else in the years to come", clearly a
capital asset yet, in your argument, as I understand
it, just by an agreement to sever the totality of
the cost of the service, not to make it two costs, but to sever the totality of the cost of the service, he can isolate the major part of it from the operation of the income tax assessment.

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MR FLETCHER:  No, that is not my argument, Your Honour. The

difference between the argument for the appellant

and what you have proposed is the reference to a

dilution of the connnercial rate for the coating of the

pipe and it is the appellant's contention that it

has been established as a matter of fact that there

was no such dilution here.

BRENNAN ACJ:  But that is a commercial decision. character of the payment is to be determined by Surely the

reference to the contract that is made, not to the

rates that were struck for some connnercial purpose.

MR FLETCHER: Yes, but, Your Honour, Part IV A would simply

step in and say, "Well, in doing it like that, you

have engaged in a tax avoidance arrangement".

BRENNAN ACJ:  Assuming it avoids tax. My proposition to you

is why does it avoid tax? Why is it not that if you

want to provide a million linear feet you can provide

the price for that in whatever way you like. You can

do it by way of a rate per foot or you can do it by

way of a rate per foot and an up front payment. Either way, if that is the service that you are providing, the payment that you get for it is

assessable income.

MR FLETCHER:	Your Honour, but in substance in that proposition the payments are entirely referable to the service
being provided.

BRENNAN ACJ: That is what I do not understand. I do not

understand why it is that you say that the payment

is referable to two several services.

MR FLETCHER: In this case?

BRENNAN ACJ: Yes, when you look at the contract and you see

that it is not. Do you see there is an up front

payment which, no doubt, is intended to be applied

to the construction of the plant, but the consideration

for it is the rendering of the service of the whole

of the works?

MR FLETCHER: Well, Your Honour, that has come back to the point

that we were discussing yesterday at 5 o'clock and

perhaps it is appropriate that I deal with that now. outline of what I understood to be the proposition

being put yesterday afternoon by Your Honour, if I

might hand that up? Your Honours, the submission by

the appellant is that the payment of the cost of
the plant did not obtain the connnitment to coat
using the plant. That connnitment was the consideration
flowing from the appellant to SECWA in return for the

promise to pay the coating price - an entirely

executary contract. I understand Your Honour's

PlT3/6/DR	27	27/10/89
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proposition yesterday to be the one set out at the

top of the page: namely, that there was a payment

for the cost of the plant flowing from SECWA to GPI

and a conn:nitment to coat pipe using that plant and,

at the same time, there was an agreement to pay the

coating price. But, if that is the case, in my

submission, there is nothing flowing from GPI in

relation to that consideration. Our proposition is as set out at the bottom of the page, that the cost of the plant secured nothing more than the

connnitment to apply the moneys to the construction

of the plant. That, in our submission, is the

correct construction of the contract and that is,

I believe, what has been found and held.

On the other side, in the other box - as we

have characterized it - there was an agreement

to pay a coating price in return for a conn:nitment
to coat the pipe using the plant. So that there

are two separate and distinct, although related,

agreements within the four walls of the one contract

and that is no different to the arrangement in

BOYCE V WHITWICK COLLIERY or APA FIXED INVESTMENT. Now, I accept that if Your Honours considered that

the principle embodied in those cases simply is inapplicable then the authorities are of little worth to the appellant but, clearly, the appellant

relies upon them, and, w..thin the four walls of the

one contract in each of those cases, there were

two agreements - there were two things to be done.

We say that that is precisely what this

contract evinces. Although one can, in a sense,
with all due respect, gloss over that and take an

approach with respect to His Honour JusticePidgeon - it

was overly simplistic ..:-arid say that, "Here we have

a contract: as far as the payer is concerned all
it wants is coated pipe; as far as the payee is

concerned it wants to coat the pipe and it says,

'But I need the facilities with which to do it'.

But, overall, it is a contract about coating pipe".

That is true, it is. It is a contract about coating

pipe but that is to ignore what is within the

contract, the discrete elements, and the evidence

has been established that it was the case from the

very beginning that the joint venturer intended

that if it was going to engage in this contract

then it needed to be provided a plant - it was to

be done in WA as SECWA required - and SECWA must

pay for it.

BRENNAN ACJ:  Mr Fletcher, this is where I think perhaps my

question to you, puts a proposition with which you

are not in agreement. You say the evidence

establishes. My question is posited on the fact

that the consideration for this payment and what

PlT3/7/DR	28	27/10/89
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was given for the receipt of the payment is to be

found within the contract. You are looking at the

evidence extrinsic to the contract, as I understand

it, including what might be regarded as the

accounting or cormnercial approach to what the

payments were for. My proposition is: look at the

critical part that is in the contract and one sees

there what this payment was for.

MR FLETCHER:	Yes, for the construction of plant.
BRENNAN ACJ:	Not simply that.  For the doing of the work that

is comprised within the four corners of the contract

which includes the production of the plant and the

coating of the pipes and the consideration that was

to be paid for the up front payments and the linear

feet payments.

MR FLETCHER:  Your Honour, with respect, I cannot agree with

that proposition.

BRENNAN ACJ:  No.

MR FLETCHER:	The contract, as we would urge Your Honours to construe it, clearly distinguishes between the
discrete payments for the establishment of the plant
and, if I could refer - - -

DAWSON J: Well you say, do you not, "Look, it could have been

done in one of two ways. It could have been that the

State Energy Cormnission could have put up the plant

itself and allowed the contractor to use it". It

did not do that and you tell me that that was for

political reasons which I only understand at that

level. It chose to pay the contractor to do it

itself, but there should not be any difference in

characterization because the situation is really the

same. You say that, do you not?

MR FLETCHER:  There should not be any difference in the

characterization of the -	there would be no payments
in the first proposition - - -

DAWSON J: That is right.

MR FLETCHER:  - - - no construction payments?

DAWSON J: Yes, but the situation is the same in the end. There

is a plant which the contractor uses to coat pipes

for which it charges the cormnercial rate and if

the Energy Cormnission had put up the plant itself

and paid for it then you would not be treating that

as a sort of fringe benefit, as it were, for income

tax purposes. There it is, it has got nothing to do

with the assessable income of the contractor.

MR FLETCHER: If the SECWA created the plant?

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DAWSON J: Yes. Well, it did not happen to do it that way,

it did it another way, but the situation is really

no different you say, do you not?

MR FLETCHER:	Yes, and if I could -
DAWSON J:	And it is unrealistic to look at it in any other

light. That is the way you put it.

MR FLETCHER:  Yes, it is because at the end of the day - I mean,

if it was the case that there was a gain in there

for GPI then the position might be different.

McHUGH J: But what has the gain got to do with this. Let me

give you this illustration: suppose BHP said to

Brambles, "We want you to make available, for three years, five trucks and drivers, 24 hours a day and

we are prepared to pay you $10,000 a week for three

years". Brambles says, "That is a million and a

half. That sounds all right but we would have to

buy five new trucks. We would like an up front

payment of $600,000 and the $900,000 spread over the

three years, say $6,000 a week". So, they get

$600,000 as an up front payment and then $6,000 a

week. Now, why is not the $600,000 income?

MR FLETCHER: It is.

McHUGH J: It is?

MR FLETCHER:  Yes.

McHUGH J: Well now, what is the real distinction between - - -

MR FLETCHER:  Because the price for the provision of the

service, Your Honour, there, is being diverted to a

capital - this is one of the essential points the

appellants are making, that this is not a case of
a tax avoidance arrangement arising from the

diversion of what would otherwise be revenue for an

activity, in this case coating pipe, to a capital

end or use and thereby saying, "Well, it went from
there to there, it is not assessable".	Now, that

is not the proposition. That is untenable and the

authorities are quite clear that you cannot, simply

by slight of hand, say, 'That has become magically
non-assessable because of what we did with it"•

But the authorities are also extremely clear that

in certain circumstances, where there is a payment

made on the understanding and requirement that it

be applied for a capital purpose and it is so applied,

that that is not an assessable sum.

It holds true, conceptually too, because of

day perhaps there will be a gain in the sense of a profit from that asset being disposed of, or

the fact tha4 as was said quite clearly in the the

perhaps there will not be.

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McHUGH J: In the illustration I gave you, would it make any

difference if it was not Brambles but BHP approached

some body without any capital and said, "We are

prepared to give you $600,000 as an up front
payment so you can buy five trucks and then we will

pay you $6,000 a week for the next three years to

provide trucks and drivers 24 hours a day". What

is the situation there?

1:1R FLETCHER:  It depends upon what is the appropriate

commercial rate for the provision of those trucks

and drivers. Now, if it is a dilution of that rate

then we say that that amounts to, in substance, a

diversion of revenue to a capital outgoing. But

if it is not - - -

McHUGH J: Yes, I follow.

1:1R FLETCHER:  The point that I am - - -

DAWSON J:  But you also say, of course, that the contractor

was committed to use this money for the purpose of

erecting the plant. He could not say, "Well, I

am not going to use it for that purpose if I can

use it for something else".	He is committed to use
it for just that purpose.	I assume that - I have not
looked at the - - -

1:1R FLETCHER:  He was, indeed, and the evidence has found that.

It is quite clear and that is one the points I was

going to raise in answer to His Honour Justice Brennan's

example concerning the inducement that, if this was

a true inducement, if, in fact, it was an inducement

for instance, if SECWA had said, "Look, here is

$4.6m. We are giving this to you provided that

you agree to coat your pipes at your Maasluis plant"

which was in Holland - and I will come back to that

in a moment -"your Netherlands factory". That may

well be assessable because there is no requirement

that anything be done with it. I mean, it is a

cooling situation in relation to an inducement to

enter into a lease. The money is received and

then what you do with it is up to you. You may

expend it on capital outgoings but that is irrelevant.

You may fritter it away. It is entirely yours, it

is a gain in your hands.

But, in this case, it had to be expended on this plant which is absolutely useless to GPI apart from

perhaps the salvage value other than to use as

the structure for carry on a profit making operation, and

also bearing in mind that it was not the case that

GPI was already in business and particularly in a

business in which, to take Justice McHugh's example

yesterday, perhaps what would otherwise be a long-

term durable asset was of short-term benefit and

was treated as a consumable and written off like

roads. This was setting them up in business. The

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company was not in business until it had that plant

to use. In relation to that, Your Honours, it is

pertinent, I think, to note that - if I could ask

Your Honours to refer to page 821 of the appeal book.

McHUGH J:	What volume?
MR FLETCHER:	That is volume 4 of the appeal book, and the

third paragraph, paragraph 3, under the heading,

Additional Services Offered by the Joint Venture:

Early coating at our European factory in

Maasluis. We have the ability to coat pipes

prior to shipment to Australia, and would be

happy to discuss this possibility with you.

Following on from that, Your Honours, if I could ask

you to refer to volume 1, pages 167 and 170, and at

point 20, in answer to the question:

And in particular, item 3 relating to early

coating at Maasluis?---Yes. We were at this

stage tendering our services and were seeking

to obtain the work from the State Energy

Conm1ission, and we were offering the various

advantages which we could to the client.	Some
of those are listed.	One of them was, of

course, the fact that we were able to coat the
pipe. Irrespective of plant in Western

Australia, we could coat the pipe in Maasluis in Holland.

And, at page 170, at point 40:

Can you say whether or not if SECWA had

stipulated that it wanted to own the plant it

would have made any difference to the price

which you tendered?

The answer was:

Not really. It would have been probably a

different set of calculations that we might

have gone through but in essence we didn't

mind who owned the coating plant. Our job

was to coat the pipe and to make a profit out

of coating the pipe.

And, Your Honour, that is corroborated by the form

of the tender and other evidence concerning that

aspect of it.

BRENNAN ACJ:  If SECWA had owned the plant and had charged

rental for it, it would have made a difference,

would it not?

MR FLETCHER:  If SECWA had owned the plant and charged rental

for it?

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BRENNAN ACJ:  Yes. It amortized the cost of the plant over

the life of the project.

MR FLETCHER:	SECWA?
BRENNAN ACJ:	Yes.  As the owner of the plant charging the

contractor for the use of it.

MR FLETCHER:  Yes, it would have made a difference to GPI in

the sense that it would have had to take into

account that additional revenue cost.

BRENNAN ACJ: I would have charged more per foot.

MR FLETCHER:  But that is not what was done.

BRENNAN ACJ: That is right, it was not what was done.

MR FLETCHER:  And what was done is analogous to what has been

done in other cases in which it has been held that -

BRENNAN ACJ: Well, I will just ask one further question. Is

it right to say, so that I will understand what I

must look at, that the relevant contract is to be

found at page 565 and following, and in particular

in schedule B which contains the schedule of rates

and the establishment cost items at page 576?

MR FLETCHER: Well, the relevant contract includes those

portions, Your Honour.

BRENNAN ACJ:  I understand it includes it but I want to know

is there any contract other than that which starts

at page 565?

(Continues on page 34)

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MR FLETCHER:  There was a contract constituted by all

documents to which reference could properly be

made and the post-tender discussions, including

the post-tender discussions reduced to minutes,

and the letter of acceptance in which SECWA said,
"Yes, we agree to pay the establishment costs"

and that, it was agreed, was to be the contract

until such time as the formal contract, which is

the document you have referred to, Your Honour,

was brought into existence. This contract applied

from, I believe - I would have to check - I think,

January 1982 but there was a contract on foot

from the time that the tender was accepted in

December 1981 so, I suppose, without trying to make it difficult, there was another contract but, I -

would think that the formal contract was subsumed

and taken over from the initial one. It states that

it is intended - - -

BRENNAN ACJ:  Well, the date of this contract is said to be

at page 569, to:

be deemed to be the effective date of

the -

acceptance of the tender.

MR FLETCHER:	Yes, Your Honour, effectively it does.
BRENNAN ACJ:	So, what I am seeking to discover, is the contract pursuant to which the subject payments
were made and what I am asking is whether or not
the subject payments were made pursuant to the
contract which starts at page 565 and were they the payments which are to be found on page 576 and are
the clauses which are referred to at the bottom of
page 576 those which are to be found at pages 587,
591 and 639 or some other pages and is there any
other contractual material which throws any light upon the character of the payments?

MR FLETCHER:  Your Honour, I did not hear the pages you

referred to. You are referring to the reference,

are you, on page 576 to clauses SC2.6?

BRENNAN ACJ:	SC2.6, yes.
MR FLETCHER:	Yes, that is at page 637; SC 19 at page 666

and SC20 at page 667.

BRENNAN ACJ:  Page 667, that is quite right, yes, I have

given you the wrong ones.

MR FLETCHER:  Yes, Your Honour, that is the contract.

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BRENNAN ACJ:  And the relevant provisions which govern

the payment which is the subject-matter of these

proceedings?

MR FLETCHER:	Yes.
BRENNAN ACJ:	Now, could I just draw your attention also to page 587 which contains the work, as I
understand it, which constitutes the pipe coating programme. That is part of the contract?
MR FLETCHER:	Yes, Your Honour.
BRENNAN ACJ:	And, I think, there is another provision at

page 591 which requires the contractor to

establish the production plant and so forth.

MR FLETCHER:	Yes, indeed.
BRENNAN ACJ:	Now, are there any other provisions of the

contract which bear upon the consideration?

MR FLETCHER: Yes, there are, Your Honour. If I could ask

you to refer to firstly, page 564, which is the

index to the contract, under the heading "Contents",

provides:

Schedules to the Agreement

A Scope of Work

B Schedule of Rates

C Information Supplied by Contractor

D Rise and Fall

Special Conditions of Contract

General Conditions of Contract

Specifications

Now, I would ask Your Honours to note that the

'Specificationd'all relate to coating, they do not

relate in any fashion to construction and if

Your Honours can turn to page 566 under the recital A,

the 'Wor~' is defined to be:

coating of high test line pipe and associated work (herinafter called "the Work").

And then, to page 567 at paragraph 2, which

provides that:

In the event of any inconsistency or

ambiguity between the provisions of any

of the documents -

P1T4/2/JH	35	27/10/89
Pipecoaters(2)

then there is a set out sequence in which the

various parts to the contract will apply.

At page 572, which is under the heading "Schedule A

Scope of Work", it says:

Al.l Work Included

The scope of work contained in this

Contract comprises application of external

and internal coatings of the type and

system stipulated in the Contract for both

corrosion control and weight, in accordance

with the various grades and sizes of pipe

as listed in Schedule B. The Contractor

shall furnish all coating materials, labour,

supervision, inspection and plant and

equipment as required for performance of

the following work in accordance with the

applicable Specifications.

Then, the applicable specifications are listed below

and that is performance in accordance with those

specifications which all relate to pipe coating,

not to supply of a - - -

TOOHEY J:  Mr Fletcher, are you suggesting that this in some way

qualifies your answer to Justice Brennan? These

documents are all caught up within the contract by

express reference.

MR FLETCHER:	Yes, I appreciate that, Your Honour.
TOOHEY J:	What use you may make of them is another matter but

is it right to say that the entire contract between

the parties is to be found in the agreement of

15 July 1983?

MR FLETCHER:	Yes, I am not qualifying that answer.
TOOHEY J:	And that one does not go beyond that.

MR FLETCHER:	Well, I do not know whether the - I have not turned my mind to that question, Your Honour.
TOOHEY J:	Well, for any relevant purpose, does one go
beyond that?
MR FLETCHER:	The point was that in the supreme court and the

Full Federal Court, the contract was construed, I believe, in the light of the evidence given

concerning the way in which it was brought into

existence and whether or not it is necessary, or

it was felt necessary, to go beyond it, I do not know.

It was found by His Honour Mr Justice Pidgeon that

the contract did accord with the intention of

the parties but the intention of the parties was

PlT4/3/JH	36	27/10/89
Pipecoaters(2)

clearly found to be that there would be a

separate payment for the construction of a plant

so I am simply concerned that if it is suggested

that the contract does not evince that intention,

which I believe it does quite clearly, that is the

only reason for my hesitation in accepting that one

need not go beyond it. Up until now there has been

no question about what was the arrangement, the

agreement, and the evidence accords with,

according to the decisions of the Federal Court

and the supreme c~urt, the terms of the contract.

DAWSON J:  Is there anything in that contract which says that

the contractor shall establish a plant?

MR FLETCHER:	In those words?
DAWSON J:	No.
MR FLETCHER:	No.
DAWSON J:	All you get is what you see in schedule Bat

page 576, is that right?

MR FLETCHER:	No, there is more than that, Your Honour.
DAWSON J:	But, there is nothing, when you take schedule A

at page 572 and the work is described, it is not

described so as to include- - -

MR FLETCHER:  Building a plant, no. The whole thrust of

the contract in its drafting was that, this is a

contract for the coating of pipe but, in addition,

there is associated work which relates to the

furnishing of plant and equipment and that is

separately provided for, there is a separate regime
for the payments, they are not ordinary progress
payments, there is a whole separate regime set out

in the contract for the consideration to flow

in respect of that associated work. Your Honour,

you will notice at page 586, under the heading

that it refers to coating plant as a separate item.	"Schedule C Information Supplied by the Contractor"
Everything else there relates to the programme
for coating pipe and everything else in schedule C
relates to the procedure that will be followed, in
great detail, set out in relation to the coating of the pipe.

TOOHEY J:  But, you are presently engaged in the exercise of

construing a contract but what is the contract;
If it is not to be found within the document with,
of course, the provision that that document in terms
incorporates other documents, what are we faced
with, some open-ended enquiry as to what was the

contract between the parties?

PlT4/4/JH	37	27/10/89
Pipecoaters(2)

MR FLETCHER:  No, Your Honour, I am not suggesting that.

This is the contract.

TOOHEY J:  Well, we can take it, can we, that leaving aside,

well perhaps, not leaving aside anything, that the

contract is to be found within the document of

15 July 1983?

MR FLETCHER:  Yes. Schedule A sets out in detail that there

will be certain specifications which the

performance of the work must follow; it must be

in accordance with those specifications and they

all related to the coating of the pipe. Page 575

sets out under Bl.1 under the heading "Schedule of

Rates":

The rates set against each item shall be

deemed to include for everything necessary

for the full and proper execution of the

Work under the Contract whether or not

specifically mentioned therein and for

complying with all other contractual

requirements, conditions, obligations and

liabilities.

And, we would submit, that one of those was that

the plant be built first and that then the pipe be

coated using it.

GAUDRON J:  At page 591, Mr Fletcher, there is an obligation

to establish a plant?

MR FLETCHER: 

Yes, that is the obligation that I am referring

to, that the contractor will establish a particular
plant at a particular location and throughout the

evidence it is shown that, as I mentioned yesterday,

for instance, the State Energy Commission required

that it have premises at the plant for its own

use and, secondly, that the contractor justify to

the State Energy Commission how moneys were being

spent and whether they were being spent in the

Geraldton area; how much employment was being

generated there and it kept a very, very close eye

on the construction and, furthermore, it retained the right to cancel the contract and to take back the plant.

GAUDRON J: 

Where does that appear in the contract?

MR FLETCHER: 

Unde:i::- the heading, "Cancellation", Your Honour,

at page 650, at (iv):

Assign to the Principal or its nominee, to the extent desired by the Principal, all

rights and benefits of the Contractor under

existing corrnnitments to third parties.

P1T4/5/JH	38	27/10/89
Pipecoaters(2)

Now, in the evidence of Mr Van Kaan and, I believe,

Mr Treloar and Mr Perrott, in particular, it was

explained that they were left in no doubt that

the SECWA considered that it had the right, should

it terminate, to take the plant back.

TOOHEY J:  But, when you say, to take it back, it was to

take it because that was its security; it was

paying money at a point where it was not receiving

any coated pipes, is that not the position?

MR FLETCHER:  Yes, but the security undertakings were

related to the obligation to repay the moneys;

I do not believe there is any direct security over

the plant, as such. They were by way of bank guarantees.

TOOHEY J:  I am not using security in any technical sense;

I am simply suggesting that the power to take
the plant, among other remedies provided in the

contract, arose because the Commission was paying

money at a point where it was getting nothing in

return. It did not expect to get anything until such stage as the production plant was operating and the pipes could be coated.

MR FLETCHER:	Yes.
TOOHEY J:	I am just not sure what you are seeking to make

of that sort of provision.

MR FLETCHER:  I am seeking, Your Honour, to draw an analogy

between the position here and that of BOYCE V

WHITWICK COLLIERY. One of the reasons for the

decision there in favour of the taxpayer was

that this was akin to an expenditure by a third

party or a party on the land of another and that

it was in the nature of a joint venture for their

mutual benefit and that in the event of cancellation,

or termination, the pumping plant there could

allure to the benefit of the payer, in this case

SECWA and we are simply saying that given that

the exercise undertaken by the ~upreme court and

Full Federal Court was to distinguish the cases

that - I am highlighting that that is one reason

why BOYCE V WHI'IWICK COILIERY should not be distinguished.

It is a very analogous situation. There were

rights retained in the plant, in effect, by SECWA.

TOOHEY J:  Not retained in the plant; if you say, retake

the property,retained in the plant, but that is not

accurate, is it? The Commission, as I understand

it, maybe I am wrong, had no interest in the

plant and could obtain none except by way of a

remedy in the event of default. Is that accurate

or not?

PlT4/6/JH 39 FLETCHER 27/10/89

Pipecoaters(2)	(Continued on page 39A)
MR FLETCHER:	Yes, that is correct.
TOOHEY J:	Thank you.
GAUDRON J:	I thought you had finished that - had you

finished that answer?

MR FLETCHER:	I had, yes.
GAUDRON J:	Is there any express commitment of the $4.6 million in the contract to the building of the plant?
MR FLETCHER:	We would say, Your Honour, that the

commitment arises under a schedule of rates, or

one of the two schedules of rates. There was a
separate schedule of rates in relation to the
coating activity and under the schedule of rates

in respect of establishment costs, it provides

that they are payments for establishment costs.

DAWSON J:  On page 666, there has to be an undertaking

that at least the first lump sum has been expended,

does there not?

MR FLETCHER:	Yes.
DAWSON J:	That is SC19.1, item B2.1 being.the:

establishment costs to be paid on

Day 1 of the Contract.

MR FLETCHER:  Your Honour, I am sorry, you are looking

at page 666, are you?

DAWSON J:	Yes.
MR FLETCHER:	SC19.1?
DAWSON J:	Yes.
MR FLETCHER:	Page 666:
Prior to the commencement of the period
for which such payment becomes due and
prior to the payment, the Contractor shall
lodge with the Principal an unconditional
and irrevocable (pay on demand) undertaking
to the value of the payment.
DAWSON J:	Yes.
MR FLETCHER:	Yes, Your Honour, that undertaking, as I

understood it, was a bank guarantee and it related

to, indeed, the obligation to expend the moneys

on the construction of the plant but I do not believe

that it expressly said so.

P1T4/7/JH	39A	27/10/89
Pipecoaters(2)

DAWSON J:  Well, it refers to item B2.l and B2.l is:

establishment costs to be paid on

Day 1 of the Contract.

MR FLETCHER:  Yes, but by reference it does, indeed,

relate back to it.

DAWSON J:  It does not say, "And you must put up a plant"

but the effect of it is that you do.

MR FLETCHER:	That is quite right.
BRENNAN ACJ:	Why do you say the effect of it is that?
MR FLETCHER:	The effect of the unconditional undertaking

is - - -

BRENNAN ACJ:  What unconditional undertaking; that is the

bank's unconditional undertaking?

MR FLETCHER:  Yes, that is correct, Your Honour. It is a

bank guarantee being provided by GPI.

BRENNAN ACJ:	Well, where is the contractor's undertaking to apply the money to the erection of the plant?
MR FLETCHER:	It is not expressed in direct terms,

Your Honour. That arises from the fact that the whole thrust of the contract from the point of

view of the SECWA was to simply get their pipe coated

but the company was satisfied that the contract

provided what it had agreed, or it had negotiated

should happen, and the statement that, "There will

be the expenditure of this upon that", arose by

virtue of the fact that payments would not be

approved by the engineer - on approval by the

engineer as SC19.l refers to - until the engineer

had issued a certificate and the evidence also

relates to that. I think Mr Van Kann's evidence

said that in terms of whether or not the - how was

it that the SECWA ensured that the moneys for the

establishment costs were expended on the plant?

And, Mr Van Kann said, "Because we had our

engineers there making sure that the plant was

being constructed according to schedule".

BRENNAN ACJ:  That might have been the way in which they

did it, but the contracual right to payment is that

which was conferred upon the contractor at page 639

by reference to the dates which might elapse and

the security which the principal had, as I

understand it, is that which was indicated by the

critical plan on page 588 so that if there were

any breach of the critical plan, then the engineer

had his remedy. Is that not right?

P1T4/8/JH	40	27/10/89
Pipecoaters(2)

MR FLETCHER:	Yes, Your Honour, but once again - - -
BRENNAN ACJ:	So, the contractor got the money and he was

obliged to do the work.

MR FLETCHER:  Yes, but, Your Honour, what he was obliged to

do was not to supply product in relation to that

money; he was obliged to apply the money to

create a particular capital asset. There is no

prospect of any profit out of the receipt of those

funds.

BRENNAN ACJ:  He asserts to apply the money but you

have not thus far demonstrated from the terms of
the contract that there was any contractual
obligation to apply the money as distinct from

building the plant.

TOOHEY J:  And while you are considering your answer to that

question, Mr Fletcher, you might take into account

this aspect: hat if, in fact, the plant had cost

less to build than your client had originally

estimated? Was it to return or be deprived of any

difference?

MR FLETCHER:  No, but the reason for that being not of

concern to the State Energy Commission of Western

Australia is that, as the evidence shows, very detailed estimates were done by the supervising engineers, Fluor Maunsell acting as agents for the SECWA, as to the cost of creation and of construction of this plant.

TOOHEY J:  It may not have been a matter of concern but it

tends to point up some of the difficulties you are facing in regard to the contract when you say that

this money was paid - the particular money that you

are speaking of, the up-front payments - were paid

against an obligation on the part of your client to

expend those moneys and, as I understand you to be

putting it, expend them only on the construction of

plant.

MR FLETCHER:	Yes.
TOOHEY J:	Well now, perhaps in the light of that, if you

went back to Justice Brennan's question, where

does one find this obligation in the contract?

MR FLETCHER:  It is not expressed in as many words for the

reasons that I outlined. The obligation arises

from the fact that the contractor is obliged to

construct the plant. The critical path plan shows

that the plant would be constructed over

the period that relates to items B2.l, ~2.2 1 B2.3~

that is to say day one to day one 1980.

PlT4/9/JH Pipecoaters(2) 41 27/10/89

The critical path plan shows that as it is

receiving those payments, it is constructtng a plant to be finished by day one 1980 so, in my

submission, that plus the fact that the contract

expressly provides that the plant will be built

plus the fact that those lump sums will not be released, not be paid to the appellant unless

the engineer approves their payment and the

engineer, on the evidence, is supervising the

construction, overlooking it, then taken together

it is clear, in our submission, that there was an

obligation to apply those funds to the

construction of the plant. I appreciate that it

is for this Court to construe the contract but it

has been found, as a matter of fact, that the funds

were applied to that purpose.

DAWSON J:  Well, you would not expect to find a construction

contract drawn with the Income T.ax Commissioner

in mind; perhaps you might, but this one was not

obviously.

MR FLETCHER:  One of the curious features of this case

is that there was no consideration given to tax
implications at all until everything was in place
and the question was, "What do we put to our tax

return?". There is no tax avoidance intention

anywhere in here and certainly that was not

uppermost in their minds.

DAWSON J:  What you say is, they would not have got their

money unless it was obvious the plant was there and

that is that?

MR FLETCHER:  Yes, they would have got the first payment on

day one with nothing being there and they did.

DAWSON J:  But then, they had to give undertakings in

relation to it.

MR FLETCHER:  They did.

DAWSON J:  What was the form of the undertaking that the

work would be done?

MR FLETCHER:  They were simply irrevocable bank guarantees,

Your Honour. The appellant had to obtain guarantees

from the bank in relation to - I do not believe

there is one of those - the documents in this

case were - - -

DAWSON J:	Guaranteeing what?
MR FLETCHER:	Guaranteeing its performance of every aspect of this contract.
DAWSON J:	Guaranteeing its performance under item B2.l

which is to erect the plant.

PlT4/10/JH	42	27/10/89
Pipecoaters(2)

MR FLETCHER:	Yes, that is right.
DAWSON J:	It was; it would do the work.
MR FLETCHER:	To erect the plant, yes, that is correct,

Your Honour.

DAWSON J:  So that, in every way, the SECWA was assured

that the plant would be erected before it paid

out the money. In relation to the first payment,

it got a guarantee, a bank guarantee; in relation

to the other payments, it would not pay out unless

the engineer said the plant was constructed.

MR FLETCHER:	That is correct.
BRENNAN ACJ:	Where does it say that the engineer can stop the payments being made?
MR FLETCHER:	If you bear with me, Your Honours, for a moment,

I have to find that point. It is under the provision for progress payments.

BRENNAN ACJ:	It is at page 639, is it not?
MR FLETCHER:	Yes, the whole regime of progress certificates

and progress payments, 42.1, does apply to the
payments for the establishment costs but 42.l(f),

on page 639, deals with them as a separate issue

and this is one of the points that we raise that -

BRENNAN ACJ:	Notwithstanding (a) aforesaid.
MR FLETCHER:	Yes.
BRENNAN ACJ:	In the proposition I put to you earlier is

it the entitlement to the payments which are the subject of these proceedings, is the provision

on page 639 and it was paid these amounts of

money at those elapsed times and the security for

SECWA was the engineer's capacity to terminate

the contract or take other steps if the critical

plan were not adhered to?

MR FLETCHER:	Yes, Your Honour, but - - -
BRENNAN ACJ:	And, if on the first day they gad got that amount

of money and applied it to the purchase of a Lear

jet, there would not have been one moment's

breach of contract.

MR FLETCHER:  I do not know whether I can accept that

proposition, Your Honour.

BRENNAN ACJ:  Well then, is there anything in the contract

which would make it invalid?

PlT4/ll/JH	43	27/10/89
Pipecoaters(2)

MR FLETCHER:  Yes, I think the fact that as, His Honour

Justice Dawson pointed out, there is a connection

between the undertakings that were given and the

requirement that - - -

BRENNAN ACJ:  Well, that might be a problem for the bank.

I mean, they might have arranged with their bank

to apply this to the purchase of a Lear jet and
get an advance from the bank for the construction

of the plant.

MR FLETCHER:	Well, Your Honour, if it is the case that that applies in relation to the first payment by
virtue of oversight in the way in which the contract was drawn, it certainly does not apply in
relation to the second two payments because on
page 639 although, as Your Honour pointed out, in
subparagraph (f) it says:

Notwithstanding (a) afore -

at the bottom of that clause, it says -

All other conditions shall be in

accordance with Sub-Clause (a) afore.

So that, it is modifying "(a) afore" in some

respects but it would appear that the balance of

(a) and (b) and (c) which follow on from (a), I

take it - it does not make any reference to (b) and

(c) and (d) and (e) - but I assume that they all

apply and it was certainly the appellant's

understanding and the way in which the contract was

administered that the engineer had to say, "Yes, here's the claim for a separate discreet amount, not being a progress claim in relation to the

coating of pipe"; it was a claim for one of the

three establishment costs the engineer had to

certify that, "Yes, that is due and payable".

And, I take Your Honour's point, perhaps in

relation to the first one, that that sanction

simply was not there but certainly in relation to

the other two it was.

(Continued on page 45)

PlT4/12/JH	44	27/10/89
Pipecoaters(2)

BRENNAN ACJ:	Yes, I understand.
MR FLETCHER:	While we are looking at the contract, Your Honours,

I would like just briefly to refer to a couple of other provisions that are in there which are of

relevance, I believe: on page 580, there is-, at B6.3 the

only other provision in the contract for the

contribution by SECWA of an amount being a cost

and that is the:

Provisional Sum for the cost of Electrical

Power -

and that, of course, is on the authorities

including RECKITT AND COLMAN, as I referred to you,
a subsidy or a "filling the hole" in respect of

a revenue outgoing - electrical power is a revenue outgoing - so, of course, that $Im was by no means a capital contribution and it was returned as

assessable income. It is. And, on page 581,

under the heading "Stand Down Rates", B7.4.l:

If treatment plant ceases all Work but is fully operational and ready for

immediate re-commencement of Work.

Now, quite clearly, that cannot relate to the

construction of the plant. "Work" there refers to

the work of coating the pipe and then everything

else under "Stand Down Rates" deals with those

elements.

B7.4.4 If treatment plant ceases Work

and production crew is stood down.

It indicates that "Work" is meant to encompass only

the production using the custom-built plant to be

provided by GPI and paid for by SECWA of the coated

pipe.

And at page 622, Your Honours, it is of some

significance that - could I ask Your Honours what

time the Court is likely to rise?

BRENNAN ACJ:  The Court will be rising at 1 o'clock but that

should not inhibit the presentation of argument. If

the argument is not completed then the Court will adjourn the matter for further hearing at a later date.

MR FLETCHER:  On page 622, the heading is "Schedule D"

"Rise and Fall". Now, the significance of this

and the pages following to 625 is that "Rise and Fall"

applied only to matters which related to the coating

of pipe: Labour Factor, Material Factor in

relation to Internal Lining; Concrete Coating. It

covers coating labour and materials only. There is

PlT5/l/DR	45	27/10/89
Pipecoaters(2)

no coverage in relation to rise and fall which one

would expect to find if it was a construction

contract. We would certainly expect to find that

if you are seeking to make a profit on the construction

of the plant that you would ensure that the costs

in relation to that were covered by a rise and fall

clause so that your profit margin is not utterly

eroded lt:the end of the day over a - you know - a

fairly major construction project if you have not

covered that by rise and fall, then you are not

acting in a corrnnercially sensible fashion .. And we say

that points to the fact that this was a contract

which involved primarily the coating of pipe and,

incidentally, the putting into position of the

appellant to coat the pipe.

To highlight that, at page 656 at the bottom of the page, Special Condition 12.3:

The three payments outlined in items B2.0 and

Sub-Clause SC 2.6(f) -

and those are the establishment costs -

shall not be subject to Rise and Fall as

outlined in Schedule D and Clause SC12.0.

Once again, Your Honours, the only sensible reason for that is that those payments have nothing to do with coating the pipe. Those payments relate to

the construction of the plant, otherwise it makes

nonsense of the contract, in my submission. There

is nothing else in the contract, Your Honour, which

I wish to go to. I was, earlier, dealing with the

point raised by His Honour Justice McHugh and I did

wish to deal with that more thoroughly. I think it

is important that it be established that the matter

of the deductibility of these outgoings was
completely out of the question.

And I was referring to the BP case and, after

referring to the reasons for judgment of

Their Honours the Chief Justice Dixon and Kitto,

Lord Pearce then analysed the arrangement at page 393 and concluded that:

There can be no doubt that the only ultimate

reason for any lump sum payment was to maintain

or increase gallonage.

Then throughout that page there are references to

"gallonage", the fact that the payments were founded

on gallonage and they amounted to a revenue expense

of marketing. On subsequent pages there were analyses

of other cases and some of them, t:"tre payments, were said

to be clearly connected with the ever recurring

PlTS/2/DR	46	27/10/89
Pipecoaters(2)

question of personnel or the ever recurring question

of marketing and, accordingly, the advantage being

sought was of a non-structural type. And, at the

bottom of page 397 and on to 398 the statement was:

The advantage which B.P. sought was to

promote sales and obtain orders for petrol.

BP, of course, being already in business and it was to do that:

by up-to-date marketing methods.

To do that in the changed market situation:

it must obtain ties with retailers ..... To

obtain ties it had to ..... pay out sums .... .

The payment of such sums became part of the

regular conduct of the business. It became

one of the current necessities of the trade.

Now, of course, Your Honours, on the other side

of the coin, there is the SMITH case. It is not

on the list of authorities but it referred to in

B.P. AUSTRALIA and, in that case, a tie with a

garage proprietor, the cost of obtaining that,

was held to be a capital outgoing, but it was just
one tie and I believe it was of some magnitude -

or some duration - whereas in the B.P. case the particular aspect of it which the Privy Council

focused on was that, here is a response to a

market situation and there were a whole of series

of such ties that became regular and, on

page 399, it was pointed out that, moreover, there
were fresh sums being paid each year to fresh
retailers. It became in the nature of one of those
constant demands which one has to meet in utilizing

your business structure to generate profits.

On page 400 reference is made to arguments put

by the Commissioner to the effect that these ties

had some "enduring benefit" and he relied upon a
case,	HINTON V MADEN & IRELAND LTD:

where expenditure on knives which.were used

in machinery and had on the average a life

of three years (but sometimes a life of only

one year) was held to be capital expenditure.

And the reasons for distinguishing that case of

Lord Pearce were that:

the observations were directed to tangible

tools and such assets do not form a safe

analogy when dealing with choses in action.

The plant and machinery and tools of a factory

PlTS/3/DR	47	27/10/89
Pipecoaters(2)

and other tangible assets are prima facie durable objects and part of the structure within which the profit yielding process

is carried out.

In other words, factory and plant are essentially

structural. Your Honours, on the list of

authorities I did refer to the work by

Professor Parsons and for the benefit of

Your Honours I have photocopied the pages starting

at paragraph 7.9 through to 7.17 and then at 7.31

through to 7.39. Without going into those in

detail, there is a useful examination of the concepts

behind structural assets and the costs of acquiring

structural assets and revenue assets and the

characterization of the costs of acquiring such

assets. The point is made at 7.39 that: "a

conclusion that an asset is structural and the cost

of it not deductible must always depend on a
judgment of the significance of the asset to the
process of income derivation".

In our submission, the significance of this

asset to the process of income derivation and
certainly gain by the appellant could not have been

greater. I have also provided a copy of a recent

decision of the Federal Court, GRIFFIN COAL MINING

COMPANY LTD V THE FEDERAL COMMISSIONER OF TAXATION,

89 ATC 4745, a decision of His Honour Mr Justice Lee,

and that involved coincidentally the SECWA again
and it does contain a useful analysis, once again,

of SUN NEWSPAPERS and the principles that are

involved. The outgoings there were in relation to

feasibility studies for a new aluminium smelter and

His Honour Mr Justice Lee said, at page 4759:

For the second limb of subsec. 51(1) to apply the loss or outgoing must have been

necessarily incurred in the carrying on of

a business. The outgoings disallowed were

not necessarily incurred in carrying on the business of extraction and sale of coal.	They were expenses incurred for the purpose
of seeking to acquire an asset to be used in
an expanded business -

and whether it was an expanded business or the

corrnnencement of the business, it does not really

make a lot of difference. It was an asset to be

used for the production of assessable income rather

than - - -

McHUGH J: But suppQsing you had to coac another pipeline in, say

New South Wales, and you requiredto have a plant

built there, it would be very difficult to argue

then, would it not, that these were not revenue

PlT5/4/DR	48	27/10/89
Pipecoaters(2)

outgoings, that if you really have sorrething sort of recurring,

admittedly, a unique situation, but there would

be a question of recurrence about it, would it not?

MR FLETCHER:  No, Your Honour, with respect. Recurrence

there is an element that plays a role. Perhaps

I ought to refer Your Honours to SUN NEWSPAPERS

because that point is dealt with very - - -

McHUGH J: That is one of the three matters that - - -

MR FLETCHER:	That is right.
McHUGH J:	taken into account.
MR FLETCHER:	As I have set out in my outline of submissions,

Your Honours, although that is one of the three

tests it is by no means conclusive and, in my

submission, it is entirely overshadowed on the -

McHUGH J:  Well,

it is in your favour in this case because it is not a recurrent payment, it is a

once-off payment.

MR FLETCHER: That is right, it is a once-off payment and

perhaps it would. But I understoo~ Your Honour,

that inherent in your proposition was that these
types of outgoings could be deductible. I doubt

that but it does not need to be decided in this

case. The reason that I doubt that is that

everything that I have read suggests that where it is of the nature of the class of an outgoing

which will endure, then it does not really make

a lot of difference whether or not it does

endure but perhaps it will make a difference.

If in a systematic course of carrying on business

you are building what would for another taxpayer

be an enduring asset but using it for only a

couple of years and discarding it, well that may

well override. It might tip the scale but it

certainly does not apply in this case.

Your Honours, in relation to the deductibility

of the outgoings point, the final thing I would

wish to say is that, as I have referred to

previously, there was a very clear series of concessions made at the trial of this matter. For instance, at pages576 to 577 of the transcript -

and I do have copies of these which I will make

available to the Court - in his address, counsel

for the respondent said, "Of course the coating

plant was capital and of course the expenditure

on it was capital expenditure. There has never

been any question about that".	The matter just was not
questioned.

PlTS/5/DR	49	27/10/89
Pipecoaters(2)

And then at pages 612 to 614 of the

transcript, "I did not question that once the plant

is being" - or has been, it seems to be a typographical

error - "constructed it is obviously an instrument

for the coating of the pipe. And as and when it was

being constructed you were adding to the profit

dealing structure of this particular joint venture

company because there was never any doubt or

question that this company owned the plant and

there was never any doubt that the plant could be

used for the purposes of coating. In other words,

when the coating plant is constructed it becomes

and it is added to the profit yielding structure."

A fairly lengthy statement by counsel and, in my

submission, this appeal cannot be decided by

resolving that the expenditures ought to have been or were properly deductible and that, accordingly, it does not distort the reflex of the taxpayer's

accounts to treat the amounts received to be

expended in that fashion as assessable.

The fact that it is not deductible because the

payment was spent as required on creation of a

structural capital asset, as I said, provides a

reason why it should not be characterized as income.

If I might refer Your Honours to the decision in

JOHN V THE FEDERAL COMMISSIONER OF TAXATION and,

in particular, to the judgment of Your Honour

Justice Brennan at page 4117. The reference is

89 ATC 4101. At the bottom of the left-hand column,

the paragraph starting:

For the purpose of ascertaining taxable income, the trading account of a taxpayer who is carrying on a business must contain only items of assessable income and items of allowable

deductions as those terms are defined in the

Act. There are some provisions of the Act,

notably sec. 26(a) as it then stood, which

require the ascertainment of a profit as a

step towards determining assessable income.

And of course, to interpose, if it was the case

that a profit emerged here and if it was the case

that the necessary profit intention could be found in

relation to the manner in which that profit was

generated - upon the sale of a plant, for instance -

then we accept arguably that it could come into

the assessable income of the appellant. Bu4 (a)

there was no profit; (b) there was no profit

intentioned, and (c) the case has not been argued on

that basis. Then, further down that right-hand

column, about a third of the way down:

PlTS/6/DR	27/10/89
Pipecoaters(2)

In the ordinary case, the commercial profit emerges from the carrying on of a business

corresponds with the difference between

assessable income derived from the business

and allowable deductions incurred in carrying

it on, so that it produces no distortion of

the taxpayer's true liability to treat the

commercial profit as taxable income.

But, in my submission, Your Honours, it does

produce a distortion to treat as assessable income

an amount the costs of obtaining which cannot be

allowable deductions. I refer to GAGA - - -

BRENNM ACJ:  That passage there does not say a thing about

that proposition,does it? Those passages that you

have just cited do not bear upon the proposition

which you have just submitted.

1vt:R FLETCHER:  No, they do not deal with that proposition but

what I am drawing from that, Your Honour, is that

in the statement "that it produces no distortion of

the taxpayer's true liability to treat the commercial

profit which has emerged as taxable income", I am

simply building on that to say, by way of comment,

that it does produce a distortion to treat, as

assessable income, an amount the costs of obtaining which are not allowable deductions because inherent

in this notion of commercial profit is that the

cost of obtaining an inflow is going to be ordinarily

deductible. But if the terms upon which you obtain

the inflow are such that you are precluded from

obtaining a deduction it will completely distort

the equation.

To serve as an example of that I suggest

that if we take the proposition that the company

received the $4.6m, built the plant, but then for

one reason or another, and it was perfectly

possible, it could not proceed to coat the pipe
profitably, could it realistically be suggested that

the company ought to be taxed on $4.6m particularly

bearing in mind that having built the plant it

turned around - if it was able to - and sold it off

. it would get more or less what it got after two or

three years of using it: namely, about $500,000.

BRENNAN ACJ:  The difference would have been deductible. It

would have been an allowable deduction.

1vt:R FLETCHER:  But, Your Honour, in this case the company was

not carrying on business. It would not have been an

allowable deduction because there would be no

business context. It does not commence to carry on

business until it has got its plant.

PlTS/7/DR	51	27/10/89
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BRENNAN ACJ: Business is the business provided for in the

contract. That is simple enough, is it not? That

is assessable income and then so far as the

deductions are concerned it is what is left at the

end. There does not seem to be the slightest

distortion about it.

MR FLETCHER:  No, Your Honour, I do not understand why it

would be deductible in the first place. If it is

the requirement that the money be expended on a

capital asset, it is so expended. That is not deductible

BRENNAN ACJ:  No, your hypothesis is, of course, the very

problem. Your hypothesis is that it has to be

expended on a capital asset. If you regard the

totality of the receipts under this contract as

assessable income and you regard the loss on what

you would call a capital asset as an allowable

deduction - that is $4.Sm less the $0.Sm salvage -

there is not the slightest bit of inaccuracy.

MR FLETCHER: But, Your Honour, with respect, there would

not be an allowable deduction for the loss. There

is no allowable deduction in respect of a loss on

disposal of a capital asset outside the regime of

the present capital gains tax.

McHUGH J: So, it is a capital loss.

MR FLETCHER: It is a capital loss.

BRENNAN ACJ: That is assuming it was a capital asset to

start with in this venture.

MR FLETCHER:  Yes, indeed, which it is and, in my submission,

it cannot be escaped from. It is a capital asset

namely, that in relation to this matter of potential for loss or gain, that this is

but the result would be a distortion in the equation. highlighted:

history in the sense that with the introduction of

the capital gains tax legislation, section 160ZH(ll)

provides that in computing the asset cost base of

an asset any recoupment of the expenditure upon the

asset will be deducted from that cost base. The result will be, of course, that if you do have - if we postulate the situation where the taxpayer

deliberately obtains the asset with a view to

ultimately selling it at a profit, which I

envisage is one of the problems that might arise,

the true gain - the real gain - will be taxed because
of the fact that the amount paid by the SECWA,
for instance, will recoup the cost of the expenditure
on the asset. The cost base is thereby eliminated

to zero, in this case, and then anything you obtain

upon disposing of it, as a capital asset, would

enter assessable income as an assessable capital

gain subject to everything else.

PlTS/8/DR	52	27/10/89
Pipecoaters(2)

BRENNAN ACJ:	Mr Fletcher, there is one proposition that I am not quite sure that I follow at the moment.	I
understand your argument that the expenditure on

the construction of the plant was capital expenditure

on the acquisition of a capital asset. If that

capital asset had a life expectancy of three years,

or whatever it might be having regard to the terms
of this contract, and was then only scrap value,

why,on a straight line depreci~tion,would you not

be entitled to reduction of 331/3 per cent per year?

MR FLETCHER:  You may well have been.

BRENNAN ACJ: Well then, it is not a question of a loss, as it

were, on the sale of capital asset. It is question

of writing it off by way of depreciation.

MR FLETCHER:	Yes, but, Your Honour, that depends upon what is - I do not understand whether you are talking about
this case or about the example I - - -

BRENNAN ACJ:  About this case. If the proposition is that

this was a plant that was built as a one-off plant

for the carrying out of the work that was provided
for in the coating of pipes under this contract and

the life expectancy of the plant was three years,

let us say, why is it that in relation to the years,

if you adopt a straight line method of depreciation,

you are not entitled to write off one-third of the

cost of that per year?

MR FLETCHER:  Your Honour, the answer is that the proposal

that you put before, which I said distorted the
equation, involved the company being unable to use
the plant to carry on business. That being the case

there would be no depreciation deductions. That was

my proposition. To test this matter of whether or

not these receipts can be properly described and

characterized as assessable income, I am suggesting

we must look at what if the company was unable to

carry on business.

BRENNAN ACJ:  The problem about that propositon is that link

about the application of the money to the construction

because there is absolutely no proposition of general

law that you cannot apply income for the acquisition

of a capital asset. So that the problem which you

face in the illustration that you give is saying
that this is money which must be characterized as

capital because it was intended to apply it in the

construction of a capital asset. That is the

difficulty on that limb of the argument, as it were.

But I was taking you up on the second limb which is

whether or not, if the asset is a capital asset,

there would be any distortion in the tax situation

if you wrote it off?

PlTS/9/DR	53	27/10/89
Pipecoaters(2)

MR FLETCHER:  Yes, but the position is, as the authorities

have recognized, that in certain circumstances if

an amount is paid on the obligation upon the

recipient that it be expended upon the creation of

a particular capital asset, that that amount is not

to be regarded as assessable income. Now,

Your Honour, in challenging whether those
authorities are correct or not, one has to look for

the underlying basis for that. Is there a fundamental

flaw in that? In my submission, there is not because

if it is not part of the profit-making activity

then it should not be treated as profit, particularly

when there is no potential to profit from it. The

potential to profit is from the use of the asset

to which it has been connnitted and, of course, that

profit is assessable - all profits or gains.

There is no inherent gain in that situation.

There would be a gain if the asset was sold. I am

looking to see where is the gain? What gain has

arisen? As was stated in READ V THE COJ:1MONWEALTH by this

honourable- Court recently, the mere potential to achieve a gain

is not a gain, it is not a profit. Certainly there

is a potential in here perhaps.

BRENNAN ACJ:  We do not have to go into the question of

whether there was a gain, do we? If we were going

to look at it from the point of view of whether
or not the company was better off having expended

the money on the acquisition of the plant, the

answer is undoubtedly, it is, because it is that

much better off, it has got the plant.

(Continued on page 55)

PlT5/10/DR	54	27/10/89
Pipecoaters(2)

MR FLETCHER:  Your Honour, with respect, it is only better

off to the extent to which there is a profit that

might emerge from the fact that it is the owner

of a plant and in dollar terms that cannot be

anything greater than the salvage value and that

would be assessable if that value was realized

provided that, of course, the necessary profit-making

intention was there.

DAWSON J:  In fact, $500,000 or so was realized but it was

not a profit because, in fact, the plant had cost

more than the amount that had been received, yes.

MR FLETCHER:  Yes, that is quite right. The p 1 a rt: , in fa c t ,

had to be exoanded; the overall	amount that had
to be spent ;n the plant was in	excess of the
total neceived.

DAWSON J:  But had they got a net plus of $500,000 they

would have had to pay tax on it.

MR FLETCHER:  Perhaps; not necessarily, Your Honour, because -

these days yes, undoubtedly.

DAWSON J:	Yes.
MR FLETCHER:	In fact, these days, they - yes, they would pay

tax on the full amount at top price, yes.

DAWSON J: It would have been a capital profit, you would say?

MR FLETCHER:  They would have paid tax on the full amount

of the capital proceeds of the disposal of the asset.

There would have been no amount deducted as the cost

base because the cost had been fully recouped but

then, when the capital gains tax regime did not

apply, it would have depended entirely upon whether

or not there was a profit-rnaking intention.

DAWSON J:  Enough to say that it was a capital gain if it

was $500,000 at the end, surplus, having sold the

plant and how it was dealt with depended on the

provisions of the Act.

MR FLETCHER: Yes, that is correct. This underlying problem

of the idea of treating as assessable income an

amount of this type was of great concern to

His Honour Mr Justice Owen in the APA FIXED INVESTMENTS

case and, without taking Your Honours to that case,

I would simply wish to point out that it was accepted
by His Honour as being quite absurd to say that

the amount there paid as a recoupment of an expense

incurred by the recipient, it building a building

at the request of the payer, to treat that as

assessable income was, he considered, quite absurd
and, in my submission, although there is no detailed

reasoning, it is correct.

PlT6/1/SH	55	MR	FLETCHER	27 /10/89
Pipecoaters(2)

McHUGH J:	But is not the bottom line in this case this: that it would be one thing if there was an identity
between the money you receive for the construction of this plant and the money you expended on i~ but
all that was done was make an estimate? If there
was a loss, then you had to carry it and your profit
on the contract came from the rates per pipe, length of pipe, less the loss in the construction
plant and if it cost less than the amount allowed
for then you made a profit on it.  It is just
all part of your revenue under the contract, is
it not?

MR FLETCHER:  No, with respect, Your Honour, no. The point

is that if a profit emerged in that fashion, yes,

there is an identifiable profit which, according

to the authorities -WHITFORD'S BEACH, COMMERCIAL

AND GENERAL ACCEPTANCE, JOHN -that profit would

then enter assessable income but there is no basis

for saying that in this particular circumstance

where there is no gain that has come home the

amount should be treated as assessable income.

I keep reverting to the point that if it was the

case that the money was given to them - "Here's $4.6 million" - and they were going to coat the pipe at an existing factory at Maasluis and they

were going to be paid a commercial rate for

coating that pipe, that the amount received may

well be assessable.

You can see again, it has emerged, it is there,

but to be, if I may use the expression, lumbered with this plant and to be assessed on the amount that you were paid in order to create the plant

just does not fit into the matrix at all. The

eorrect approach is - the only benefit that can be pointed to is the benefit derived from using

that plant and that benefit is the benefit of

receiving a profitable amount for the coating of

pipe using the plant and there were additional

within the Act that apply to capital assets used,	statutory benefits being the concessions that are
namely, depreciation, but those benefits will apply completely irrespective of whether or not the funds
used to apply the asset have first been treated
as assessable income. There is no statutory
requirement that they first be assessable income
and, as I say, if the State Energy Commission had
contributed the capital in a different form, for
instance, via a joint venture company and that
capital had gone into the plant, the job was done;
at the end of the day, the capital is gone bar the salvage value. They have, effectively, contributed it but one would not seriously suggest that the
company receiving the share capital should be taxed on the capital on the basis that it has thereby
gained; it is capital and that is what has happened

P1T6/2/SH	56	27 /10/89
Pipecoaters(2)

in this case. It is a contribution of capital

to what was effectively a joint venture between

the two parties; a joint venture to get what the

SECWA wanted, namely, the plant constructed here

and what the appellant wanted, namely, the opportunity

to coat pipe profitably. The evidence is quite

clear that that is what they wanted and that is

what they got. But, Your Honour, with respect, although

it might be seen to work some sort of rough justice,

it is not in accordance, in my submission, with
the whole scheme of the Act and if the appeal was
decided on that basis, then it opens up some unhealthy

possibilities in terms of the determination of what

is assessable income and what is an allowable

deduction and I think that that is the underlying

reason for the decision~ which are very few and

very rare because the circumstances are very rare,

such as the SEAHAM HARBOUR DOCK, APA FIXED INVESTMENTS,

BOYCE V WHITWICK COLLIERY and the GARAGE TYRE cases.

That is the underlying reason. It just is not

correct to say that is assessable income; it

can introduce distortions.And where a person gets

their capital from is - if someone is prepared to

give it to them - if, for some domestic reason,

I want to set my son up in business and I want to do business with him after I have set him up, why

should he be assessed on the capital that I have

contributed?

McHUGH J:	Yes, but this is a company set up especially for this contract, a single contract, receivedpayments
under it, and the plant - you are going to have
only salvage value at the end of the contract.
That is the big difference in this case, is it not,
from BOYCE's case?
MR FLETCHER:	The only difference, Your Honour, with respect, is the length of time to which the plant is to be applied and, with respect, that is not a difference
of any significance. It, nevertheless - if it is the
fact that · it  is a capita 1 asset , a st r u ct u r a 1 asset ,
then one cannot go any further.  The mere fact that
it is going to be used for a short period rather than a long period in this particular case is
rather irrelevant. The possibility - - -

McHUGH J: Well, that is absolutely right but that rather

accords the result of your classification. The

question is how do you classify it and in the
classification prcbJ_F.!17 the fact that this is a short-term

contract, and this company was broti3ht into existence

for that, are all matters of importance.

MR FLETCHER:  I do not deny that they are matters of importance,

Your Honour, but I do submit that it is not open to hold

that, for that reason, the appeal should fail because

it would have been deductible which, I think, is the

end result of your proposition.

P1T6/3/SH	57	MR	FLETCHER	27 /10/89
Pipecoaters(2)

McHUGH J: Well, the Full Court took the view it was a close

question; whether this was capital or injunctive and - - -

MR FLETCHER:  Your Honour, I simply confidently rely upon the

authorities which, I think, do establish that there

is really no prospect whatsoever of these outgoings

being properly characterized as outgoings on revenue

account.

BRENNAN .ACJ: Mr Fletcher, is it fair to say that so far as

the facts are concerned, your proposition is that

this receipt was a receipt of money which was to

be expended on the erection of the plant; the plant

was a capital asset; therefore, the money when

received bears the character of capital in the hands

of the recipient and that the authorities for that

are chiefly the APA case and BOYCE's case?

MR FLETCHER:  Your Honour, yes. In encapsulating

certain of the salient teatures of the case, the

factual features, you have -

BRENNAN /:CJ: I am trying to get to the essential lines of

your argument. I just want to know are those the

essential lines of your argument?

MR FLETCHER:  Yes, they are.

BRENNAN PCJ: Well, now, we have debated the question of the contract, the findings of the court below and you have addressed some submissions to the evidence

which goes to it. Is there anything else that we

need to consider in determining the accuracy of

the facts which are material to that line of argument?

MR FLETCHER:  Your Honour, I am sorry, I missed the last

portion of your- - -

BRENNAN KJ: Is there any other material we should look at

in the appeal books in order to, or which is relevant

to the lines of argument we have just been discussing?

MR FLETCHER:  Yes, there is, Your Honour, and I do not propose to

take you to that material other than to point out that

under the heading, "Contentions of Fact·", there are listed certain contentions and the references to the portions of the reasons for decision of the

trial judge His Honour Mr Justice Pidgeon and of the Full Federal Court and also various exhibits

8nd the evidence of witnesses.

BRENNAN PCJ: Now, do we have the transcript in which those

concessions to which you have earlier referred were

made?

MR FLETCHER: Yes, I do, Your Honour. BRENNAN PCJ: Does the Court have them?

P1T6/4/SH	27 /10/89
Pipecoaters(2)

MR FLETCHER:	No.	I sha 11 hand them up to the Co1 ir t.
BRENNAN ACJ:	Yes.

MR FLETCHER:  Your Honour, there is just one further matter

and that is that the appellant in the light of the

fact that there has emerged this matter of the

profit-making intention which I understand my

learned friend is going to be relying upon, the

appellant does seek to amend the notice of appeal

and the amendments are minor, indeed, in our

submission. Two of the amendments have been

agreed to by my learned friend and the only amendment

which is the subject of opposition emerges from

ground 2. 15, and ground 2.15 says that:

The receipt in this case was not, "generated

as a profit component of a profit-making
scheme", nor was the receipt in this case

"a gain made in the ordinary course of

carrying on the business".

BRENNAN P.CJ: Where do we find this document?

MR FLETCHER:  This is the notice of appeal that I am referring

to at the moment, Your Honour, and I have the amended

one here. The notice of appeal is in volume 1 of

the appeal book, I believe, or so I have been informed.

TOOHEY J: Well, there is one at the very end.

McHUGH J: Page 968. But, why do you want to amend your

notice of appeal, because of t~~se matters that are

raised in this notice of contention on behalf of

the - - -

MR FLETCHER:  Yes.

McHUGH J: Well, they have got to get leave to raise this point, have they not? Really, the Federal Court

would not allow them to raise it.

MR FLETCHER:  Yes, Your Honour.

McHUGH J: Well, you can deal with that later, can you not?

MR FLETCHER:  Yes. In view of that, Your Honour, I am happy

to leave this matter in abeyance.

BRENNAN P.CJ:	Do you have a draft notice of appeal?
MR FLETCHER:	Yes, I do have it, Your Honour.

BRENNAN P.CJ: This is an amended notice of appeal, is that

right?

MR FLETCHER: It is.

PlT6/5/SH	59	MR FLETCHER	27 /10/89
Pipecoaters(2)

BRENNAN/(~': You may as well take possession of it at all

events, at this stage.

MR FLETCHER:  Yes. I should point out, Your Honours, that

this amended notice has been with the respondent

since March of this year.

BRENNAN ,<'.i_C_T:  We 11, r.Je wi 11 hP.ar ,.7l1a t they have to say on that.

GAUDRON J: Well, apropos of some of the grounds in this

draft amended notice of appeal- and this is not

directed specifically to you, Mr Fletcher- but it

is of passing interest to me that tax cases seem

invariably to be conducted without reference to

the terms of a statute. Could somebody please tell

me what provision of the Act is said to make this

assessable income?

MR FLETCHER:  Your Honour, the provision of the Act which

is relevant is section 25(1). I do not believe

there is any other provision unless it is the case

that leave is given to the respondent to contend

that there was a profit-making purpose afoot in

relation to the receipt of these amounts and the

application of the construction of the plant.

If that is the case, then section 26(a) would

be relevant and beyond that I do not believe that

there is -

GAUDRON J:	So this is said to be income - - -
MR FLETCHER:	According to ordinary concepts.
GAUDRON J:	- - - according to ordinary concepts.
MR FLETCHER:	Yes.
GAUDRON J:	Thank you, and that~~ bave to look to the general case law for?

MR FLETCHER:  Yes, Your Honour. The section that I was

dealing with in answering propositions put by

His Honour Justice McHugh was section 51(1); that

is the section which governs the general deductibility

without - - -

McHUGH J: First paragraph or - the first limb, or second one?

MR FLETCHER: Well, there are two liI11hs in section 51(1).

They are both within section 51(1).

McHUGH J:  Yes, but you rely on both,or which one do you

rely one?

MR FLETCHER:	Well, I say neither are applicable.
McHUGH J:	I am sorry, yes.

P1T6/6/SH	60	27 /10/89
Pipecoaters(2)

MR FLETCHER: Section 51(1) simply has no application

whatsoever. I am not aware, Your Honour, of anything

else in the INCOME TAX ASSESSMENT ACT that is being

relied upon by - well, certainly not by the appellant

because unless it is income according to ordinary concepts,

or it is a profit that is generated by a

profit-making scheme, then it simply cannot enter

assessable income but, of course, it would be different

today because of the capital gains tax rating.

GAUDRON J: Well, it is said to be profits generated by

a profit-making scheme?

MR FLETCHER: 

Well, it was never contended that it was in

the Supreme Court. The possibility that that
could be contended was canvassed in the notice to

a::lrri.t facts and the notice to ad"'!lit facts specifically
raised the matter of intention and, at page 127

of the appeal book, paragraph 60, the notice to

admit facts, you will see clearly raised the issue

of profit-making, 1::ear:IT"B in mind that the taxpayer

had the onus of proof- had to prove, without knowing

precisely what case might be raised, that the

assessment was incorrect; it was excessive.

GAUDRON J: 

But what I do not understand is if you take

the view that you look to the contract as a whole,
the total contract, the total payments made under the

contract; if you take that approach that you are

looking at the total profits paid under a contract
for the coating of pipes, why are you not looking
at profits generated by a profit-making scheme for
the whole enterprise where the question then

becomes what is the profit-making scheme, rather

than what is the contract?

MR FLETCHER:  Yes. The reason why one does not is because

at the core of our argument is the fact that it

was a divisible contract in that there were two

elements to it and one of them was never designed

to generate a profit and evidence was led in

relation to profit-making intention in respect

of the construction and it was held - it has been
held by both courts below that no profit in fact

was made but it is still contended now by the

respondent that there was an intention profit,

notwithstanding concessions made at the time of the trial. ~~ say th~t the only identifiable

profit in this transaction is the profit which

flowed from coating the pipes and all of that has

been assessed as income. There is no problem with

that; some $26 million. It is the $4.6 million

for building the plant with which to carry out that
process that we say was a contribution to capital.

There was no intention to profit in relation to

the construction of the plant. The intention was

to profit as handsomely as possible from the coating

of the pipes at the best possible rate they could

negotiate and that they did.

PlT6/7/SH	61	MR	FLETCHER	27 /10/89
Pipecoaters(2)

For that reason, Your Honour there never has

been any issue that there was a profit from the
construction of the plant in the sense of a surplus

of receipts over outgoings and I have alluded to that under the heading "Additional Contentions",

at paragraph 3 on page 13. It was not and is not

open to the respondent to contend, that, because

there was a potential for net gain should either

the cost of construction have been over-estimated

Dr should a profit have arisen upon the disposal

of the plant, the establishment costs have the

character of income. The position is not open to

the respondent because of the concession made by

counsel for the respondent at the trial. He said:

I do not think it could be seriously urged

or, with respect, seriously entertained that

what we are concerned about is profit in the

sense of net gain.

That was echoed by counsel for the appellant; that

there was no question of there being any profit

or surplus over and above. So, that means that

the only way in which the $4.6 million could be

treated as profit in any respect is to treat it

as assessable income under section 25(1) and that

is only open if it is properly characterized as

income, notwithstanding the circumstances in which

it was to be received and expended.

Your Honours, could I ask whether or not it

is anticipated that, given the shortness of the

available time, that written sub~issions are - - -

BRENNAN There is no shortness of available time,

Mr Fletcher. If the argument is not completed, then the matter will stand adjourned and will be

completed at a later time.

MR FLETCHER:  Thank you, Your Honour. I think all that

remains for me to say, Your Honours, is to refer

to one or two of the contentions in the outline

of appellant's argument. I do not wish to go into

those in detail, just to bring them to Your Honour's

attention; paragraph 5, that the taxpayer did not

conduct a plant construction business and the

disputed receipts were not proceeds of an isolated

business venture concerned with the erection and

sale of the plant and the second bit of that I have

already dealt with. But the matter of whether it

is a plant construction business I have alluded

to the fact that the contract has no earmarks of

it being a plant construction business that tbe ai_::plicant

was engaged in and, furthermore, for it to be such

a business, one would seek to find an intention

to do it again, the elements of regularities and

system and there is no such intention anywhere

evinced in the evidence.

PlT6/8/SH	62	MR	FLETCHER	27 /10/89
Pipecoaters(2)

The one other point is the question whether

or not the Federal Court was correct in saying,

as they did, that these amounts may well have been

non-assessable as capital receipts if it was the

case that they accorded precisely with the amount
disbursed that they were intended to be or were,

in fact, direct disbursements to the contractors

constructing the plant and I should point out, of

course, that although the appellant was required

to cause the moneys to be expended on construction

of the plant, the fact that the appellant was not

a construction company is highlighted by the fact

that it engaged a whole variety of other expert

companies to do it, to construct it, but the Full

Federal Court, to come back to my point, suggested

that it may well be a different decision if there

had been a precise payment to those contractors

of the amount that the appellant was incurring in

constructing the plant.

So, there was an acceptance of the underlying

principle that this could be a capital receipt but

a distinction being drawn between concise recoupment

and a payment of an estimated amount designed to

recoup but without guaranteeing that there would

be a precise matching of the outgoings with the

receipt. But, in respect to that, we say that no

problem was caused by that situation to His Honour

Mr Justice Owen in APA FIXED INVESTMENT because

there it was an estimate 0f an amount to be

incurred in building a building and, furthermore,

there was no problem caused by that in SEAHAM HARBOUR

DOCK; there it was an estimate. It does not ~e th2 character of it but, of course, it does change the

situation if there is a profit-making intention

and there is a surplus. That surplus would be

assessable, but there was no surplus here. So that

we say that the Full Federal Court was quite right

in saying, "Well, yes, the principle is there but

it does not here apply because there was not a

precise matching of outgoings with receipts".

We say that, contrary to the court's proposition, it

is sufficient for the amount to be a bona fide estimate

of costs. W2 say that the contract determines

how much was received for the erection of the plant

and how much was received for the value of the pipes

and we say that all payments, save the first three,

were in respect of the coating of the pipes and

it is definitely denied that those receipts were

assessable income and not capital receipts. I have

already referred to the fact that section 160ZH(ll)

has some bearing upon the situation today, because

of the erosion of the asset cost base. Your Honours,

those are the submissions for the appellant.

BRENNAN ACJ: Thank you, Mr Fletcher.	Yes, Mr Carr.
MR CARR:	Your Honours, I would pass up my outline.

PlT6/9/SH	63	27 /10/89
Pipecoaters(2)

BRENNAN ACJ:	Yes, Mr Carr.
MR CARR:	Your Honours will see that I have taken very much
a factual approach to this matter and the reason for that is that when one goes to the Law Reports
for some authoritative cases from this Court
or from the House of Lords on the principles
or guidelines for characterizing receipts as
capital or income, other than in the context of sales of property or remuneration under service contracts, tips and the like, the cupboard is fairly bare. There are cases on the expenditure side of the equation, numerous cases
on sales of property and the characterization
of the receipts in those situations and it
would appear that by analogy from those cases
that the capital or income characterization
depends essentially on an assessment and
weighting of all the salient facts and that is
what I have endeavoured to do in this outline
of submissions.

Before I come to the outline perhaps

I should refer to a few preliminary points which

arose in argument. First of ali Justice Gaudron

asked which sections we are dealing with; there

is no doubt we are dealing purely with

section 25(1) whether this money, these receipts,

should be characterized as income in accordance

with ordinary concepts and no other question

arises under the second limb of section 26(a)

or any other section of the Act other than this

question of income in accordance with ordinary

concepts and understandings.

Secondly, His Honour Justice Dawson was

interested in the idea that SECWA although

paying for the plant was somewhat disinterested

in what happened to it when the salvage of some

half a million was realized. The answer to that

is that the original price, the costing for the

plant, had built into it a provision for what

would be yielded on salvage at the end of the job

and that meant that it was in effect credited to

SECWA from the outset, that the charge raised
excluded the salvage. So there was no gross

negligence or anything like that on the part

of SECWA. They had received credit from the

outset for the likely anticipated yield on the

salvage.

The essential facts in bare outline, in our

submission, are that to start with SECWA had
to build a gas outline from Karratha to Perth

and this was likely to cost about $650 million.

Secondly, part of that work involved the

construction of a pipecoating plant and the use

PIT7/l/JM	64	27/10/89
Pipecoaters ( 2)

of that plant to coat the pipes both internally

and externally. SECWA's professional advice

was that that part of the work would probably

cost about $40 million.	SECWA advertised
extensively that this work was available.	The
local company looked at the advertisement,
according to the evidence, and decided the

job was too big and forgot about it. But it

came to the attention of the Dutch company

who had, as it happened, constructed a pipecoating

plant in Scotland and sent an executive to the

local company and said, "We are prepared to join

with you to carry out this contract that the SEC

has for some" - as the SEC thought - "$40 million.

We have some expertise that we can contribute,

let us do it together."	That was the first joint
venture that was formed, very businesslike.	Then,

because it looked as though the particular

process, the resin process was going to be adopted,

a third entity - really in fact two entities, but

I will call it a third entity - CRI and Indeng

came in and was made a joint venturer also on the

assumption that the pipecoating process that was

adopted would in fact be adopted. It had constructed

plants of that type in Argentina and two in

Saudia Arabia, and I will be taking Your Honours to

that in a moment. So there the joint venture came

together to cost out what they thought it would

cost to coat this piping externally and internally,

submit a tender and win the contract and if it

won the contract then carry out all of the work.

Right from the beginning when SECWA advertised

in this State, interstate and internationally, right from the beginning,part of the work that

the tenderers were asked to perform or to interest

themselves in quoting for was the construction of

the plant in the field. The winning and the

execution of the contract, in our submission, was

the business of the joint venture company when

it was fo:rn1ed. They progressed through s.tages

of joint venture heads of agreement through to submission of a tender and once the tender was

accep.ted,the incorporation of the taxpayer

appellant company.

The next salient fact is that the tender, which on the indicative quantities was worth about

$31 million, was based on an assumption of some

1500 kilometres of pipeline being required and there

was provision in the contractual documents that if

that was not the case, that if that varied by a

plus or minus 5 per cent there would be a recasting
?f ~he ~onsideration un~er the contract, So,although
it is, in one sense, fair to say it was a schedule
of rates contract, in another sense not only was
there provision in the contract for lump sums to

be put into the schedule where the schedule of rates

were expressed, but furthermore, underlying that was

PIT7/2/JM

Pipecoaters(2) 65 27/10/89

the contractual commitment to there being that

much amount of work that some 1500 kilometres

would be coated. In other words, there is a
considerable degree of lump sum entitlement
in this schedule of rates contract because of

those clauses to which I will be taking

Your Honours later. So the joint venture

entity, in_our submission, carried out the

work and earned the contract price.

Turning now to the detailed submissions, they comprize simply a listing of what, in our

submission, are the salient facts. It is not

essential to our case that it be established

that there be a profit-making intent or purpose.

That is the cream on the cake. The essence of

our case is that this consortium earned the

money by carrying out the contract and that

unfortunately one does not earn capital, one

earns income and that is what they did in this

case. The first submission is based on an

analysis of the various stages of how the

contract came into existence. I have prepared

an aide memoire which avoids the necessity of

going from one appeal book to another and then back again to trace through the preparation of

the quotation, the movement of the quotation into the tender and then the tender into the

formal contract.

McHUGH J: Is this first proposition in l(a) inconsistent,

or does it seek to outflank the ruling of the

Full Court at page 951 where they said you

could not make a decision on this question of

profitability?

MR CARR:  Yes, Your Honour. It, in my submission, did

not reject the submission in entirety It

really descended into a question of labelling.

The Full Court of the Federal Court said, "We're content to call it an allowance for contingencies."

We had served notice of contention before the case went to the Full Court of the Federal Court.	We served a notice of contention, copies of which
I can pass up in a moment, but to make it clear
that whilst we were not conceding that the trial
judge had made any finding whatsoever on the
question of intent to profit, we would be contending at the Full Federal Court that there was an
intention to profit and we argued that fully before
the Full Federal Court, without objection from senior counsel for the -

McHUGH J:  But the Court would not rule on it, would they?

MR CARR:  Your Honour, in a way they had. They said, "Well,

we're content not to decide on the question of

whether it was profit; we will call -it a contingency."

PIT7/3/JM 66 27/10/89

Pipecoaters(2)

When I take Your Honours to the document, whether

I am allowed to do it for the purposes of the

profit argument or not but for another argument,

the word "profit" quite clearly appears, and not

only that, the word "profit" appears not

just in the context of the plant, but also in
their calculations as to how they were going to

be remunerated for the pipe, on exactly the same

line on the same page. So if it is argued that

the taxpayer did not make any profit on the

plant, then as night follows day, they could

not have made any profit on the pipecoating plant -

on the pipecoating itself. And that is quite

ridiculous because the formula they applied to

get their profit on the coating of the pipe, as

will be abundantly clear from the page of the
exhibit I am going to take Your Honours to,

was exactly the same profit, 15 per cent total sum. I was concerned when I heard Your Honour

Justice McHugh say that I would need leave to

argue this profit intent because I thought we

had argued it at length in the Full Federal Court

and all the Full Federal Court had done was to

baulk at the idea that it was profit and to

settle that it was for something described as

contingencies which may well have included profit

in it. Perhaps I had better face that hurdle

straight away. What I had in mind to pass up to Your Honours was an aide memoire, as I was

saying, which simply photocopies pages from the

appeal books and puts them into convenient order,

about a dozen pages, and I propose to take

Your Honours through them, rather than thumbing

through the appeal books.

BRENNAN ACJ:	Yes.
MR CARR:	But there is with it an aide memoire which is
a sort of Cook's tour of the documents, but
perhaps the simplest thing would be to pass
it up to Your Honours. I have given a copy to my learned friend yesterday.

GAUDRON J: If your paragraph l(a) argument is that the

construction of the plant was itself a profitable,

or hoped to be profitable enterprise, why is the

cost not deductible? Why is it any different

from any ordinary build and supply contract?

MR CARR:	Our answer to that. Your Honour, is that it is
deductible, only under a different regime. It is
deductible under the depreciation provisions
and it is up to the taxpayer to choose which
way it takes its deduction. Section 82 provides that the Commissioner can allow, where there are two different means of deductibility, that
which he thinks to be most appropriate. Here the

PIT7/4/JM	67	27/10/89
Pipecoaters(2)

taxpayer has decided to take the deductions

by way of depreciation.

DAWSON J:  But if he chose the other, the Corrnnissioner

might well have allowed it.

MR CARR: It is possible, Your Honour, it is very hard

to speculate, but quite possible that he might

have said, "Yes, this is a short contract."

DAWSON J:  Anyway, there was nothing to prevent him

doing so, you say, there was nothing to prevent

him do so?

MR CARR:	No, Your Honour. It depends on whether he,
if it had been put up to him at that stage,
decided whether it was capital expenditure
or not.  We concede that later, when it was
in litigation, we accepted that it was a piece of capital equipment so we cannot reopen that,
but we do say that despite the concession that
it is capital equipment, it is a very odd sort
of capital equipment and in the characterization of the receipts we are entitled to say it is
a very short-lived piece of capital equipment, very different to the - - -

DAWSON J: But it is capital equipment.

MR CARR:	Yes.
DAWSON J:	And their whole case is that here you were given

money to buy that capital equipment, not income.

MR CARR:	Yes, I will come to that in a moment, Your Honour,
but the answer to that is - perhaps I should not,
perhaps I could deal with it straight away. The
answer to that is they have earned the money to buy the capital equipment. That is our
submission.

On the deductibility point Your Honour

Justice Gaudron raised, there is another way in which they could quite legitimately have

got the whole of this as a deduction. They could

have taken the money, banked it and invested it

as they saw fit - any kind of investment,

income generating, or not - and leased the plant.

They could have gone to their bankers and said,

"We are contractually bound to build this plant

at Geraldton, finance it for us." So long as

they had complied with their contractual

obligation, put the plant on site, SECWA, as

a matter of corrnnercial sensibilitY. would not

have concerned itself. '

GAUDRON J:  They did not own the land?

PIT7 / 5/JM	68	27/10/89
P ipecoaters ( 2)

MR CARR:	They leased the land, Your Honour,and had
an option to purchase, which they did in fact
exercise in due course.  So there was no
commercial reason why they could not have - - -
GAUDRON J:	But it was much more commercially

straightforward to do it the way they did than
to engage in these excessive commercial

subtleties that are par for the course these

days.

MR CARR:	Your Honour, it, of course, was much simpler
to take the money from the client and expend
it, but my point was simply there are three
different ways in which they could have
claimed the deductions.  They chose one and
to argue that because they do not match is not
in fact the truth.  They could easily match
depending on the rate of depreciation.

GAUDRON J: Well, would it be the case that if instead

of using SECWA's money they had simply used

their own money to build the plant, putting SECWA's

money in the bank and earning interest on it,

on your argument l(a), all of their own

money that they expended would have amounted

to a deduction being an outgoing on a supply

contract?

MR CARR:	It would have, Your Honour, if they had
persuaded the Commissioner that the type of
expenditure was so short-lived that it was
appropriate to apply the BP principle.

GAUDRON J: That is because you do not see it as a supply

contract, is it? Do you accept that the building

of the plant was in essence the same as the

supply contract?

MR CARR:	I do not understand what Your Honour means
by "supply contract".
GAUDRON J: Have a contractual obligation to provide in the

same way as you might have an obligation to

build a house.

DAWSON J:  They are in the business of building plants

as well as coating pipes.

MR CARR:  Yes, Your Honour. I now appreciate the point.

Certainly in that situation it would be a simple building contractor case where a building contractor earns the money from the building owner to build, say a block of flats or a block

of offices, and then spends his own money to

buy the steel girders, the bricks and the

windows and what have you. Certainly in that

situation they would be a straight tax deduction.

It happens every day of the week.

PIT7 /6 /JM 69 27/10/89

Pipecoaters(2)

TOOHEY J:  The difficulty is that the taxpayer did

not claim it as a deduction.

MR CARR:  He did, Your Honour. He claimed it under the

depreciation provisions.

TOOHEY J: Well, yes, under the depreciation provisions

but not as a direct outgoing and not

surprisingly, given the view that the taxpayer

took of the money that had come in, but in

the sense, at least as the decision presently

stands, is lost on the incoming argument and

has taken a particular stand on the outgoing

argument with which he is presently saddled.

But whether it makes a great deal of difference

in the end given the duration of this contract

and whether the depreciation benefits are

equal to the benefits that would have been

obtained had it been treated as a direct

outgoing I do not know, but there may not

have been much in it.

MR CARR:  There was not, Your Honour. If we go to

page 889 there is a summary of the way

in which the receipts were treated for

the purposes of the INCOME TAX ACT and also

for the purposes of general accounting.

TOOHEY J:  Do you mean treated by the taxpayer or

by the Commissioner?

MR CARR:  By both, Your Honour.

TOOHEY J: Yes.

MR CARR:	The first line there is "Mobilisation Payments",
that is common to both and incidentally, in
the first year the taxpayer treated it as a sales account and posted it all to revenue.
But that does not bind it to the taxpayer and
it is some comfort.  Then the deductions are
shown which were allowed for income tax purposes
in each of the three years, totalling $1,509,861
and that is for tax purposes.  But for general
accounting purposes the taxpayer depreciated virtually more than - wrote it all off for
financial reporting purposes.  Then the next
line, "Losses on disposal of plant and equipment", this is for tax treatment, $2.4 million, less some
profit on disposal.  Then another deduction there
of $2.4 million. Incidentally, it may be a
bit of a red herring, but they had an investment
allowance as well.  So the total deductions
came to $4,517,000. That does not take into account of course the sale of the buildings which
came in later. Because we are not arguing under
the second limb of section 26(a) we do not have to go into this splitting-up of what they got
for what because, in our submission, the regime

PIT7/7/JM	70	27/10/89
Pipecoaters(2)

that applies is that the money comes in under

section 25(1) as assessable income; it was earned

and everything that was expended to earn that

income is written off one way or another, either

if they claimed it and persuaded the

Commissioner that BP applied as an outgoing as

if they were carrying on business as building

contractors for the first six months, which they

were on our case, or as depreciation or as -

with all due respect to Your Honour, I did not

think it was all that subtle the idea that they

should lease the plant and install it on their

leasehold property. I would have thought that

was quite a commercial proposition. If they

had some particularly good investment elsewhere

and the rate of interest current at the time - and

this is eight years ago, nine years ago - was

favourable, there was money to be made by taking

the client's money, utilizing it sensibly and

borrowing somebody else's to put the plant up.

That is how the figures turn out.

DAWSON J:  Those are the deductions they were allowed in

fact on the left-hand column and the right-hand

column is the loss they made according to

ordinary accounting principles, is that the

comparison?

MR CARR:	Yes, Your Honour, that is right.	They have alrrost
balanced out in both cases.

DAWSON J: Yes, I see. ~ut you would have to take into

account the profit on the sale of the

buildings which was $500,000.

MR CARR:	I cannot say that, Your Honour, because the
building and the land were sold together. They exercised the option under the lease to acquire the freehold and sold it all together.
DAWSON J:	It was some sum, but not in excess of that.

MR CARR:	Yes, and those proceeds, as I said a moment
ago, were all anticipated when they priced the
job.  So SECWA was not being financially
irresponsible; it had got a credit for that half a million, as I will show Your Honours in
a moment.  Could I pass up the aide memoire,
please?
BRENNAN ACJ:	Mr Fletcher, yes?
MR FLETCHER:	Your Honour, in relation to the aide memoire

it does amount to submissions on the matter of

the profit-making intention. I would have

thought that it might be more appropriate that
the question whether or not it is open to the

respondent to contend that there was a

PIT7/8/JM	71	27/10/89
Pipecoaters(2)

profit-making intention should be determined

first before the aide memoire is dealt with. is the undue prejudice to the appellant of

this matter being raised as it is. It has

been dealt with in some detail by outline

of submissions.

TOOHEY J: Are you putting this on the basis of leave

or on the basis of what was argued before

the Federal Court and before Justice Pidgeon?

MR FLETCHER:  I am putting it on the basis that there

should not be leave to the respondent to
contest on this ground at all, bearing in

mind the prejudice that the appellant will

suffer because of what occurred in the

Supreme Court.

BRENNAN ACJ:  But is there not a general proposition that

he can uphold the judgment in the court below
on whatever grounds may properly be open to

him and whether they were the grounds on which

the court below decided the matter or not,

subject to this, however, that if he relies

upon some ground that has never been taken in

the court below, or conceded against him in

the court below, then he cannot do so?

MR FLETCHER: That is our proposition, that the -

BRENNAN ACJ:  What is the proposition?

MR FLETCHER: That the matter of profit-making intention

was conceded in the court below.

BRENNAN ACJ: That there was no profit-making intention?

MR FLETCHER:  Yes, the whole issue of profit-making intention

was raised in the notice to admit facts because

of the onus of proof that the taxpayer bore and

evidence was led. There was no cross-examination;

an affidavit was introduced into evidence. There

was no objection, or no submissions as to the

weight to be given to that affidavit and no
opportunity whatsoever was given to the appellant
to re-examine witnesses to whom questions were

put the answers to which were quite inconsistent

with any profit-making intention, which opportunity

would have been there if they had been

cross-examined as to those answers by counsel for

the respondent.

TOOHEY J:  Mr Fletcher, when you speak of profit-making

intention, are you speaking of it in the limited

sense of the profit-making intention related to

the plant, or the contract at large, or what?

PIT7/9/JM	72	27/10/89
Pipecoaters(2)
MR FLETCHER:	Yes.	You see, the difficulty is - - -

TOOHEY J: Well, "yes" to which?

MR FLETCHER:  To the plant. There was clearly a

profit-making intention in respect of the

coating of the pipes, there is no doubt

about that. But the difficulty is that,

having read the aide memoire and the

photocopies of the pages from - there is no

difficulty with the photocopies of the paees
in the appeal book, of course, but the

aide memoire puts propositions to the Court

in relation to how one should interpret a word

appearing in a document in the appeal book when

that proposition was never put to the witness
through whom the document was tendered and who

was asked questions concerning the matter of

what the document meant. There was no

cross-questioning of that witness and now the

respondent is seeking to, to the disadvantage of

the appellant, rely upon that document and tie

that in with other documents and say "Oh,

there we are, they always intended to make a

profit on construction of the plant", and

yet that had been denied.

BRENNAN ACJ:  What is meant by "profit" in your submission

there:  a difference between the cost of erecting

the plant and the money which was received under

schedule B of the - - -

MR FLETCHER:  Yes.

McHUGH J: Fifteen per cent profit margin.

MR FLETCHER:	Yes.
McHUGH J:	It is dealt with at page 951 where the court

said:

There seems to be substance in the -

Commissioner's -

argument ..... but since it was not put

directly to witnesses, submitted to the

learned trial judge, or dealt with in

his Honour's reasons for judgment, it is

difficult for this Court to reach any

concluded view on the difference between

the two submissions of counsel.

MR FLETCHER:  Yes.

DAWSON J: Are you saying it was never submitted that

there was an intention to make a profit at

the trial stage?

PIT7/10/JM	27/10/89
Pipecoaters(2)

MR FLETCHER:  No, it was not. of proof upon the taxpayer it had to be raised
by the taxpayer to negative any of the half a Because of the burden

dozen sections of the Act that potentially the

respondent might rely upon and one of those

was section 26(a), profit-making intention.

Questions were put to witnesses for the appellant

the answers to which are completely inconsistent

with there being the existence of the intention

which the respondent says is evidenced by the

documents he now wishes to have the Court refer

to and to construe in a certain way. If that

had been raised at the trial, then counsel for

the appellant would most certainly have taken

the opportunity to (a) re-examine - - -

BRENNAN ACJ:	Re-examine after what?
MR FLETCHER:	If the matter had been raised in cross-

examination of the witnesses who gave the

answers in examination-in-chief - - -

BRENNAN ACJ: There was no cross-examination.

MR FLETCHER:  There was cross-examination.

McHUGH J: There was and there is an ambiguous answer.

MR FLETCHER:  No, the answer that was ambiguous came

in the examination-in-chief.

McHUGH J:	I see.
MR FLETCHER:	But then after that, in examination-in-chief there was another question asked of the
particular witness, Mr Perrott, which was completely at odds with the prior answer to a
rolled-up question and other answers were given in cross-examination which indicated no intention whatsoever, but the matter was not
taken up by counsel for the reepondent in
any way, whether in cross-examination of Perrott
or the other witnesses, or in addresses. There
was no indication that there was any intention
to rely upon this document, to construe it in a certain way without giving the witness any
chance to explain his answer, or to explain the document and without giving counsel for the appellant the opportunity to recall witnesses, or to call further witnesses.

BRENNAN ACJ: There are two questions, are there not?

One, is the issue raised as an issue for decision at

the trial? The second is: in what way was the

issue dealt with? We are concerned only with the

former of those. It may be that the respondent,

if he wished to raise this issue he is now

raising at the trial, would have been met with

PIT7/ll/JM	74	27/10/89
Pipecoaters(2)

the arguments that you are now submitting with

reference to cross-examination. If the issue

was alive at the trial, it was alive at the trial

however the trial was conducted.

MR FLETCHER:  Your Honour, as I understand it, the rule

in BROWNE V DUNN requires that if you - - -

BRENNAN ACJ: That is a different problem, is it not?

That simply means that you can rely upon the

fact that here was an answer which was not

cross-examined upon and therefore you should

succeed on the issue. But the problem that we have

to consider is whether the issue was one which

was joined at the trial.

MR FLETCHER:  I understand from the authorities that it

is not open to the respondent to raise this

matter at all.

McHUGH J:  It is not a BROWNE V DUNN point you rely on;

it is the WATER BOARD V MOUSTAKAS point. This

was not an issue at the trial.

MR FLETCHER:  Yes, it is a combination really. I suppose

right now it is a question of whether or not

it can be raised as an issue, given that it

was not an issue then. It was certainly

not raised as an issue by the respondent.

The only way in which it was raised was

in the formal pleadings in the sense that

to cover every possibility, as you have to do

in a tax case, it was formally stated in the

notice to admit facts that there was no
profit-making intention in relation to

the construction of the plant.

BRENNAN ACJ:	Was that conceded?
MR FLETCHER:	Not in the notice to admit facts, no.

Very little was conceded and that is why it

took four days to - - -

BRENNAN ACJ:  If it was not conceded, then the issue was

alive, was it not?

(Continued on page 76)

PIT7/12/JM	75	27/10/89
Pipecoaters(2)

MR FLETCHER: Well, Your Honour, perhaps in that sense it was

alive, and perhaps I have to rely upon the fact that

if it is open still, but I - - -

TOOHEY J:	Could I just interrupt you, Mr Fletcher? I am having
a lot of trouble with this.  If it was alive, presumably
it was made the subject of counsel's address - I mean,
if it was not adverted to by counsel in their address to
Mr Justice Pidgeon, in the ordinary course he would
have proceeded as if that were not an issue and appears to have so proceeded.
MR FLETCHER:	Yes, well certainly counsel for the respondent did not, as I recall it, raise it in his address - - -

TOOHEY J: Are you saying that counsel for the taxpayer raised

it?

MR FLETCHER:  I have difficulty in recalling whether or not

Mr Malcolm did raise it in address. If he did

it would have been merely to gloss over and say there

is no question about profit-making intention. I am

sorry, Your Honour, I would have to check the transcript
to double check on that point, but certainly it was

no issue in the sense that there was nothing - - -

TOOHEY J: Well, in a sense it may not matter what cross-examination

there was, if in the end no reference was made to this
matter in the course of addresses, because counsel

quite often raise matters in the course of evidence

and then decide that they are not issues when it

comes to final address. None of this is against you.

MR FLETCHER:	Yes.
TOOHEY J:	I would have thought it was for the respondent to
demonstrate that this matter was placed before the
trial judge.
MR FLETCHER:	Yes, well, Your Honour, we say that it was not

in any significant fashion :.·aised aa an issue before

the trial judge.

BRENNAN ACJ:  Mr Fletcher, perhaps if we hear from Mr Carr, and

he can say in what way this was an issue at the trial

and how it has proceeded since that time, and you can

have an opportunity to reply.

MR CARR:  Your Honours, at the trial before Mr Justice Pidgeon,

it was an issue only in the sense that it had not been
admitted. It was not as I understand it the

subject of address at the trial before Mr Justice Pidgeon.

BRENNAN ACJ:  Can we identify what this issue is?

PlT8/l/FK	76	FLETCHER	27/10/89
Pipecoaters(2)

MR CARR:  In the characterization of the receipts, in our

submission, it is relevant - very relevant - to

have regard to the fact that the taxpayer had an

intentional purpose to profit on the construction

of the plant. It is not central to our case.

BRENNAN ACJ:	To make more out of the up-front payments than he would expend in the construction of the plant.
Is that the-proposition?
MR CARR:	Yes, Your Honour, purely and simply that ; not that

it did, but that it was carrying on business and it

is building on that that we say it was carrying on business and it intended to and had the purpose of

making a profit on the construction of the plant.

That, we say, is relevant in the characterization

of the receipts as income. Back to the course

of the proceedings; my learned friend's - - -

DAWSON J:	Can I just ask one question in respect to the course of the proceedings? Were questions asked by the taxpayer of its witnesses whether there was such an
intention?
MR CARR:	Yes, Your Honour, and we rely on it - sorry, Your Honour
DAWSON J:	And they denied it?

MR CARR:  No, Your Honour, no. In fact, at page 164, at point 9

on the page, the managing director of the taxpayer

agrees that that is what it was; it was profit.

McHUGH J: Well, it is a rolled-up question, though, is it not.

It is a rolled-up question and that is the complaint,

is it not?

MR CARR: Well, the response was, yes, it was for profit and for

other contingencies. Perhaps it is the - it has been

taken through the first document which is on the inside

folder of the aide memoire. It has been taken by his

counsel at line 39.

Then you get on the second last line,

"Profit 15 per cent total sum." Could

you explain the reference to "profit

15 per cent total sum"?

TOOHEY J:	I am sorry, where are we looking at this?
MR CARR:	Page 164, Your Honour.
TOOHEY J:	I thought you had taken us to the aide memoire.
MR CARR:	I am sorry, Your Honour. Well, I can do that as
well.
TOOHEY J:	No, no, stay where you are.

PlTS/2/FK	77	27/10/89
Pipecoaters(2)

MR CARR:	Could you explain the reference to
"profit 15 per cent total sum"?

and he says:

At this stage, your Honour, we had a series of estimated numbers; we had a

number of specifications; we had

altogether a number of factors which we

then had to put together.

And, what he is talking about is evident later: he

is talking about the various components that had to go into the construction of the plant and the coating of the pipe -

We had altogether a number of factors

which we than had to put together and

we estimated a figure of 15 percent as

being an allowance for contingency for risk

and for profit because -

and if that is the extent of the rolled-up answer to the

question, Your Honour, I would respectfully submit

that what he is talking about is exactly the same

thing. The contingency for risk is another way of

exp::-essing in English an allowance for the profit,

that things might happen that are not predicted.

Because any one of those items might have

been inaccurate and we therefore came up with an

in globo 15 per cent as being our estimate of

an amount to cover those things.

And, of course, it is as plain as a pikestaff that to

cover those things is not the construction of the

plant, it is to cover the coating of the pipe as well,

as is evident from exhibit 17, page 10 of that exhibit.

McHUGH J:	But the Federal Court dealt with it on the basis that the
allowance referred to was for contingencies as opposed
to an intention to make a profit.
MR CARR:	Yes, Your Honour, there are two issues; first of all,

the argument that we should have been allowed to run
that submission in the first place in the Federal

Court. The appellant took absolutely no

objection whatsoever to our making the contention.

We served notice of contention that the trial judge

should have, in characterizing the income, come to

the conclusion there was a profit-making intention.

TOOHEY J:	Can I stop you there? What is the consequence of that?
Was it then sought to be argued that the matter was
not merely that the income was not merely asses8able
under section 25, but was also assessable under
section 26(a)?

PlT8/3/FK	78	27/10/89
Pipecoaters(2)

MR CARR: Certainly not, Your Honour, no -

TOOHEY J: It has never been a 26(a) case?

MR CARR:  Never ever, and it is not now, Your Honour, no. It

is purely income in accordance with ordinary

concepts and usages.

TOOHEY J:	So this evidence, if it had been used, or were permitted
to be used, is to throw light upon the character of the
money that was received for the purpose of determining
the application of section 25?

MR CARR: Exactly, Your Honour, and we pray iri aid the principles -

the touchstones - the guidelines declared in MYER,

which I will take Your Honours to in a moment.

BRENNAN ACJ:  Does it make the slightest bit of difference to

your argument if you reframe it to say that there has

always been an issue to the question of whether there was
15 per cent over and above estimated costs for

contingencies?

MR CARR:  It probably does not, Your Honour.

BRENNAN ACJ: Well then, hopefully they will not be spent.

To the extent of the hope it is profit, is it?

MR CARR:  Yes, Your Honour. That is what I was grappling for a

moment ago when I said that they mean the same thing

in English.

McHUGH J: But I thought you wanted to rely on it to prove an

intent. Your position would be very strongly advanced

if you could infer intention to make a profit, would it not?

MR CARR:  I think so, yes, Your Honour. I think that this Court

has said that is a very telling factor.

DAWSON J:	Because then they would be in the business of building
plant.

MR CARR:  We say that they are in that business anyway, whether

there be that intent or not.

DAWSON J: That is a point more markedly true, yes.

MR CARR:	It puts it almost out beyond a peradventure if they
were doing it for a profit. But coming back, if I
may, to this question of whether it is fair that I

should be put through these objections at this stage

in turn, my learned friend Mr Merralls, who appeared

for the taxpayer in the Full Federal Court, raised

absolutely no objection to my running this argument

in front of the Full Federal Court. We went through

it in great depth and he had made very detailed

submissions to counter the argument that this was

PlT8/4/FK	79	27/10/89
Pipecoaters(2)

for profit; no argument that it was unfair to

the taxpayer at that st~ge. So we are, as it were,

dragged into this Court, and we say, well the

before it and which we have got reproduced here, should have had no hesitation in corning to the conclusion that there was a profit-making intention.

Federal Court should have, in its decision - it may have
baulked at the profit finding - the intent to make

profit, but we are asking this Court to say that the

McHUGH J:	But that means you are asking us to make a finding of fact in respect to an issue which does not seem to have been raised before Mr Justice Pidgeon and
which the Full Court declined to enter upon.

MR CARR: Well, it went part of the way, Your Honour. It went

as far as saying we will accept that they were
contingencies, but we will leave undecided the

question of - - -

McHUGH J: That was always connnon ground that there were

contingencies?

MR CARR: Yes, Your Honour, and that is what I am asking the

Court to say; that they should have, perhaps, if they had been properly taken by myself through the steps which I propose to take this Court, if I am allowed to, through - if they had been taken through those

documents they should have said what Mr Perrott

was saying in his answer is quite clearly that there

was an intent from the outset to make a profit on

the co.l1ting of the pipe and on the construction of

the plant. There simply was that argument in the

Federal Court. We say that the Federal Court should

have come to that conclusion and we ask this Court,

on reviewing the matter, to rule that there was this

intent as part of the characterization of the receipts

as income in accordance with normal, ordinary

concepts.

BRENNAN ACJ:  Is the inference of intent to be drawn from

anything else but the provision of 15 per cent above

estimates for contingencies?

MR CARR:  Save for Mr Perrott's answer, no, Your Honour.

BRENNAN ACJ: Well, Mr Perrott's answer plus - - -

MR CARR:	I meant to say that the only - - -
GAUDRON J:	And in relation to that, I suppose, we may take

account of the fact that there is no rise and fall

provision in the contract surn,for that?

MR CARR~ Certainly, Your Honour, that was made a sales point,

as it were, by the taxpayer. They said that, "We

always tendered on the basis that we would have these

PlT8/ 5/FK	80	27/10/89
Pipecoaters(2)

up-front payments. It was nothing new. But, if

you do not insist on the variation that we have

got to finance it, then we have got to charge you

$602,000 for that. The bonus to you will be that

there will be no rise and fall on the construction

phase", and, of course, the construction phase was

less than a third of the total contract for a time.

So, there was far less exposure to rise in respect of the construction of the plant, but it was made

a selling point by the taxpayer. There will be no

rise and fall: it is in the letter which I can take

Your Honours to; a letter which Mr Perrott wrote to

the consulting engineers.

So there is nothing that we rely on other than the taxpayer's own evidence. The answer in

examination in-chief and the taxpayer's own documents,

and I have nothing I can add to that.

BRENNAN ACJ:  Yes. I think we should hear Mr Fletcher in reply

before we look at the - - -

MR FLETCHER:  I can, Your Honours, only repeat the fact that

there was no , as has been considered by my friend,

no raising of this issue in the trial court, and the

fact that it would be asking for a finding of fact that

was not raised there, and it does involve, as my

learned friend said, the question of the subjective

intention of the witness. Now, I appreciate that

perhaps that could be the subject of submissions in

relation to it, in reliance upon BROWNE V DUNN, but

nevertheless I do object, and I do consider that it

is highly prejudicial and there should be - it is not
open to the respondent to raise this issue now in

the way that he proposes to do.

Apart from that I simply point out that he is

being rather selective in his submission of materials - - -

BRENNAN ACJ:  You- c21n ·eeal with that in reply;:-no doubt.

MR FLETCHER:	Yes.
BRENNAN ACJ:	Mr Carr, you may proceed to put your argument, based upon the aide memoire in your paragraph l(a),
but the Court will consider, of course, at the end of the matter whether the point which you are now
seeking to make under those heads is one which is
properly open to you now for the first time, or
whether it is one which has been raisedearlier, or
permissible line of argument to pursue in this Court.
whether, fur any other reason, it is or is not a will consider in due course whether or not the points
which are to be made from the material are open for
consideration in this Court.

P1T8/6/FK	81	27/10/89
Pipecoaters(2)
MR CARR:	I understand, Your Honour.	Do Your Honours have

the booklet before you?

BRENNAN ACJ:  Yes.

MR CARR: Well, the starting point is a document which has

an "A", in red, written at the top. It has

"Exhibit 17" typed on it and the word "QUOTATION"

typed on it, and on the front page it has

"DAMPIER/PERTH 1.498.880 lin. meter" quotation
"DAMPIER/PERTH for STATE ENERGY COMMISSION" then

the two types of pipe: ·the 26 inch; the 20 inch

converted to square meters: from lineal meters

into square meters, for the estimator - and I

think it is cormnon ground - is a European, was

converting for his purposes for the preparation of

his quote. And the type of application is shown

there "Fusion Bonded Epoxy Powder External and

Internal coating"

What is this document is explained and

identified by Mr Perrott at page 154 in volume 1,

and that is probably the simplest way of explaining

what it is. One does not have to - - -

TOOHEY J:	It is item Bis it, in your aide memoire.
MR CARR:	The trap I was seeking to avoid - item B of the

second document down, about line 40, the witness

is being asked about this exhibit 17:

Can you tell us that the document is?---This
document was a final surmnary of the various

calculations which had been done at the time

of preparing our tender. It was the basis
upon which we answered, or filled in the

various components in the tender documents.

Then he is asked:

This document has on it, on the first page:

"Quotation -

and there is a description of the first:

What does that refer to?---That refers to

the estimated number of lineal metres which

were nominated in the tender.

So many lineal metres?

Yes. It was approximately 1500 kilometres.

Then it has got "26" - is it 26 inch -

"l lineal metre equals ..... Yes. That is the

approximate area per lineal metre.

PlT8/7/89	82	27/10/89
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And then, if one goes straight to page 8

of the exhibit 17, that is document A - page

8 has in the top right-hand corner the appeal

book number 817. It is in fact the eighth

numbered page of this exhibit. And, here is,

as part of the overall sunnnary, as I mentioned at

page 2 of the aide memoire, as part of this

document which sunnnarizes all of the work which

SECWA required to be done; the amount of material,

energy and labour involved in carrying out each

aspect of the plant, including construction of

the plant. On the eighth page is the appellant's

estimate of the cost of the plant, and perhaps I

could take Your Honours through it.

It is headed "DEPRECIATION"; on the left-hand

column "EXTERNAL", on the right-hand column "INTERNAL"

They differentiated the processes. The external

coating was a different process to the internal
coating, and so that in his costing the estimator

so divided the items of plant. And he starts with

under "EXTERNAL", "Buildings" and comes to a total

of 612,000, to which he has added 5 per cent
miscellaneous, not to be confused with contingencies
or profit, and the sub-total is taken across: 642,600.

Following down that left-hand column with "Machinery"

a total of 1.1 million; 5 per cent added for

miscellaneous at that stage, brought across to

1.24 million and those two items totalled to 1,882,000,

for buildings and machinery to do with the external

coating of the plant.

Then, in the evidence I will be taking Your Honours

and there is the 35 per cent that I. was talking

to in a moment, it is indicated they expected the plant

to be worth about 35 per cent at the end of the job.

about, Your Honour, in relation to the SEC's

recoupment, as it were, of the salvage value at the

end. Provision was made for that. And the net figure

resulting is 1,223,800, which is converted by the

production - that is nearly 1500 lineal kilometres -

that is 1,498,880 lineal metres, converted - that-aspect

of the plant cost is converted into a lineal metre rate

of $0.817.

The reason why the items below that are totalled

and dealt with separately, the evidence discloses, is

that they did not expect there to be any residual _

value, so the whole of these items, plus 5 per cent
were brought in: the 5 per cent at the bottom -

the estimator .;;;-·or .the typist ran out of space at the

bottom of the page, and that has to go over to - the

division there is per lineal metre 0.676 cents. So

there is the second of four components that will find

their way through to the quotation, the tender and the

contract. The external aspect - and a very similar

PlT8/8/FK	83	MR CARR	27/20/89
Pipecoaters(2)

exercise is done by the estimator on the right-hand
side of the page for "INTERNAL". Split up in

methodically the same way: "Buildings", "Machinery"

a net figure expressed as a rate per lineal metre and

then, in respect of the items that had to be written

off totally, there would be no residual - the same

thing for internal - a much lesser figure, and I

apologize - at the bottom of the page, that figure

is 0.035.

I would ask Your Honours then to go to page 820, and this page is the drawing,in of all the components

for the whole contract, the building, the plant,
coating the pipe, everything is drawn in on page 820.

We find the plant about 14 items down: "Depreciation"

and "Mobilisation" "page 8" - can Your Honours see

that? And I mentioned the four components at page 8:
they are reflected in respect of external pipe $0.817,

and 0.816, for some reason, I think it is common

ground that should be a seven, in respect of the 20

inch pipe - it is a typographical error, because

the arithmetic comes out that way, and in respect of

the internal coating, which was on the right-hand side

of the pag~ 0.566, 0.566. So those were the items

where there was expected to be 35 per cent left over

at the end of the job.

Then, underneath that, again, from page 8, the

rates 0.676, twice in respect of the two types of

pipe, and then in respect of the internal, 0.035.

All of those figures are identical to the four figures

that I have just taken Your Honour to on page 817/8

where the details of the plant costs are set out.

Then, moving down two columns on that page, the

total of all those items from the various pages,

one through to nine, the totals are added up and

taken along the bottom line: so there are two types of -

external coating of the two types of pipe: the 26 inch

and 20 inch, and similarly for the internal coating.

The figures there $14.91, $13.294, $2.382 and $2.131.

The interest is taken out, on the next line, because

it was added in - a calculation was made at page 9 on

what the interest would be, but it was taken out again

because, as it says, "Interest down payment" for the

tender was going to provide for these up-front payments,

so the interest was, as it were, gutted out; so it is a

bit of a red herring.

Some item there - "Extra repair and maint." in

relation to the internal items was added in there:

two cents, and then a fresh total is made along the

third-last line, running along there, 14.491, 12.874,

2.254 and 2.003, and, bearing in mind that this is coming

down to a grand total for all of the components expressed

as a rate per lineal metre, here is the provision for

profit. "Profit 15 % total sum 2.557", and it is just

P1T8/9 /FK	84	27/10/89
Pipee:oaters(2)

applied straight across the board for each of the
two processes for both the main types of pipe.

And a total of 17.048 - I do not need to read the

figures along, but that total results from applying -

in fact, it results from applying a factor of

17.6 per cent to the resultant figures. But working

backwards from the figure that found its way through

the tender, it really is, in fact, a 15 per cent on

$17.00 and $15 and $2 and $2.35.

The next stage, which is dealt with on page 3 of the aide memoire, at paragraph 3 of the aide memoire, takes Your Honours to the third of the documents that are reproduced in the right-hand folder: to page 459.

This is part of the appellant's tender to SECWA,

schedule Bin the Schedule of Rates, and if one looks

at Item B3 it describes what it is. This is the

external coating with fusion bonded epoxy and the

specification of the type of applications, as described

by number. But, I ask Your Honours to look at

Items B3.1, B3.2, B3.3 and B3.4 in respect of

external coating.

(Continued on page 86)

PlT8/10/FK	85	27/10/89
Pipecoaters(2)

MR CARR (continuing):  The figures that appear there are

identical to the second decimal place as the

figures which I showed Your Honour at page 820.
$17.048 comes to $17.05 on page 459.

$15.146 becomes $15.15 on page 459 and so there

is the exact replication of the external rate for
building the plant and coating the pipe, brought

through into the schedule of rates in the tender.

As I say at paragraph 4 of the aide memoire:

The same precise carrying through of the lineal

rates

from page 10 of exhibit 17

cannot be observed at the equivalent page

of the Tender (p.463)

marked 11 C11 , but that does not matter because there	which is again in the document
has been an increase. The rates for internal
shown at page 820 are 2.652 and 2.357 respectively
and they have been increased in items B 6.1,
B 6.2, B 6.3 and B 6.4 to larger sums. 2.652
becomes 3.26 for the 26 - - -

BRENNAN ACJ:  We do not need to go through the detailed

mathematics ,do we? The point is that the profit

items as calculated in the earlier document has

been translated into this tender figure.

MR CARR:	Yes,Your Honour,and the aide rnemoire, if Your Honours
have resort to it at a later stage, will take it
further.  Not just - we · stopped at the ·
tender. There are other points apart from just the
profit that arise out of this Aide memoire, but
I will skip through on the assumption that Your Honours
are going to read this through and see that these figures flow right through to the formal contract.
The next point that I would like to develop is that -
is that:
and that is at page 4 item 6 on the aide memoire

The timing of the total payments required by the

Tender is shown

in the one page document marked "D" and the point that I am seeking to develop here is that nothing

changed right from the very start. They were

tendering on the basis that they would have 5 per cent 0f

the contract value and the contract value, of course,

was 1500 kilometres multiplied by the lineal rate.

And that was the contract value. They wanted 5 per cent

on - contract award, which was their tender. 5 per cent

on construction procurement and 5 per cent on

ccnstruction complete, making it a cumulative

total in the third column of 15 per cent and then one can

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see the days in the first column (I should have

taken Your Honours to that first) 1, 90, 180 and then

from there on through to completion the 85 per cent
the contract value would be paid at 85 per cent

value divided by the number of process weeks.

So that was right from the outset their intention.

Paragraph 7 of the aide memoire relates to

document E which is the acceptance of the tender

by SECWA accepting the tender and if one reads

through the aide memoire one sees that precisely
the same figures in that letter from SECWA of the

9 December 1981:

The Contract Sum sha\l be comprised as follows:-

(aX External F.B.E. coating $24,510,174.00

that comes straight from item B 3. that I took

Your Honours to a moment ago at page 451. The

three extras are irrelevant and then the -

(e) Internal Pipe coating $4,859,531.00

that comes straight from page 452 of the tender

document and then there is a -

(f) Sub-total $30,172,910.00

There is a slight variation for the provisional

sum for the electricity of tenders put in

1. 7 5 million and that is brought· down to a million,

but the contract sum is then $31 million roughly.

And the contract sum is found at page 583,is the

second page of the document marked "F". Establishment

costs are shown there as absolute figures and

various other components of the contract are set out.

A total of $31 million. The three payments eachof 5

per cent of thecontract sum are shown a.t the first

of those two pages, page 576, and they are expressed

in absolute terms, but they are in fact 5 per cent
contract sum.	Each of those payments of $1,558,645.50 is

5        per cent of the contract sum which is arrived. at by

multiplying 1500 kilometres by the lineal rate.	So
the idea expressed in the tender that they get ,: µer	___ cen,t

of the contract sum up-front flowed through, with nothing

whatsoever changing, into the contract itself in

schedule Bat page 576. So the total amount which

the appellant sought to be paid $31 million, including

profit on the plant construction and profit on

coating the pipe, as described in the quotation, was

thus taken to the tender and then into the contract

and recovered as to three payments of 5 pe:i;- cent of the

estimated contract value and the balance of 85 per cent of

the estimated contract value $31 million ,85 per cent of

that $31 million was recovered as the pipes were

coated.

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BRENNAN ACJ:	Was there any estimate done of the costs of construction of the plant as against the
$4,675,000?
MR CARR:	As constructed as it eventually turned out?
BRENNAN ACJ:	No,as it was estimated to be.
MR CARR:	That is at page 8 of exhibit 17, Your Honour. That is it. Page numbered 8 of the exhibit 17,
page 817 of the transcript. That is the plant.
BRENNAN ACJ:	That does not appear to bear any relationship

to $4,675,000, does it? I know it represents these

various proportions that you direct our attention

to, but is there any necessary correlation between
the $4,675,000 and the estimated cost of the

construction of the plant?

MR CARR:	Yes,Your Honour, there is when you take the gross
amount.  You see, what they got in their three
payments was not the net cost that this estimater
was working out in Holland.  He was working out
the net cost that would have to be recovered
allowing for salvage.  What they got was the gross
amount, the $4.6 million they actually had to shell out, plus in fact, because some of that was profit
and then there was still room left over.
BRENNAN ACJ:	Where do we find the gross amount estimated?

MR CARR: If you are looking at page 817. If you take the

figures before the depreciation calculation, take

$1.88 million, $1.304 million and then down at the

bottom of the page $1.013 million and then $52,500.

Perhaps the best illustration - - -

BRENNAN ACJ: • What is~the_total of those four; do you have it

at hand?

MR CARR:  I beg your pardon, Your Honour.

BRENNAN ACJ:  Do you have the total of those four figures

at hand?

MR CARR:  Yes, Your Honour. My learned junior informs me

that is $4,252,600. That is the gross cost.

BRENNAN ACJ:  Is the relationship between that $4,252 million

and the $4,675 million purely coincidental?

MR CARR:	No, I do not think that I can go that fa½ Your Honour.
I think that they had an idea of what their out-of-pocket
expense and profit - well,they had some idea of
much they wanted in to cover their start - - -

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BRENNAN AGJ: 

They had the idea that 15 per cent of the total cost

would cover the cost of construction, is that
what you are saying?

MR CARR: Yes, Your Honour. And comfortably,because the

evidence is that there was some $300,000 in off-site
costs in Perth. There were overheads that they did not capitalize as it turned out. Yes, that is the fieure, but perhaps the simplest way of

reinforcing that is to take Your Honours to the

second document in the kit, as it were, document B, and to go to the second page of that document which is page 156 of the appeal book, where Mr Perrott

is asked:

Could you explain the calculations on page 8

to his Honour?

He says:

This was an estimate prepared by us in

preparing the various components that we

thought would be required in carrying out

the work. We tried to list on one side

the amount required for the external equipment

and on the right-hand side the amount required

for the internal coating process. We also

broke it into two parts, the first being the

amount that would have some sort of scrap

value at the end of the project in our

estimation and the bottom part being that

which we thought would have no value of any

nature at the end.

What were the buildings referred to

under "External" and "Internal" respectively?

These were buildings in which the coating

process took place and they were large sheds

of a structural steel nature.

May we take it that everything on page 8

related to the acquisition of the plant and its

installation in the factory building which

was to be constructed at Geraldton?

Yes.

His Honour asked:

Which is the area that has no residual value?

Your Honour, look at the bottom part under

"Mobilisation and Demobilisation."

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Then Mr Malcolm took the witness through much

the same exercise that I was taking Your Honours

through a moment ago, to get down to the bottom of

the page:

Your Honour, it is a mere matter of mathematics,

but the total is $4,252,600.

In fact its net is $3.1 million net.If you take the estimated residual value out, the net amount is

$3.1 million. So what the appellant was getting

at this stage was all of the net cost, eventual cost
of the plant, that is $3.1 million, plus the extra 65per
cent is going to be depreciated and in our submission

plus the profit of 15 per cent and then some, because it

only came to $4.2 million gross and they were to get

$4.6 million in the first three up-front payments.

And then the reference at page 159, just at the end

of page 159 at line 32 there is the confirmation

about the 35 per cent:

Alternatively, 35 per cent was the amount

which we thought we ought to be able to

obtain at the end one way or another by way

of scrap value or selling it in any way.

And it is by way of a credit through to the price

of constructing the plant.

DAWSON J: Can you just for a IDJi11alt look at document E and document F on the second page. I am not sure that I understood

your explanation for why the figure for external

coating is $24 million, to take the example on document E

and then it appears in schedule Bon the second page

of document Fas $20 million and presumably that
figure, the difference, plus the difference for
internal coating, is to be found in the establishment

costs which are listed separately there. Why do

you say that was done that way? In other words,

document E makes no reference to establishment costs;

it just gives a price for the coating. It is taken

out and appears as a separate figure in schedule B.

:MR CARR:  Document E comprises all of the costs, of course, for
external coating. All of the charges.

DAWSON J: Including as well establishment costs and it is done

as a price for the coating?

:MR CARR:  Yes, Your Honour. By document,j: that is - the letter accepting the tender?

DAWSON J:  Yes. Why are they split up in F and not split up

in E? I mean-I do not know~ you may not know either -

but what do you say you draw from all of this?

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MR CARR: It is a contract summary. It draws in all of the

items listed in the various schedules of rates

and it just happens that they are described

separately. I do not know the answer,Your Honour.

TOOHEY J:  But once you isolate your establishment costs, all

the other components have to be reduced, do they not?

MR CARR:	Yes,Your Honour.
TOOHEY J:	And there has to be a difference obviously between

any costing that begins with establishment costs
and a costing that absorbs them in respect of each

item.

MR CARR:  Yes,Your Honour. Inevitably because of the up-front

payment being made, there had to be a reduction in

the lineal rate expressed in the original quotation

and in the tender itself, because encompassed in

there was a net amount of the estimated plant cost
all up, but what was taken out was not the net
amount. What was paid up front was 5 per cent
three times of the contract price, which was far more
than the net amount, so that the rate per lineal metre
for coating had to be adjusted much lower. It had

to be adjusted much lower than the net cost of the

plant. It was, in a sense, artificially reduced

because some of the remuneration for coating the

plant, the coating process, had already been paid

in advance in the three up-front payments.

TOOHEY J:  Mr Carr, can I just record a question, not to be

answered, but so that I do not lose sight of it

next time we meet. The proposition that you are

putting to us, although you have disavowed any

intention to rely upon section 26(a),it sounded

likes 26(a) sort of proposition. And if that

be so, would it not have been more satisfactory

for section 26(a)to have been relied upon as

an additional or alternative basis for the assessment

as well as. section 25?

MR CARR:	It might have been, Your Honour, but the teaching of the cases from this Court is that, in that
situation, in a continuing business as this in
our submission was, you apply 25(1) • although 26(a)
might have apply.  We never have relied on the
second limb of section 26(a)  In our submission,
the use of the sort of profit calculationsmade in a
25(1) exercise to bring in some kind of net profit as
income under section 25 (1) would not be justified
in this case, because the evidence was all adduced
on a totally different basis. Four accountants gave
evidence. Three of them as experts as to how these
receipts should be treated from an accounting point
of view. And they all agreed. They were all sales

PIT9/6/CM	91	27/10/89
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items. They were to be treated as revenue items,

not that they should be treated by some sort of

separate profit and loss account for the plant construction. That is what is involved in the

contention that they should be brought in under

the second, limb of 26 (a), that you have some kind of

netting out of the plant construction exercise and

then bring it in under 25 (1) as gross income.

That was never ever put to any of the accountants.

It was never suggested by the Commissioner that

that is how it should be done, but in my learned

friend's submissions, paragraph 6 of the outline,

suggests that he is not giving me a second prize

gratuitously. He is suggesting that that is the

exercise that should be done, that you should treat

the construction of the plant as having its own

profit and loss account and then bringing in, if their

is anything,and we all know that there is not, bring

that in under 25(1) as an income item. Although

that has been done by this Court in the exchange

gains and losses cases and in the

COLONIAL MUTUAL LIFE ASSURANCE case - I am sorry I do not have the references at my fingertips - but

it has been done on two or three occasions in those
circumstances. It has been done almost as an aside,

and perhaps I can develop that later, but it has been

done as an aside as a matter of convenience and some

of the commentators are disrespectful enough to

suggest that it is an aberration , but it is an

aberration that makes the TAX ACT work. But there

is no provision in section 25 for netting out before you bring in the income, that you have got to bring

in gross income and then set off the allowable

deductions, but if you are an insurance company

transposing investments, this makes it very hard to

do it that way.

BRENNAN ACJ:	The Court will adjourn at this point to a date to be fixed and no doubt counsel can be in touch
with the :Registrar from time to time to ide11tify
the occasion when the resumed hearing will take place.
AT 1.00 PM THE MATTER WAS ADJOURNED

TO A DATE TO BE FIXED

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